Sale of Business Non-Competes: The Forfeiture for Competition Alternative

Key Takeaways

• Delaware courts tightening non‑compete enforceability.
• FFC clauses tie supplemental payment to competition restrictions.
• Reasonableness review generally bypassed with FFC provisions.
• Damage‑only remedies won’t evade judicial scrutiny.
• Buyers gain flexible, enforceable competition deterrent.

Summary

Mayer Brown’s March 2026 memo urges acquirers to replace traditional non‑compete covenants with forfeiture‑for‑competition (FFC) clauses after Delaware courts increasingly invalidate non‑competes on reasonableness grounds. An FFC ties a supplemental cash benefit to the seller’s agreement not to compete, and because it functions as a conditional payment rather than an injunction, it generally avoids judicial reasonableness review. Recent rulings, including Fortiline v. McCall and a confirming Supreme Court order, reinforce that damage‑only workarounds will not escape scrutiny. The memo positions FFCs as a more reliable post‑closing protection mechanism.

Pulse Analysis

The landscape for non‑competition covenants in Delaware has shifted dramatically over the past two years. A string of decisions—most notably the Fortiline v. McCall ruling—have applied a strict reasonableness test, causing many seller‑side non‑competes to be invalidated or heavily narrowed. For acquirers, this creates uncertainty around post‑closing protection of goodwill and customer relationships. As a result, transaction lawyers are reevaluating traditional carve‑outs and seeking mechanisms that survive judicial scrutiny without sacrificing deal economics.

Enter the forfeiture‑for‑competition (FFC) provision, a structure the Delaware Supreme Court recently endorsed. Under an FFC, the buyer promises an additional cash payment or other benefit that automatically vests unless the seller competes within a defined market and timeframe. Because the clause is framed as a conditional payment rather than an absolute injunction, courts treat it as a contractual incentive, sidestepping the reasonableness analysis applied to classic non‑competes. This distinction makes FFCs more predictable, allowing parties to tailor the financial penalty to the competitive risk they wish to mitigate.

Practically, the shift to FFCs reshapes M&A negotiation dynamics. Buyers can negotiate lower purchase prices while retaining a powerful deterrent against seller competition, and sellers gain clarity on the exact cost of breaching the agreement. However, careful drafting is essential: the trigger events, benefit amount, and claw‑back mechanics must be unambiguous to avoid disputes. As Delaware jurisprudence continues to evolve, counsel should monitor upcoming opinions, but the current trajectory suggests FFCs will become a standard tool for protecting post‑closing value.