Post-closing covenants

BDC describes covenants as the actions the buyer and vendor agree to take, both before and after closing. The ones that run after closing are the post-closing covenants. BDC gives a non-compete, where the vendor promises not to participate in a competing business for a period after closing, as one covenant, and says ancillary agreements beside the purchase agreement might cover a non-compete, employment for key employees and a transitional services agreement, where the vendor agrees to provide services after closing. Check each one’s length and remedy.

Where the law steps in

Whether a covenant can be enforced is a question for each province’s law. In Ontario, the Employment Standards Act, 2000 (s. 67.2) bars an employer from entering into a non-compete agreement with an employee and makes one that breaches the ban void. Section 67.2(3) lifts the ban for a non-compete the purchaser and seller enter into as part of a sale of a business if, immediately following the sale, the seller becomes the purchaser’s employee, and s. 67.2(4) excludes executives. Check the law of the province that governs the agreement.

What to ask about each one

• How long the promise lasts, and where and to what activities it applies.
• What the seller must actually do for transition help, and what happens if they cannot.
• Whether confidentiality continues after closing, and for how long.
• Which remedy the agreement gives for a breach.

For the drafting side, see restrictive covenant and what post-closing covenants bind a seller.