Corporate Archives - Adishian Law

This article focuses on the concept of unequal bargaining power. Unequal bargaining power occurs throughout business and life. Being aware of when you are facing unequal bargaining power will help you strategize for your best possible outcome and lessen your risk.

Case Study: “Hitching Your Wagon (“Business”) to a Star (“SuperNova”)”

Partnering with a dominant corporation (SuperNova to use an astronomy analogy) by joining their eco-system can often be a smart and fast way to scale a business.

These positives however, are often offset by a loss of bargaining power, which shows up as a shifting of risks onto to the weaker party.

The underlying contracts are often very one-sided (in their favor) and can be legally revoked or altered almost at will. Whenever entering into such a relationship, you will want to look at the future risk of cash flows.

Can my (dominant corporation) partner change terms?
If so, do I get notice, or can it be overnight?
If so, what happens to my business?

If you decide to hitch your business to a economic Supernova, it is important to take steps to maintain the certainty of your future cash flows and quickly diversify your company’s dependence upon one relationship for its growth or existence. You will want to consult with a solid business lawyer to review contracts and advise you as to potential risks as well as steps to mitigate those risks.

About Adishian Law Group, P.C.

Adishian Law Group (https://adishianlaw.com) is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. As of November 2015, the firm has represented corporate and individual clients located across 22 California counties, 13 States outside of California and 9 foreign countries in over 480 legal matters. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco.

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If you are an entrepreneur, you need to understand risk management and Insurance. Risk management and insurance knowledge is essential for any business owner, asset owner or executive charged with running the enterprise.

Are you a small business? These days that is generally viewed as any business below $50M in annual revenue. Are you insured? The answer is always YES. The question is how…

If you have not purchased insurance, then you are “self-insured” – essentially relying on a combination of faith, your business cash flow and assets, and your personal cash flow and assets. Once you have a business of any size, it is wise to defend that business and cash flow with a combination of law and insurance. The foundation of a long term successful business is growing, recurring cash flows. Your cash flow cannot grow if it is always paying liabilities, and it won’t recur if one of the liabilities put you out of business.

Two components of your business advisory team should be a solid business lawyer and an experienced commercial insurance agent.

About Adishian Law Group, P.C.

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EL SEGUNDO, CA (October 1, 2012)—Adishian Law Group served as exclusive sell-side counsel to Bay Area Pain Center in its sale to Prospira PainCare.

In one of the most significant M&A transactions for a Bay Area healthcare company this year, Prospira PainCare (www.prospirapc.com) announced the acquisition of Bay Area Pain & Wellness Center (“BAPWC”) (www.bapwc.com) as its initial entry into the massive California market.

The Adishian Law Group represented BAPWC as exclusive sell-side legal counsel throughout the transaction, from letter of intent through execution of deal documents. Prospira’s transaction team included three law firms — two ranked in the Top 60 in the United States by size — and three private equity firms. “Representing BAPWC in the sale of the enterprise to such a sophisticated buyer as Prospira was the type of challenging, complex and fun assignment that lies right in our wheelhouse,” states Chris Adishian, President of the Adishian Law Group. “Our team brought a wealth of transactional experience to the table, which leveled the playing field and helped the Company reach a “full value” deal that was fair all around.”

This confidence in the Adishian firm is testimony to the Principal’s judgment and the firm’s breadth and depth of knowledge in sell-side M&A transactions. Prior to quarterbacking corporate and transactional matters as a lawyer, Adishian spent time at Arthur Andersen and the West Coast’s leading investment banking firm, Montgomery Securities.

Says Adishian, “We appreciate the trust placed in us by BAPWC, and are grateful for the opportunity to apply our talents towards achieving a successful transaction for our client.”

About Prospira Pain Care

Prospira PainCare, located in Mountain View, California was founded in August 2012. Prospira PainCare partners with world class interventional pain management physicians and rehabilitation specialists (www.prospirapc.com).

About Bay Area Pain Center

Since 1999, BAPWC has offered a full complement of pain therapies, from highly specialized interventional treatments, to the most sophisticated interdisciplinary pathways and programs. The Company addresses one of the most complex and challenging problems in society—chronic pain. Bay Area Pain & Wellness Center has increased its sphere of influence through geographic expansion from its headquarters facility in Los Gatos to San Francisco and Santa Cruz along with education through publications, lectures and teaching (www.bapwc.com).

About Adishian Law Group, P.C

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

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Telephone: 310.726.0888 | 415.955.0888
Email: askalg@adishianlaw.com

Selling a minority interest in a privately held business in California must be handled thoughtfully. First, if you are able to sell a minority interest in a privately held business for a profit (whether small or substantial) you are already on a good path. This article addresses some considerations for an individual minority owner who is also an employee.

