Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The M&A Non-Disparagement Clause That Backfired on a Buyer
Transcript
- Lucas: It's a standard boilerplate clause. Probably fewer than a hundred words. And it nearly cost a seller the entire payout from a one hundred forty million dollar deal. Luna: The non-disparagement clause. We've all seen it. 'Seller shall not make any statement that disparages Buyer.' Lucas: Right. And in most deals, no one fights over it. The buyer's lawyer says it's market. The seller's lawyer says fine. But I found a case from 2023 — it's a confidential arbitration, so I'll call it Doe versus Roe Corporation — where that clause became the center of a seven-figure dispute. Luna: What happened? Did the seller go on a rant? Lucas: Not even close. The seller was the former CEO of a niche software company — let's say they made compliance tools for mid-sized banks. The buyer was a private equity firm that rolled up three competitors. After the deal closed, the seller stayed on for a six-month transition, then left and joined a competitor. That's allowed — the non-compete was only twelve months geographically limited. But the non-disparagement clause was unlimited in time. Luna: So the buyer claimed he disparaged them by joining a rival? Lucas: No, that wasn't it. The trigger was a single LinkedIn post. The seller wrote something like: 'Excited to join a team that truly understands the compliance needs of community banks. In my experience, too many vendors treat compliance as a checkbox, not a partnership.' He didn't name the buyer. But the buyer's legal team argued that 'too many vendors' was a clear reference to them, and that the post implied they treated compliance as a checkbox. Luna: That feels like a stretch. But I'm guessing the clause was written broadly. Lucas: Extremely broadly. The clause said — and I'm paraphrasing — 'Seller shall not make any oral, written, or electronic statement that disparages, defames, or otherwise brings into disrepute Buyer or its affiliates, including any statement that could reasonably be interpreted as critical of Buyer's products, services, or business practices.' That's a huge net. Luna: It basically covers any negative opinion. Even a vague one. Lucas: Exactly. So the buyer sent a demand letter citing breach of the non-disparagement clause and threatening to claw back part of the earnout — which was eight million dollars. The seller refused to settle. The case went to arbitration under JAMS. Luna: The arbitrator ended up tossing the claim, right? Because of California law. Lucas: Yes. The arbitrator applied California Civil Code Section 1668, which says contracts that waive liability for future intentional misconduct or violations of law are against public policy. The arbitrator reasoned that this non-disparagement clause was so broad it could be read to cover false statements of fact — which, if intentional, would be a form of fraud or defamation. Waiving liability for that in advance is unenforceable. Luna: So the entire clause was void? Not just narrowed? Lucas: Void in its entirety. The arbitrator held that the clause was not severable — meaning you couldn't just cut out the unenforceable part. So the buyer got nothing. But here's the thing: the seller still spent about three hundred thousand dollars in legal fees to defend the arbitration. Even if he won, he lost. Luna: And the buyer probably spent more. So a standard clause that nobody negotiated ended up costing both sides. Lucas: Right. And that's the real danger. Sellers think the clause is harmless. Buyers think it's a shield. But if it's written too broadly, it might be unenforceable exactly when you need it. And if it's too narrow, it might not protect the buyer against real harm. Luna: What's the better way to write it? I assume you've seen some good examples. Lucas: Yeah. The best approach I've seen is a mutual non-disparagement clause that includes three specific carveouts. First, factual statements — you can't be held liable for saying something that's objectively true. Second, statements made in legal proceedings, like court or arbitration. Third, statements required by law, like responding to a subpoena. And then you cap the damages — say, half a percent of the purchase price — so that even if there's a breach, the buyer's remedy is proportional, not the entire earnout. Luna: Half a percent of a hundred forty million is seven hundred thousand dollars. A serious number, but not company-killing. Lucas: And crucially, it's liquidated damages — no need to prove actual harm. That actually makes the clause more enforceable, because courts prefer a fixed number over a speculative claim. And the mutual aspect means the buyer also can't disparage the seller. That creates symmetry and reduces the chance of a fight. Luna: Speaking of fights that could have been avoided — we've done, what, almost a hundred episodes on M&A traps? And the non-disparagement clause is one of those things that feels small until it isn't. Lucas: It really is. And I think that's why we keep coming back to these seemingly minor clauses. If this conversation has helped you think more carefully about your own contract language — whether you're a buyer or a seller — that's exactly why we do this show ad-free and listener-supported. If you've gotten value from these deep dives, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep these episodes coming without any sponsors. Luna: Yeah, listener support really is what keeps us independent. And we appreciate every person who chips in. Lucas: So back to the Doe case — there's one more detail I want to mention. The arbitrator also noted that the buyer's own post-closing conduct — specifically, a press release that implied the seller had been fired for poor performance — might itself have violated the non-disparagement clause if it had been mutual. But since the clause only bound the seller, the arbitrator didn't reach that issue. Luna: That's interesting. So a one-sided clause actually hurt the buyer's credibility. Lucas: Exactly. And that's a lesson for buyers: a mutual clause isn't just fairer, it's also more defensible in court. If you're going to ask the seller to keep quiet, you should be willing to do the same. Luna: So what's the takeaway for someone about to sign a purchase agreement today? Lucas: Read the non-disparagement clause as carefully as you'd read the indemnification section. Ask yourself: does this cover opinions or just false statements of fact? Is it mutual? Is there a liquidated damages cap? And if you're selling a company in California, or if the deal is governed by California law, you should know that an overbroad clause might be completely unenforceable. Don't rely on boilerplate to protect you. Luna: And if you're a buyer, you don't want a clause that gets thrown out the first time you try to use it. Lucas: Right. A well-drafted clause is a real tool. A poorly drafted one is a false sense of security. And in a hundred forty million dollar deal, you want your tools to work.