2021 was marked by an intense volume of M&As, Venture Capital and Corporate Venture in Brazil, where investors acquired 100% or part of the target companies’ equity.
A crucial point in these processes is the negotiation between the investor and the founders of the target regarding the sellers’ affirmative obligations of “Non-Compete” and “Non-Solicitation of Employees” after closing the deal.
1. Non-Compete Clause: This is one of the most sensitive items in equity investments. Investors and sellers must negotiate and include in the Term Sheet/Letter of Intent and, subsequently, in the Stock Purchase Agreement, which activities and segments that sellers will undertake not to act, participate, invest, whether directly or indirectly, after closing, which may compete, in any way, with the businesses operated by the target company.
This restriction on competition will remain in effect for a period determined in the Stock Purchase depending on the relevance and sector, which may vary from 1 to 5 years.
2. Employees Non-Solicitation Clause: This is another item that has gained relevance in Brazilian deal given the current scenario of talent retention. Investors and sellers must establish in the Stock Purchase Agreement the parameters of the sellers’ obligation not to hire, or attempt to hire, any employee, senior officer, director, exclusive supplier, commercial representative, distributor or other exclusive service provider of the target company, or induce or persuade any such person to terminate their relationship with the target company, or cease to provide services.
This non-solicitation restriction will also remain in effect for a period determined in the Stock Purchase Agreement depending on the relevance and sector, which may vary from 1 to 5 years.
3. Consequence of Defaulting with “Non-Compete” and “Non-Solicitation”: The effectiveness of clauses such as Non-Compete and Non-Solicitation in equity transactions will depend on the consequences generated by their non-compliance. One format that investors have used is the provision for payment of a contractual penalty of a net and determined amount of “BR$ XX thousand or million”.
The payment of the penalty by the defaulting party may take place without prejudice to the applicable losses and damages that may be determined by the investor.
With the already intense volume of equity transactions in 2022 in Brazil, investors and target sellers need to pay attention to these two crucial obligations that significantly impact post-closing life for both sides.