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Restrictive Covenant
Practical Law Glossary Item 9-382-3769 (Approx. 4 pages)
Glossary
Restrictive Covenant
Also known as a negative covenant. An agreement or promise restricting the person or persons giving the covenant from taking certain actions.
In an acquisition context, restrictive covenants can restrict actions of the parties both before and after the closing. They generally include covenants restricting the seller from:
- Taking certain actions concerning the target company or business before the closing without the buyer's consent.
- Competing with the target company or business for a specified period of time after the closing.
- Hiring or soliciting employees transferred to the buyer in the acquisition for a specified period of time after the closing.
For examples of restrictive covenants in purchase agreements, see Standard Documents, Stock Purchase Agreement (Pro-Buyer Long Form): Article V and Asset Purchase Agreement (Pro-Buyer Long Form): Article VI.
In a labor and employment context, restrictive covenants typically restrict activities of an employee following a separation of employment from the employer. Typical restrictive covenants include:
- Non-compete provisions, prohibiting the employee from working for a competitor or in a competitive role at another employer for a specified period of time.
- Non-solicit provisions, prohibiting the employee from soliciting customers or employees of the original employer for a specified period of time.
- Non-disclosure provisions, prohibiting the employee from disclosing the employer's confidential and proprietary competitive information.
- Non-disparagement provisions, restricting what an employee can or cannot say about the employer following a separation of employment.
For examples of employment-related restrictive covenants, see Standard Documents, Employee Non-Compete Agreement: Restricted Covenants and Employee Confidentiality and Proprietary Rights Agreement. For more information, see Practice Notes, Non-Compete Agreements with Employees and Protection of Employers' Trade Secrets and Confidential Information.
In a commercial context, restrictive covenants can restrict the action of one or both parties to a contact. Common restrictive covenants include:
- Non-disclosure provisions prohibiting a party from disclosing the other party's confidential information.
- Non-solicit provisions, prohibiting one or both parties from soliciting customers or employees of the other party for a specified period of time.
- Non-circumvention provisions, prohibiting a recipient from using its relationship with an introduced party to compete against the disclosing party.
For examples of commercial-related restrictive covenants, see Confidentiality and Nondisclosure Agreements Toolkit, Standard Clause, Confidentiality Agreement: Non-Solicitation Clause, and Standard Clause, Confidentiality Agreement: Non-Circumvention Clause.