Buyer beware as the asset protection afforded by non-disclosure and non-solicitation agreements signed by prospective purchasers may not survive the sale. This issue was addressed in a recent federal decision in Illinois offering some cautionary reminders for business buyers. In this case, Keywell LLC (“Keywell”) sought to sell its assets. Croniment Holdings, Inc. (“Croniment”), a bidder for Keywell’s assets, signed a non-disclosure agreement (the “NDA”) which prohibited Croniment from disclosing Keywell confidential information and prohibited Croniment from hiring any of Keywell’s employees with whom Croniment came into contact during negotiations. Keywell and Croniment entered into an asset purchase agreement by which Croniment would serve as the stalking horse bid for Keywell’s assets in bankruptcy.

Keywell filed for bankruptcy, but a third party other than Croniment prevailed and purchased Keywell’s assets. The bankruptcy court order authorized the sale of Keywell’s assets to the third party, but the order was specific that the sale was not a consolidation or merger and that there was no continuity of enterprise between Keywell and the third party purchaser. The third party purchaser did not assume any employment or similar agreements to which Keywell was a party.

After the sale, Croniment offered employment to two Keywell executives. The two Keywell executives had non-compete agreements that prohibited them from disclosing confidential information and from being employed by certain companies, including Croniment, for two years after the termination of their employment. Croniment filed a lawsuit that sought a declaration that the third party purchaser of Keywell’s assets could not enforce the NDAs and or the non-compete agreements. After the lawsuit was filed, Keywell assigned all of its rights under the NDAs and the two non-compete agreements to the third party purchaser.

The main issue before the court was whether the NDA and the non-compete agreements were assignable to the third party purchaser. Focusing first on the NDA, the court recognized that a non-disclosure agreement is essentially a restraint on trade and its validity and enforceability are analyzed in essentially the same way as if it were a covenant not to compete. Thus, the NDA and the non-competes were only enforceable if they protected Keywell’s legitimate business interests.

The court found that following the sale of its assets, Keywell had no interest in customers, confidential information, trade secrets, or in retaining a stable workforce. Those interests were all transferred in the asset sale. The assignment of the agreements after the sale was not effective because the sale terminated Keywell’s existing legitimate business interests effectively terminating those agreements. Therefore, the third party purchaser could not enforce any of the agreements.

When relying on NDAs and restrictive covenants, ensure that they provide the protections you require, and if you are relying on them as a business purchaser, confirm that those protections flow to you.