Letting a Seller Keep Public Shares Without Keeping a Foothold

The situation

Niran called on a Thursday afternoon, sounding less worried than puzzled. 'Kavya just told us she can't sign our non-compete,' he said, 'and I don't think she's trying to get out of the deal. I think our draft is actually asking her to do something she can't.' Niran and Anong were trustees of a newly formed employee ownership trust set up to buy a Beamsville business that manufactured specialized agricultural equipment, a structure where the employees, collectively, would become the company's owners through the trust rather than through individual share purchases. Kavya was one of two founding shareholders selling the business, planning to stay on for a transition period before stepping back entirely.

The deal itself was substantial, valued in the $30 million to $50 million range, and had been moving smoothly through negotiation for weeks. The sticking point surfaced only when Kavya's lawyer flagged the standard non-compete language in the purchase agreement, the clause restricting her, for a period after closing, from holding any ownership interest in a business competing with the one she was selling. Kavya, as it turned out, held a modest position in a publicly traded agricultural technology company, part of a long-standing personal investment portfolio she managed independently of the business she was selling. That company's product lines overlapped, in a general sense, with the equipment the Beamsville business made, enough that the non-compete's broad wording would have technically caught her public shares in its restriction.

For Kavya, this was not a minor inconvenience to shrug off. She had held the position for years, it represented a meaningful piece of her personal savings, and she had no operational role or influence over the public company whatsoever; she was, in every practical sense, a passive shareholder like thousands of others who traded that stock. Being asked to sell it, or hold it in some kind of ongoing legal jeopardy, as a condition of closing a sale of an entirely different business struck her as unreasonable, and she said so plainly.

The complication for Niran and Anong was timing. The equipment business could not simply pause operations while the trust and Kavya worked out the wording; customer orders, seasonal production schedules, and financing commitments were all moving on their own clock, and a drawn-out renegotiation risked the deal's momentum even though the underlying disagreement, once understood, was fairly narrow.

What the other side was relying on

Kavya's position rested on a distinction that non-compete clauses, drafted broadly, often fail to make: the difference between actively competing with a business and passively holding a small slice of a public company that happens to operate in an adjacent space. A non-compete exists to stop a seller from taking the customer relationships, know-how, and goodwill they built in the business they just sold and redeploying it against the buyer, whether by starting a rival company, joining a competitor in an operational role, or steering business away from their old company toward a new one. None of that concern applies to someone who owns a small, publicly traded stake with no board seat, no operational input, and no ability to direct what the company does; a passive shareholder in that position has no more influence over a competitor's conduct than any other member of the public who happens to hold the same stock.

Her lawyer's argument was that a covenant broad enough to capture that kind of passive holding was not protecting the buyer from anything real. It was simply overreaching, and an overly broad restrictive covenant carries its own risk for the buyer: if a non-compete is written wider than necessary to protect the legitimate business interest at stake, a court asked to enforce it later may find the whole clause unreasonable and decline to enforce any of it, even the parts that were genuinely necessary, which is precisely the opposite of what a cautious buyer wants from its most important post-closing protection. Kavya was not threatening to walk from the deal over this point, but she was clear that she would not sign a clause requiring her to divest a long-held personal investment as the price of selling her business, and she was not going to let the point get negotiated away by attrition as the closing date approached; she had raised it early enough, in her view, that there was no excuse for treating it as a last-minute inconvenience.

Niran and Anong's instinct, understandably, was to want the broadest possible protection: Kavya knew the business, its customers, and its technical approach intimately, and a competitor gaining any foothold through her, even indirectly, was a real risk the trust's employee-owners could not easily absorb, especially since the trust structure meant the employees themselves, not a single sophisticated buyer, would ultimately bear the cost if the covenant failed to hold up when it mattered. The challenge was translating that legitimate concern into language specific enough to hold up, rather than language broad enough to catch a public shareholding that posed no actual threat, and doing so quickly enough that the disagreement did not stall a transaction the business's operating calendar could not comfortably absorb a long delay in.