The good news is that you are getting paid for your hard work and getting a return on your investment. These are the rewards that capitalism provides. The bad news is that your Company may try to limit your ability to own and operate a similar business for a period of years or within a specific geographic region through a non-compete agreement.

You may say, “Wait, I read ‘Non-Competition Clauses In California: It’s No Contest after Edwards,’ which says non-compete agreements are void in California.” They are ….for pure employees. However, there are narrow exceptions under 16601, 16602 and 16602.5 which provide that a seller of “substantially all” of his/her/its assets, goodwill or interest in a business “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.”

Here, there are elements of both the employee relationship and the owner relationship. Despite being an “owner” many “owner-employees” are not financially independent such that they can afford to not work for an extended period of time, even with a substantial payout from the sale of their shares — taxes, mortgages, school tuition and debt incurred during the formation and growth of the business all add up quickly. Therefore, the owner-employee must tread carefully so as to not restrict his or her future ability to earn a living or maintain his or her lifestyle when agreeing to sell his or her shares.

On the one hand the owner-employee is often not required to agree to any and every restriction, on the other hand the employer is often not required to repurchase the shares. The “may“ language will naturally result in a negotiation of the future restrictions on the activity of the owner-employee, which will often become a material business point affecting the purchase price paid for to the owner-employee for the shares or whether the sale will even be consummated at all.

Adishian Law Group, P.C. assists owners of privately held companies in the negotiation and sale of their shares or membership interests to maximize the value of their ownership interest while allowing them reasonable freedom to pursue their next entrepreneurial dream or investment. If you are contemplating the sale of your interest in a corporation, limited liability company or partnership, we recommend that you consult and attorney before concluding the purchase and sale agreements.

About Adishian Law Group, P.C.

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Selling a your minority interest in a privately held business in California must be handled thoughtfully. First, if you are able to sell a minority interest in a privately held business for a profit (whether small or substantial) you are already on a good path. This article addresses some considerations for an individual minority owner only (e.g. not an owner-employee).

You may say, “Wait, I read ‘Non-Competition Clauses In California: It’s No Contest after Edwards,’ which says non-compete agreements are void in California.” They are ….for employees.

However, there are narrow exceptions under 16601, 16602 and 16602.5 which provide that a seller of “substantially all” of his/her/its assets, goodwill or interest in a business “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.”

Due to the “may“ language this will naturally result in a negotiation of the future restrictions on the activity of the seller, which will often become a material business point affecting the pruchase price paid for the Seller’s shares or whether the sale will even be consummated.

About Adishian Law Group, P.C.

For more information about this topic or to speak with Chris Adishian:

The concept of ownership is deeply woven into the American Dream — e.g. own a home, own public stock, own bonds, own a business — so deeply woven in fact that sometimes “ownership” becomes the goal regardless of the consequences attendant to that “ownership.” Yes, when done properly, with due attention to the risks, rewards and ROI (return on investment), ownership can create equity expansion and increase net worth like few other opportunities in our economy.

However, poorly thought out investments in privately held Companies can lead to “dead money”, where the only “return” is pride of ownership and you cannot get your money out. That is, you get to tell your friends and family that you are an “owner of this Company” but in fact you see no financial benefit to this ownership at all! Even worse, such investments can result in a complete loss of the capital invested. Either way, the money is effectively gone, and you are unable to use it in another productive investment. Bad result.

Some points to consider before investing in a privately held company:

Will I ever see a return on my investment?
How will I see that return? (Dividends, interest, appreciation?)
How likely is it that I will actually see that return?
Will I ever get my original investment back?
Can I sell my stock to somebody if I want/need my money (or some of it) back?
At what price can I sell my stock?
How long will that take?
There are many other issues to consider as well.

Adishian Law Group, P.C. assists investors in privately held companies in maximizing the value of their ownership interest and minimizing the risk of capital loss or “dead money.” We assist with the “capital allocation decisions” for both majority and minority shareholder positions, as well as subsequent ongoing management of these investments. If you are contemplating an investment in a privately held company, or you are already a minority investor, we would be happy to talk with you about your options for increasing the value of your shares.

About Adishian Law Group, P.C.

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SB 392 authorizes the Contractors’ State License Board, commencing no later than Jan. 1, 2012, to issue a contractor’s license to a limited liability company (LLC) and authorizes the responsible managing manager, officer, member, or employee of the LLC, to qualify for that license. In order to be licensed as an LLC, the applicant or licensee must have a surety bond in the sum of $100,000.

