Selling Stockholder’s Non-Compete Invalidated by Delaware Chancery Court: Kodiak Building Partners, LLC v. Adams (Del. Ch. Oct. 6, 2022)
By Sachin V. Java, Ulmer & Berne LLP
This recent decision denying a motion for a preliminary injunction from the Delaware Court of Chancery addressed whether a restrictive covenant agreement was enforceable against a defendant who entered into that agreement as part of a sale of a business. In reaching its decision, the court held that the restrictive covenant analysis as to a selling stockholder is limited to the Buyer’s economic interest in the goodwill and information it acquires, carving out any preexisting interests of the acquiring company.
Relevant Facts and Background
This case arose out of the acquisition of Northwest Building Components (Northwest), a roof truss manufacturer with a single location in Idaho, through a Stock Purchase Agreement by Kodiak Building Partners, LLC (Kodiak, or Buyer), a serial acquirer in the construction industry with operations in multiple business lines. The Defendant in the matter, Adams was the general manager of Northwest and oversaw the day-to-day operations and “the overall performance of the business unit.” He earned $84,000 in base compensation and owned 8.33% of Northwest’s stock (worth ~$900,000 in deal consideration).
In connection with the acquisition, Adams entered into a restrictive covenant agreement (RCA) lasting thirty months, which restricted him from competing with any business in Kodiak’s broad portfolio of construction-related companies, and in geographic areas beyond the locations Northwest served. The RCA also restricted him from soliciting any client or customer of Kodiak and its affiliates. In the agreement, Adams acknowledged the covenants were reasonable in scope and agreed that he would not contest them.
Approximately sixteen months following closing, Adams resigned from Buyer, and two months later joined a competing company, located within the restricted geographic territory.