Negative Covenant

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Related to Negative Covenant: Negative pledge, Affirmative Covenants

Negative Covenant

A provision found in an employment agreement or a contract of sale of a business that prohibits an employee or seller from competing in the same area or market.

A negative covenant is commonly used by businesses, particularly those that depend upon trade secrets for their success. An employer wants to ensure that a former employee will not parlay information, skills, customer lists, and personal relationships with clients acquired on the job to gain a better position with a competitor or to start his or her own business. An employer also wants to protect his or her business in the competitive marketplace against the use of the unique personal skills of a former employee. An employer can achieve these objectives by including a negative Covenant in the employment contract. Such a provision specifies that the employee will not work for a competitor or start a competing business for a period of time after leaving the employer. The covenant must be reasonable in its scope and duration. It cannot bar the employee from working at all, anywhere, or for an unreasonable length of time.

A court enforces a negative covenant by granting an Injunction prohibiting the employee from working in a competitive enterprise as described in the covenant. It will do so only when necessary to protect the former employer's legitimate interests.

A contract for the sale of a business often includes a negative covenant at the insistence of the buyer. A buyer wants to protect and capitalize on the good will of the business he or she buys. He or she must have an opportunity to get to know and serve the customers if the business is to continue to be successful. The value of the business is undermined if the seller can open a competing enterprise next door, thereby keeping some of the good will that was sold to the buyer. A negative covenant under which the seller agrees not to open a competing enterprise for a reasonable period of time within a reasonable distance from the original business is a frequent provision in a sales contract.

References in periodicals archive ?
There are no upper price limitations, negative covenants or restrictions on OncoGenex' future financing activities.
The facility has no financial ratio covenants, and other negative covenants are similar to those in its revolving credit facility.
The termination of the Credit and Security Agreement released all liens and security interests securing the debt, as well as affirmative and negative covenants including, among other things, a financial covenant that required us to maintain minimum levels of cash and cash equivalents in collateral accounts that were pledged to MidCap.
Factors that could cause actual results to differ materially from NorthStar Realty 's expectations include, but are not limited to, the timing and amount of borrowings under the Revolving Credit Facility; NorthStar Realty's ability to comply with the various affirmative and negative covenants, including the financial covenants, contained in the Revolving Credit Facility agreement; NorthStar Realty's use of leverage; the anticipated strength and growth of NorthStar Realty's business; NorthStar Realty's liquidity and financial flexibility; NorthStar Realty's future cash available for distribution; and the availability of, and ability to consummate investment opportunities funded by, borrowings from the Revolving Credit Facility.
The Company is subject to various negative covenants, including compliance with a certain leverage ratio, which negative covenants place limitations on the ability of the Company and its subsidiaries to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends or distributions to stockholders, undertake transactions with affiliates and enter into merger transactions or consolidate with other companies.
The terms of the Credit Facilities and the Bridge Facility will provide for customary representations and warranties, affirmative and negative covenants and events of default.
intends to enter into an amendment to its Credit Agreement, dated as of May 6, 2011 to, among other things, relax the financial maintenance covenants, to make certain changes to the restricted payments and investments negative covenants and to increase the applicable rate for the loans borrowed under the Credit Agreement.