Restrictive covenants, including non-competition clauses, are commonly misunderstood, and such misunderstandings can cause problems not only for employees, but also employers. When hedge fund managers hire new employees, these types of restrictions are often included in employment agreements or in partnership agreements (or side letters), often when an employee or partner is granted an interest in the fund manager’s profits. Additionally, they can be found in purchase agreements when a fund manager sells some or all of its business. See “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues
,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011). When properly drafted and applied, restrictive covenants can protect an employer against harm created by the theft or misuse of valuable proprietary firm information. When improperly drafted or applied, such restrictive covenants may not be enforced and will not provide the desired protection. In addition, fund managers hiring new employees who may be subject to restrictive covenants should take certain precautions to avoid allegations that they aided or abetted a breach of a restrictive covenant which can cause reputational harm, among other things. On November 10, 2011, Ronald E. Richman and Holly H. Weiss (SRZ Partners), both partners at Schulte Roth & Zabel LLP, hosted a seminar entitled “Restrictive Covenant Issues for Investment Managers” (Seminar) in which they discussed a variety of issues relevant to hedge fund managers, including the different types of restrictive covenants, common misconceptions about restrictive covenants, how to properly draft restrictive covenants, how restrictive covenants are analyzed by the courts, what happens once a dispute involving restrictive covenants arises and best practices for hedge fund manager employers looking to hire prospective employees. For the most part, Richman and Weiss focused on restrictive covenants in the employment arena. This article summarizes the issues discussed by the SRZ Partners and includes additional guidance relevant for hedge fund managers dealing with restrictive covenants.