In South African private M&A deals, sale and purchase agreements (SPAs) often include restrictive covenants or non-compete undertakings. These provisions restrict certain actions following the sale’s completion, for example, -
• Non-competition: Prohibits involvement in competing ventures.
• Non-solicitation/non-dealing: Prevents soliciting the target business's clients.
• Non-poaching: Restricts hiring employees from the target business.
• Reputation: Forbids using a similar business name.
Under South African common law, these covenants are enforceable only to the extent they reasonably protect a party's legitimate interests. When a company or business is sold, the purchaser has a legitimate interest in preserving the goodwill associated with it.
Typically, these restrictions last one to five years after completion, encompassing the business's geographic reach at the closing date and potential expansion areas.
Purchasers often extend these requirements to senior management of the target business as well. However, there's an ongoing debate in the US and the UK about whether limiting or banning such restrictions on senior management can encourage innovation and competition.
In South African M&A, post-sale restrictive covenants are essential, balancing purchaser protection with fairness to sellers and promoting healthy competition.