What we did

1. Separated the real risk from the drafting default. We asked Niran and Anong what specifically they were worried Kavya might do after closing: join a competitor operationally, start a rival business, or solicit the company's customers and staff. All three were legitimate concerns. A passive public shareholding, with no board seat or operational role, was not among them, and naming that distinction clearly reframed the negotiation from a fight over the whole clause to a fight over one narrow carve-out.
2. Drafted a passive-investment exception with objective thresholds. Rather than argue in the abstract, we wrote a specific exception into the non-compete permitting Kavya to hold up to a defined small percentage of the outstanding shares of any publicly traded company, provided she held no board seat, no management role, and no ability to direct or influence that company's operations or strategy.
3. Set the threshold by looking at Kavya's actual position, not a generic figure. We reviewed her existing holding to confirm the percentage cap we proposed comfortably covered her current position with room to add to it modestly over time, rather than picking an arbitrary number that might box her in again a year later, since a cap set too close to her actual holding would have solved the immediate problem while quietly recreating it the next time the stock moved.
4. Kept every other part of the non-compete at its original strength. The exception applied only to passive holdings in publicly traded companies meeting the stated conditions. Kavya remained fully restricted from any operational role at a competitor, from starting a competing business, and from soliciting the company's customers or employees, which is where the trust's actual exposure lived and where the employee-owners genuinely needed the strongest possible protection once they took over running a business they had built their livelihoods around.
5. Had the trust's own valuator confirm the exception did not undermine the deal's pricing. Because the purchase price reflected an assumption that Kavya would be fully out of the competitive landscape, we asked the trust's advisors to confirm a narrow, passive, non-influencing shareholding did not change that underlying assumption. It did not, since Kavya would have no means of affecting the public company's competitive conduct.
6. Circulated the revised clause with a short explanatory note rather than just a redline. To keep the pace of the deal, we sent Kavya's counsel a plain explanation of what the exception did and did not permit, alongside the legal drafting, so the point could be confirmed quickly rather than triggering another full round of review, which mattered because every extra week of back-and-forth was a week the business's seasonal production schedule could not comfortably spare.
7. Set a reminder to revisit the threshold before the covenant's expiry. Because the exception was tied to a fixed percentage and Kavya's holding could change over time through ordinary market activity, we built in a mechanism for her to notify the trust if her passive position ever approached the cap, keeping the exception workable rather than a one-time fix that could quietly lapse into a breach.

The outcome

Kavya's counsel confirmed the revised clause addressed the concern within days, and the non-compete was signed without further negotiation. Because the issue was caught and resolved during drafting, it never became a dispute the parties had to litigate, settle, or work around after closing, and it added only a short delay to the transaction timeline rather than derailing it, which mattered given that the business's production schedule and customer commitments had left little room to absorb a longer stall.

Kavya kept her public shareholding, continued to hold it after closing exactly as she had before, and the trust's employee-owners took over the Beamsville business with a non-compete that was, if anything, more defensible than the original broad draft would have been. A covenant scoped to the buyer's actual risk is generally easier to enforce than one written as broadly as possible, because a court asked to interpret it later has less room to find the whole thing overreaching, and the trust's advisors were satisfied that the narrow exception cost the business nothing in terms of the protection it actually needed.

Nothing about this outcome makes headlines. No claim was filed, no shareholder felt forced into a decision they objected to, and the deal closed on schedule with Kavya remaining involved through the agreed transition period, which the employee-owners valued as much as the covenant itself, since her knowledge of the business's customers and processes was not something a document alone could transfer. That is precisely the point: the exception existed because someone read the draft closely enough to notice, before signing, that a standard clause would have quietly asked a seller to give up something the buyer never actually needed her to give up, and fixing it before signing meant the trust never had to find out what that disagreement would have cost the deal.

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