The Federal Commerce Fee below Chair Lina M. Khan has set its sights on banning non-compete agreements, probably affecting over 30 million American employees. This transfer is especially related in monetary companies and will have vital implications for mergers and acquisitions within the trade.
FTC’s Ban on Non-Competes
In April 2024, the FTC introduced a last rule banning most non-competes nationwide, anticipated to take impact on Sept. 4, 2024. The ban applies to each present and future non-compete agreements, overlaying not solely workers but additionally impartial contractors, interns, volunteers and different employees.
Key provisions of the ban embody:
- Employers should present written discover to related employees that their non-compete agreements are unenforceable.
- An exemption for “senior executives” with present non-competes, outlined as people in a “policy-making place” incomes a minimum of $151,164 yearly.
- An exemption for non-competes associated to the “bona fide sale” of a enterprise or a person’s possession stake in an organization.
Nevertheless, as reported by Bloomberg, a latest Supreme Courtroom resolution overturning the Chevron doctrine has solid doubt on the FTC’s authority to implement such sweeping laws. This ruling considerably impacts the FTC’s energy and creates uncertainty for present and future laws.
Non-Solicit and Non-Disclosure Agreements Nonetheless Allowed
Whereas the FTC’s rule bans most non-competes, it doesn’t prohibit non-solicit and non-disclosure agreements. This allowance is especially related for monetary advisory corporations, which have traditionally relied extra on non-solicits to retain management over shopper relationships when an advisor leaves.
Nevertheless, implementing non-solicit agreements might be difficult, because it’s usually troublesome to find out whether or not an advisor actively solicited former purchasers or if purchasers adopted the advisor of their very own volition. This ambiguity might result in elevated authorized disputes between corporations and departing advisors.
California’s Strategy and the Sale-of-Enterprise Exception
California has lengthy been on the forefront of proscribing non-compete agreements. As outlined by Hanson Bridgett LLP, California Enterprise and Professions Code §16600 typically prohibits non-compete agreements, with some exceptions. One key exception is the “sale-of-business” clause, which permits non-compete agreements when a enterprise proprietor sells their firm or its belongings.
This exception in California legislation permits any enterprise proprietor who sells the goodwill of a enterprise, all their possession in a enterprise entity, or all or considerably the entire belongings of a enterprise along with the goodwill, to agree with the customer to chorus from carrying on a competing enterprise inside a specified geographic space.
Implications for Fairness Possession and M&A
The exemption for gross sales transactions within the FTC’s rule might have vital implications for monetary advisors with fairness stakes of their corporations. Not like the preliminary proposal, which solely utilized to these with a minimum of a 25% possession stake, the ultimate rule permits non-competes for any stage of possession within the case of a enterprise sale or a person promoting their stake.
This alteration might make small fairness stakes much less enticing for some advisors, as they could discover themselves topic to non-compete agreements if their agency is offered or in the event that they wish to go away and promote their fairness stake again. However, it would make providing fairness stakes extra interesting for corporations seeking to retain advisors and make themselves extra enticing to potential consumers.
For M&A exercise, this exemption might influence how offers are structured and valued, significantly within the RIA channel the place shared possession of the enterprise entity is extra widespread.
Subsequent Steps for Corporations and Advisors
Because the monetary companies trade adapts to this new atmosphere, each corporations and advisors ought to take into account the next steps:
- Evaluate employment agreements: Advisors ought to evaluate their present agreements to grasp their obligations, together with any non-solicit or non-disclosure provisions that can stay in impact.
- Construct stronger crew cultures: With non-competes now not an choice for many workers, corporations might must focus extra on making a constructive work atmosphere and enticing compensation packages to retain expertise.
- Craft extra equitable non-solicits: Corporations may take into account creating non-solicit agreements that acknowledge the “yours, mine and ours” cut up of shopper relationships. The Advisor/Consumer Relationship Equitable Cut up Settlement is one potential template for this method, as detailed by Kitces.com.
- Rethink fairness choices: Each corporations and advisors might must reassess the worth and implications of fairness possession contemplating the non-compete exemption for enterprise gross sales.
A Important Shift
The FTC’s ban on non-competes, whether or not it sees the sunshine of day, might characterize the harbinger of a big shift within the monetary companies trade, significantly for M&A exercise and advisor retention methods. Whereas it supplies advisors with elevated flexibility, it additionally presents challenges for corporations in search of to guard their shopper relationships and mental property.
Because the trade seeks to adapt, corporations might must discover different methods to guard their pursuits. At this 12 months’s Gladstone Group Annual M&A Convention, Sharron Ash, chief litigation counsel at Hamburger Legislation Agency LLC, mentioned corporations want to pay attention to state-specific legal guidelines concerning non-competes, which can apply whatever the FTC’s ruling. She added that the event of extra equitable non-solicit agreements and a deal with constructing robust firm cultures, might assist corporations navigate the brand new authorized framework of expertise retention and shopper safety within the monetary companies trade.
Finally, this new period might result in a extra aggressive market in monetary companies, probably benefiting each advisors and the purchasers they serve. Nevertheless, it should require cautious navigation of this regulatory subject and a willingness for enterprise leaders to adapt conventional practices.
Steven Clark, president of DAK Associates and senior advisor of Gladstone Group
