ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, July 13, 2018

How does a "deemed effective" date affect a non-compete?

A recent case out of New York, Niznick v. Sybron Canada Holdings, Inc., 650726/2018, illustrates how ambiguity can crop up anywhere, sometimes no matter how careful you are; it's difficult to plan for every eventuality. 

The parties had a contract that included a non-competition clause that prohibited competition for five years after Niznick ceased to own any units in the company. Sybron tried to exercise an option to purchase Niznick's units in the company in 2014, but Niznick disputed the validity of Sybron's actions, and the parties engaged in litigation. Eventually, a court concluded that Sybron was permitted to exercise the option and that Niznick's ownership interest terminated as of the 2014 date when Sybron had attempted to exercise its option. After this decision, in 2017, the parties entered into a purchase and sale agreement "deemed to be effective as if the transfer" had occurred in 2014. Niznick also asserted that, therefore, the non-competition clause would expire in 2019--five years after the 2014 date. Sybron contested that reading. 

The parties' previous contracts had referred to the non-compete as "a material part of the consideration" of the agreement. The court, therefore, did not allow Niznick's attempt to minimize its importance. The purchase and sale agreement executed in 2017 stated that Niznick "is the owner" of the units in question (emphasis added). The "deemed to be effective" date was not considered to alter the language of the non-compete, which stated that it would commence when Niznick ceased to own units, which did not happen until the 2017 purchase and sale agreement, regardless of the "deemed effective" date. 

At the time of drafting the non-compete, it was probably thought that it would be pretty clear when Niznick ceased to own the units. Sybron probably did not anticipate that they would have a dispute about the operative date this way.

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The answer is not quite that simple considering that the judgment rendered in March 2017 ruled that the sale was effective on the date the option was exercised in January 2014. The judge ordered the parties to document the sale effective that date. It gave Sybron credit of $14m towards the purchase price that had been paid to Niznick over the three years of the litigation and ordered Sybron to pay over $20 million in interest Not having paid for the shares on that date and also file new K1s documenting that Niznick did not own the shares after January 2014 which it did. So the legal question is - are unambiguous judgments binding and are “effective as of” provisions enforceable? Of course the non-compete was a “Material part of the consideration” but the sale date triggered the start of the non-compete and the K1s, the Judgement and the purchase and sale agreement all establish when that was. While it may be an interesting Question as to who owned the shares during the three years of litigation, when all is said and done the sale took place as required by the judgment in January 2014. Since you weighed in on the ruling, who has the better argument on appeal. The purchase price for my remaining 25% which is what the litigation was about was $98m including interest, which Sybron paid, so I don’t need to go back to work at 76 but if this case were in California instead of NY, the non-compete would be a different story so selection of law is important.

Posted by: Dr Gerald Niznick | May 28, 2019 11:32:51 PM

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