By Timothy P. Brynteson, Esq.
In a continued effort to limit the use of non-compete agreements (non-competes) in Colorado, the Legislature has passed Senate Bill 25-083 (SB 83), that amends the business sale exception found in Colorado Revised Statutes (C.R.S.) § 8-2-113(3)(c), by imposing new restrictions that specifically target non-competes in the context of medical practice and business sales. Although non-competes in connection with a business sale remain enforceable under the Colorado mergers and acquisition (M&A) exception, SB 83 narrows this exception by imposing a time limit for minority owners who acquired interest as part of compensation for services rendered.
Under the newly amended provision, non-competes tied to the sale of a business can be enforceable against an owner who is selling their interest. However, if the owner is a minority shareholder and acquired that ownership through equity compensation or in connection with services rendered, then the duration of any non-compete is limited to a maximum duration that is calculated using a formula that considers the owner’s receipts from the sale, divided by the owner’s average annualized compensation from the business, over the lesser of the prior 2 years or the total period of affiliation.
Notably, if a shareholder acquired their interest entirely through cash or capital investment, rather than having earned the shares, then this exception does not apply. However as stated, if an individual acquired ownership through both investment and compensation, then the statute leaves open the possibility that the duration of a non-compete might only be measurable against their compensated ownership interest, excluding any other invested ownership interest from the time calculation. Therefore, businesses should clearly document how each owner’s equity was acquired to assess durational enforceability under this new framework.
For businesses involved in M&A, this change may complicate the drafting of restrictive covenants. Buyers relying on non-competes to protect goodwill and competitive interests should consider the allowable durations for minority service-based owners. Conversely, sellers should be aware of their rights and potential limitations under this new rule.
Given the complexities and financial stakes involved, businesses and owners contemplating a sale, or generally any agreement that involves restrictive non-compete covenants, should consult legal counsel experienced in business and transactional law.
