An acquihire is an acquisition of a company for the key purpose of recruiting a target’s employees. In the last few years, acquihires have become increasingly popular in the technology sector, as good talent is one of the most valued and rare assets.
3 Tips for Lawyers Working on an Acquihire Transaction
An acquihire transaction has nuance differences compared to standard acquisitions. When staffed on an acquihire transaction, lawyers should mind the following.
1. Acquihire Reps and Warranties Focus on Personnel
If you look at a form M&A agreement, you are bound to see representations and warranties related to physical properties/leases, accounts receivable, software usage and other reps that make sense if buyer is acquiring target with the intention of maintaining or integrating operations. In an acquihire, the people are what matter which means you can trim down the reps related to tangible property and beef up the reps related to personnel.
2. Non-Competes in California Are Enforceable if Connected to Sale of a Business
Non-competition agreements in California are generally void as a matter of law, except under limited situations enumerated in Section 16601 of the California Business and Professions Code. Employees typically receive payout as equity holders and also payment through a retention program of some sort. Given that they are selling their equity interests in a business, a non-competition agreement would be enforceable in an acquihire (and should be obtained from each of the key employees selling their interests who are joining buyer), although lawyers should take note to tie the non-competition agreement to the sale of the equity interest and not to the continued employment.
3. Don’t Delay Getting Shareholder Approval
In an acquihire, the bulk of the consideration payout may be pushed by the buyer into the retention program rather than the purchase price for the company. This tends not to sit well with investors who may not receive the return multiple they were hoping for. To avoid delays, lawyers should work with their clients early to ensure that shareholder approval can be obtained and the deal will not be blocked.