Minority Shareholder Rights in California, Selling Your Minority Interest: Owner / Employee

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.