The Quiet Asset in the Schedule: Underwriting Restrictive Covenants in UK MGA Transactions

In a UK MGA transaction, the negotiating table is crowded with the obvious: renewal rights, capacity terms, commission schedules, run-off and the treatment of delegated authority. Restrictive covenants — non-compete, non-solicit and confidentiality — tend to arrive late in the process, are checked by lawyers, and are then filed as boilerplate. That is a mistake. In a business where enterprise value sits in relationships, data and decision rules rather than plant and stock, a covenant is one of the few instruments that converts goodwill from an aspiration into a defensible position. It is also one of the easiest assets to overvalue.

Why the clause belongs in the valuation, not the appendix

The value of an MGA book rests on three capabilities: the ability to renew, the ability to retain, and the ability to reprice. Restrictive covenants touch all three. A non-solicit limits the extent to which renewal conversations can follow a departing principal. A non-compete restricts a team from reconstituting the binder elsewhere. Confidentiality protects the proprietary rules, loss data and pricing logic that make the book underwritable in the first place. Each is an intangible asset with a legal enforcement mechanism — but only to the extent that a court would grant relief.

That qualification is where underwriting discipline is required. A covenant is not a guarantee. It is a probability-weighted asset, and the gap between the clause on the page and the remedy in court is the number that belongs in the deal model.

The enforceability discount

English law begins from the restraint of trade doctrine: a covenant in restraint of trade is void unless it is reasonable and protects a legitimate business interest. The Supreme Court in Tillman v Egon Zehnder [2019] UKSC 32 confirmed that the blue pencil doctrine is narrow — the court will not rewrite a clause to save it. A covenant that is too wide in scope, geography or duration may fall entirely. The practical consequence for underwriters is straightforward: the covenant in the data room is not the covenant in the market. Apply an enforceability discount.

A working formula is: probability of obtaining an injunction × proportion of revenue genuinely protected × cost and speed of enforcement. Each input can be assessed at diligence. None of them is binary.

A five-test underwriting framework

1. Legitimate interest. What is the covenant actually protecting? Goodwill, confidential information, workforce stability or something more diffuse? A covenant tied to client relationships is generally stronger than one that seeks to prevent competition in the abstract. Underwriters should ask for the business case, not just the clause.

2. Scope. Activity, geography and duration are the three dimensions a court will test. A twelve-month non-solicit limited to brokers with whom the individual dealt is enforceable in most cases. A twenty-four-month non-compete covering all UK specialty lines is likely to be struck down. The narrower the clause, the higher the enforceability probability — but the lower the economic protection. Price both sides.

3. Construction. Is the covenant in the right instrument? A restrictive covenant in a share purchase agreement binds the seller; the same wording in an employment contract binds the individual. The remedies differ, as does the ability to assign the benefit to a buyer. Covenants that sit only in a binder or a side letter may not survive the transaction at all. Underwriters should map every covenant to the entity and the individual it is meant to restrain.

4. Counterparty and monitoring. A covenant is only as good as the willingness and ability to enforce it. Are the individuals likely to litigate? Does the buyer have the resources and appetite to seek urgent injunctive relief? Is there a practical monitoring mechanism — broker notification, garden leave, exit interviews? A covenant with no monitoring is a covenant with no value.

5. Economic materiality. What proportion of gross written premium depends on the restricted individuals or the relationships they control? A non-solicit covering three producers who write forty per cent of the book is a material asset. The same clause covering a team that writes five per cent is a rounding error. Materiality should drive the adjustment, not the existence of the clause.

Where the clause sits changes the price

In UK MGA deals, restrictive covenants appear in at least three places: the sale and purchase agreement, the employment contracts of key individuals, and the capacity or binder documentation. Each location carries different remedies. A breach of an SPA covenant typically gives rise to damages, sometimes against a warranty and indemnity policy. A breach of an employment covenant can be restrained by injunction quickly, but only against the individual. Confidentiality clauses are often the most enforceable, because they protect trade secrets rather than restrain competition, yet they are the hardest to evidence in practice. Underwriters should treat confidentiality as the quiet workhorse of the package and test whether the target has classified its information, logged access, and conducted exit interviews.

Pricing the covenant: a simple treatment

Rather than a binary present-or-absent adjustment, assign each material covenant a probability band — high, medium or low — based on the five tests. Map the revenue at risk to the individuals and relationships covered. Apply a leakage assumption for the period between breach and remedy. Present the result as an explicit adjustment to key-person and renewal-rights exposures, with the assumptions visible to the deal team. That treatment does two things: it stops the covenant being double-counted as both a key-person mitigant and a goodwill asset, and it forces a conversation about enforcement budget.

Conclusion

The restrictive covenant is not a legal afterthought. In an intangible-heavy MGA, it is part of the asset schedule. But its value lies not in its wording alone — it lies in the likelihood that a UK court would enforce it, the revenue it actually protects, and the buyer's willingness to act on it. Underwriters who price the clause rather than the paper will find a more honest number, and dealmakers who read the covenant before the completion meeting will avoid paying for protection they never had.