Colorado generally disfavors restrictions that limit an employee's ability to seek employment, but such limitations are subject to several exceptions. Colorado's non-compete statute (Colorado Revised Statutes Section 8-2-113) was amended in 2022 to establish compensation thresholds for the enforcement of non-competition restrictions on "highly-compensated" employees and a lower compensation threshold for the enforcement of non-solicitation restrictions. The 2022 law, however, left intact the statute's "M&A exception," which provided that "a covenant for the purchase and sale of a business or the assets of a business" was not prohibited under the statute.
The most recent revision to the statute, which takes effect on Aug. 6, 2025, narrows the "M&A exception" with respect to minority owners who received their ownership interest as equity compensation. Now, the duration of any non-competition restriction is limited. The temporal limitation is determined by dividing the consideration received by such a minority owner in the transaction by the average annualized cash compensation (including distributions and dividends) received by that minority owner in the two years preceding the transaction. By way of example, if a minority owner received equity in a selling business and received $500,000 in aggregate consideration in a transaction, and that minority owner had received $250,000 in total cash compensation each year during the two years preceding the transaction, that minority owner could not be subject to a non-compete lasting more than two years. The statute does not make clear how it would apply to a minority owner who both purchased equity and received equity as compensation.
This new limitation on restrictive covenants in mergers and acquisitions transactions will likely add to the analysis buyers undertake when evaluating whether a transaction makes sense and the valuation of a selling business, in light of the buyer's ability to restrict a minority owner (particularly a critical employee-owner) from competing against the buyer.
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