Written by Bianca Lindau, Jameson Pasek and Crystel Saraie.
In a series of recent rulings, most notably in Kodiak Building Partners, LLC v. Adams, the Delaware Court of Chancery has signalled a robust shift in its enforcement of restrictive covenants tied to business transactions. This trend marks a move away from historic leniency in sale-of-business contexts, placing renewed emphasis on the necessity for such covenants to be precisely tailored to protect legitimate commercial interests. The Court’s unwillingness to salvage or narrow overbroad provisions suggests a new level of scrutiny that should prompt caution among drafters and acquirers alike.
Case Study: Kodiak v. Adams (Oct 2022)
In Kodiak v. Adams, Kodiak Building Partners, LLC (“Kodiak”) entered into a stock purchase agreement with Northwest and Mandere Construction, Inc. (“MCI”) to acquire Northwest Building Components, Inc.’s (“Northwest”) and MCI’s Company Capital Stock and “all of the assets, properties, rights licenses, interests, Customer Deposits, Contracts and business, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, owned, eld or used by [Northwest or MCI] or in the conduct of [Northwest or MCI’s] business (the ‘Purchased Assets’)”, as well as Northwest’s goodwill and the 8.33% interest held by Philip Adams in Northwest.[1]
As part of the transaction, certain Northwest stockholders, including Adams, entered into a restrictive covenant agreement. The covenant prohibited Adams, for a period of thirty (30) months post-closing, from owning, managing, operating, controlling, or participating in any business that was similar to or competed with the defined “Business.” The restriction applied in Idaho and Washington and within a 100-mile radius of any location outside those states where Kodiak had sold products or provided services in the twelve months preceding closing.
The agreement defined “Business” to include “manufacturing, marketing, selling, distributing, installing and/or delivering of trusses; roof, floor and stair components; framing; siding and other building materials and supplies, and providing services with respect thereto, including design, engineering, turn-key solutions, project management and trade coordination services.”
Although Adams waived his right to challenge the covenant, the Delaware Court of Chancery held that public policy required a reasonableness review. The Court found the covenant overbroad, as it extended beyond the acquired company to unrelated Kodiak businesses, and therefore could not be justified as advancing a legitimate business interest of Kodiak. While the court acknowledge that, in the context of a sale of a business, the buyer (Kodiak) has a legitimate business interest in protecting the assets and goodwill acquired in the sale, prohibitions going beyond that exceed the permissible scope.
Notably, the agreement allowed the court to modify unenforceable terms, the court refused to “blue-pencil” the provision. Instead, it struck the covenant entirely, emphasising Delaware’s preference for enforcing only those restraints that are narrowly and carefully drafted from the outset.
Corroborating Decisions: Broad Pattern Emerging
The Kodiak ruling is not an isolated development but forms part of an emerging pattern of stricter judicial review. In Intertek Testing Services v. Eastman (Mar 2023), the Delaware Court of Chancery reviewed a stock-sale agreement that included a global non-compete provision [2]. The Court found the clause unreasonably expansive in geographic scope, especially as the acquired business operated on a national scale. As in Kodiak, the Court refused to narrow or reform the covenant and instead invalidated it entirely.
Additional rulings have similarly declined to uphold overly broad sale-of-business restrictive covenants. Even when reviewing covenants under the traditionally more deferential standard applicable to business-sale scenarios, the Chancery Court has insisted that any restraint must directly correspond to the business interests actually acquired. The consistent refusal to modify excessive clauses demonstrates the Court’s firm commitment to contractual discipline and commercial fairness.
The Court’s Legal Reasoning
Delaware courts apply a well-established three-part test when evaluating the enforceability of restrictive covenants. First, the restraint must be reasonable in its temporal duration and geographic scope. Second, it must protect a legitimate business interest, typically the goodwill or proprietary information of the acquired entity. Third, the restriction must be equitable, meaning it must not impose an undue hardship on the restrained party or contravene public policy by unduly stifling competition. [3]
Where a covenant fails to satisfy any of these criteria, the Delaware Court of Chancery has shown increasing reluctance to salvage the provision. Instead, courts now routinely strike such clauses in their entirety, reinforcing the principle that parties must bear the risk of overreaching in their contractual drafting.
Practical Takeaways for Buyers and Drafters
Buyers should ensure that restrictive covenants are carefully tailored to the specific business being acquired, rather than seeking to protect their wider portfolio interests. Covenants that overreach, particularly in geographic or business scope, face a high risk of invalidation.
Reliance on boilerplate waivers of reasonableness review provides little practical protection. Courts will independently assess the covenant’s enforceability irrespective of the parties’ express agreement to the contrary. The Delaware courts have also made it clear that parties should not assume that courts will “blue-pencil” or narrow overly broad provisions. Where the clause extends too far, it is likely to be struck down in full rather than rewritten by the court.
Ultimately, precision is the safest approach. Geographic and temporal limits should align with the actual operations and competitive footprint of the acquired company, and restrictions should go no further than necessary to protect the goodwill or confidential information legitimately transferred in the transaction.
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[1] Kodiak Bldg. Partners, LLC v. Adams, No. 2022-0311-PAF, 2022, WL 5240507 (Del. Ch. Oct. 6, 2022), https://courts.delaware.gov/Opinions/Download.aspx?id=338810.
[2] Intertek Testing Servs. N. Am., Inc. v. Eastman, No. 2022-0853-LWW, 2023 WL 2568549 (Del. Ch. Mar. 16, 2023), https://law.justia.com/cases/delaware/court-of-chancery/2023/2022-0853-lww.html.
[3] All Pro Maids, Inc. v. Layton, 2004 WL 1878784, at *5 (Del. Ch. Aug. 10, 2004).