Amends Sections 7025, 2028.5, 2029, 7065, 7065.1, 7065.5, 7068, 7068.1, 7068.2, 7069, 7071, 7071.7, 7071.8, 7071.9, 7071.11, 7071.17, 7072.5, 7075.1, 7076, 7076.2, 7085.6, 7090, 7090.1, 7096, 7121, 7121.1, 7121.5, 7121.6. 7122, 7122.1, 7122.2, 7122.5, 7137, 7138, 7152, 7159, and 7159.10 and adds Sections 7071.6.5, and 7071.19 to the CA Business and Professions Code.

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Minority shareholder rights in California include protections from oppressive conduct by the majority shareholder.

California Corporation Code § 1800 provides several grounds for involuntary dissolution. A court may grant involuntary dissolution where (1) “[t]hose in control of the corporation have been guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers.” § 1800(b)(4), and (2) “liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder or shareholders.” § 1800)(b(5). See also Bauer v. Bauer, 46 Cal.App.4th 1113, 54 Cal.Rptr.2d 377, Stuparich v. Harbor Furniture Mfg., Inc. 83 Cal.App.4th 1268, 100 Cal.Rptr.2d 313, 2000 Daily Journal D.A.R. 10,657.

Involuntary corporate dissolution under subdivision (b)(4) requires a showing that those in control of the corporation have been guilty of, or have knowingly countenanced, “persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders,” or that the corporation’s property “is being misapplied or wasted by its directors or officers.”

Bauer described the course of conduct that satisfies the definition of the improper “squeezing out” of a minority shareholder, thus entitling a minority shareholder to dissolution of the corporation to protect his or her interests. The court took its definition of a from Marsh’s California Corporation Law, the portion quoted by the Bauer court is below:

“The term ‘squeeze-out’ is . . . generally intended to describe a situation where the majority controlling shareholders, who are also the principal officers of a corporation, engage in a course of conduct which is designed to exclude a minority shareholder or shareholders both from participation in the conduct of the corporate business and from the economic benefits derived therefrom . . . The conduct most typically takes the form of refusing to pay any dividends on the corporate stock, refusing to permit the minority shareholder to have any corporate office or position on the board of directors . . . , and the payment of large salaries to the controlling shareholders who are the principal officers of the corporation . . . Obviously it makes a great deal of difference whether dividends had once been paid on a regular basis, but were stopped; whether the minority shareholder had a job with the corporation from which he was fired; and whether the controlling majority shareholders increased their own officers’ salaries, after the rift appeared and the dividends were terminated.” 2 Marsh’s California Corporation Law (3d ed. 1995) § 11.46, 958-960

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Minority shareholder rights in California include protections from a breach of fiduciary duty by the majority shareholder.

Majority shareholders may be held liable for damages for breach of a fiduciary obligation to minority shareholders, Jones v. H. F. Ahmanson & Co., 1 Cal.3d 93, 81 Cal.Rptr. 592, 460 P.2d 464; Brown v. Halbert, 271 A.C.A. 307, 316, 76 Cal.Rptr. 781; and 3 Witkin, Summary of Calif. Law (1960) Corporations, s 99, p. 2390 (1967 Supp. p. 998). A majority shareholder breaches his fiduciary duties to the minority when he uses his control to distribute a disproportionate share of corporate profits (whether in the form of a dividend of excessive executive compensation), depriving the minority of its fair share of corporate profits. See Jara v. Suprema Meats (2004) 121 C.A.4th 1238, 18 C.R.3d 187; Witkin Summary of California Law, Tenth Edition 2. [§ 181].

In Jara, the court found that a minority shareholder had the right to bring an individual action against the corporation for excessive compensation paid to the two other shareholders, who were also executives and directors of the corporation. The court stated, “The objective of encouraging intracorporate resolution of disputes and protecting managerial freedom becomes meaningless where defendants constitute the entire complement of the board of directors and all the corporate officers.” See Jara, supra, at 1259.

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What is an Exchange Fund?

An exchange fund allows company founders and other large shareholders to contribute a portion of their own company stock in exchange for an ownership percentage (i.e. limited partnership interest) in a new entity that

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holds a diversified portfolio of private company shares. As the portfolio companies realize liquidity events (IPO, acquisition, etc.), the limited partners in the new entity all share in the cash or stock distributions.

The Benefits

Conceptually, as a company co-founder, you are “going long” on your single idea. In the meantime, your venture backers (and maybe your lawyers) have literally dozens of other company co-founders just like you “going long for them.” The exchange fund allows you to shift part of your portfolio to mirror the “higher-quality risk profile” of your venture capital backers. Yet, you still retain a significant percentage of your company shares.

Exchange funds offer diversification, venture capital scale returns, higher likelihood of a liquidity event, possible tax advantages versus a comparable cash investment in a venture fund and no out of pocket costs for participants.

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