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By: Taylor Bartholomew, Christopher Chuff, Joanna Cline, Matthew Greenberg, Michael Walker from U.S. law firm Troutman Pepper.

Recently, the Delaware Court of Chancery issued a decision regarding restrictive covenant agreements that will likely have an immediate impact on the scope of restrictive covenants in private equity transactions. In the decision, the court completely struck down a restrictive covenant that prevented sellers from competing, not only with the target of the transaction, but also with the private equity fund's other operating companies that were not part of the transaction. The court found that such a restrictive covenant was broader than necessary to protect the buyer's legitimate business interest in the target, and as a result, completely struck down the provision. The decision cautions private equity funds to limit the scope of their restrictive covenant provisions in purchase agreements to the business carried on by the target, and instead to seek to prevent competition with its other businesses through alternate means, such as employment agreements.

The noncompetition provision at issue in Kodiak Building Partners, LLC v. Adams was one that has become boilerplate in many of today's business sale agreements. Kodiak Building Partners, LLC (Kodiak), a private equity firm that frequently acquires construction-based businesses, purchased Northwest Business Components (Northwest), an Idaho manufacturer and distributor of lumber-bas......................

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