In July 2025, we published an article (see link below) that discussed considerations relating to rollover and incentive equity in management representations in private equity transactions. This blog post addresses additional considerations for executives or teams of executives relating to restrictive covenants.
In a private equity transaction (including a take-private transaction), restrictive covenants (such as those regarding noncompetition, nonsolicitation, nondisparagement, and confidentiality) are a key consideration for both the private equity buyer and the management team. Restrictive covenants are commonplace and generally aimed at protecting the interests of the buyer and preserving the value of the assets or equity that the buyer purchased.
Therefore, management counsel should closely review any restrictive covenants being sought from a buyer to ensure they align with the broader purchase agreement and are also tailored to be reasonably applied to management when the situation may not be as rosy for the management team post-closing. When analyzing restrictive covenants, there are three main areas of which management counsel should be cognizant: restrictive covenants in the purchase agreement, restrictive covenants in employment agreements, and restrictive covenants in equity agreements.
The first place that covenants arise is in the purchase agreement or an ancillary covenants agreement effective as of closing. In this context, restrictive covenants applicable to the management team typically run from the closing of the transaction for an agreed upon period of time thereafter (typically 2–5 years). It is important for management counsel to review these covenants (including for scope and length) and understand the applicable protected interests. Ideally, the protected interests would tie to the business being sold at the time of the transaction.
In the context of employment and equity arrangements, restrictive covenants are normally applicable during employment and for some period of time post-employment. Ideally, such restrictions would align with severance periods (even though covenants may apply in non-severance scenarios) and are reasonable in scope for the protected interests that ties to the business in effect (or actively planned) as of the separation date. However, in equity arrangements, private equity sponsors may seek to tie restrictive covenants to the period of actual equity ownership, which may pick up rollover or incentive equity and could have consequences beyond those traditionally triggered in an employment context. This may result in the restrictive covenants running for a period of time that exceeds an executive’s employment with the company post-closing and could jeopardize value creation long after the employment-related restricted period lapses. In addition, it is not uncommon for the protected interests or the definition of “protected party” (within the context of restrictive covenants) to apply broadly, particularly through the use of an expansive definition of “company group” or “affiliated companies.” In the private equity space, this may pick up additional portfolio companies of the private equity sponsor, an effect that is likely unintended or overbroad.
Given the breadth of potential restrictive covenants, it is common for diligent and experienced management counsel to seek carve-outs, including, for example, the ability to work for a noncompetitive arm of a competitive enterprise, to make passive investments, and/or to manage personal and familial investments.
We separately note that in recent years, restrictive covenant laws and guidance (particularly for noncompetition covenants) at the federal and state level have frequently shifted and evolved and continue to be a focus in key states and nationwide. Some jurisdictions have specific requirements, including requiring payment for noncompetition and/or specific considerations for attorneys’ fees and other remedies, and even protecting whistleblower and similar rights. In light of this changing landscape, management should engage counsel abreast of this shifting legal landscape, in relation to where management will be working and residing.
How We Can Help
Our team regularly works with executives and management teams to advise them on all aspects of employment and compensation arrangements, both as part of transactions and in the ordinary course. If you have any questions about the topics discussed in this blog post or would like more information on the issues discussed herein, please contact any of the members of our executive and management team representation practice or the authors of this blog post.
- Please see our July 2025 article referenced above, The Devil’s in the Deal Terms