Delaware Court of Chancery Finds Stock Purchase Agreement’s Prohibition of Sellers from Competing “Anywhere in the World” Is Unenforceable
By Jonathan M. Stemerman, Armstrong Teasdale LLP
In recent months, the Delaware Court of Chancery has increasingly viewed restrictive non-competition covenants negatively. Nevertheless, the Court has continued to enforce such non-competition clauses where the provision is related to the sale of a business and not an employment contract. In Intertek Testing Services, NA, Inc. v. Eastman, however, the Court found the purchase agreement’s restriction on a seller’s ability to compete “anywhere in the world” too broad, and the buyer’s complaint to enforce the restriction was dismissed.
Intertek Testing Services purchased a business—Alchemy Investment Holdings, Inc.—cofounded by Jeff Eastman. Eastman was Alchemy’s cofounder and CEO and was also a major stockholder. The Stock Purchase Agreement (“SPA”) prohibited each “Restricted Seller,” such as Eastman, from competing with Alchemy “anywhere in the world” for a period of five years.
After continuing to work at Alchemy for five months following the sale, Eastman voluntarily resigned as CEO. Approximately two and a half years after the sale, Eastman’s son—a former Alchemy employee—incorporated an allegedly competing company in which Eastman was an investor and member of the board of directors. Intertek subsequently filed suit, arguing that Eastman breached the SPA’s restrictive covenants, and Eastman moved to dismiss.
In dismissing the action, the Court of Chancery concluded that the non-competition provision was facially overbroad and therefore unenforceable. While noting that “relatively broad restrictive covenants have been enforced in the sale of a business context, such covenants must be tailored to the competitive space reached by the seller and serve the buyer’s legitimate economic interests.” Here, however, the Court found that the provision’s restriction of competition “anywhere in the world” was too broad because Alchemy only provided services in the United States. The Court declined to limit the provision to just the United States, stating that it would be inequitable to save a sophisticated party’s overreach in drafting a facially invalid provision.
Breach of Fiduciary Duty Action against the Sponsor and Directors of a Delaware SPAC Allowed to Move Forward
By Sean M. Brennecke, Partner, Lewis Brisbois
Vice Chancellor Lori W. Will’s recent decision in Laidlaw v. GigAcquisitions2, LLC (2023 Del. Ch. LEXIS 52, 2023 WL 2292488 (Del. Ch. Mar. 1, 2023)), provides another example of Delaware courts protecting purchasers of stock in a Delaware special purpose acquisition company (“SPAC”) from wrongful conduct perpetrated by its directors and sponsor. In Laidlaw, Vice Chancellor Will denied a motion to dismiss a complaint against GigAcquisitions2, LLC (which served as the sponsor of a Delaware SPAC known as GigCapital2, Inc. (“Gig2”)), its founder, and the members of its board of directors, alleging that the defendants breached their fiduciary duties and were unjustly enriched when they caused Gig2 to enter into a merger that ensured the value of their interests would skyrocket at the expense of the public stockholders, and impaired the exercise of public stockholders’ redemption rights by failing to include material information in the proxy statement issued in connection with the merger. The Vice Chancellor’s opinion can be found here.