Selling an IT Consulting Business
Gannons represented an IT consultancy. We structured their business sale to a listed company.
In this case, the buyer sought to acquire our client’s consulting business, in order to recruit its employees – a process known as an acqui(re)-hire. Finding the right balance between employment provisions and protecting the seller is tricky. In the case of an acqui-hire, the buyers and sellers must remain on good terms during the sale process. After all, the buyers are going to become the sellers employers.
Heads of Terms
The Heads of Terms was negotiated before either side consulted legal advice. This was both good and bad. Companies want to save money on legal advice, however, here there was scope for a lawyer to have negotiated the non-legal terminology.
A Heads of Terms is almost always non-binding. The exceptions are usually provisions on exclusivity and confidentiality. There was room to negotiate away from the Heads of Terms. However, we recommend half an hour with a lawyer prior to signing the Head of Terms. Perhaps then both sides might have pinned down terms, such as the real meaning of clauses not drafted by lawyers such as “the seller would commit to the company”. Precise language is always important in legally significant documents.
Future employment arrangements should reflect both party’s true intentions. In employment agreements, the courts usually side with employees as regards restrictive covenants. These covenants should be drafted as shorter rather than longer term, with minimal restrictions.
Share Purchase Agreement
However, the courts take a different view when there is a Share Purchase Agreement with earn-out provisions tied to certain employees remaining in place. The courts less likely to deem these covenants an infringement of employee rights, and the Share Purchase Agreement provisions are usually enforceable.
It is now common for buyers of service industry businesses to tie workers into their business. This is understandable because it’s the employees that the buyer really wants. Nevertheless, employees need to know what happens if their future employment does not work out. They do not want to be unduly limited in either their search for future employment, or subject to unreasonable loss of proceeds on the share sale.