California Non-Compete Shareholder Agreement

  • Posted on: September 13, 2021
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The Wycoff case concerned a company, but the principle applies to both LLCs and partnerships, since they are included in the definition of business unit. Similarly, its scope is not limited to medical practices. For example, most ambulatory operations centers that govern documents require an owner to cash in their interest if they violate the non-compete agreement. Often, the price paid for interest earned as a result of competition or other “adverse” events is a discount to the price to be paid otherwise, whether determined by valuation or by the application of a formula. During the reign of Hill v. Wycoff, there is an important question about whether such a transaction could support a non-compete clause under California law. For example, an ASC enterprise agreement may provide that upon termination of a membership interest, the interest is redeemed at a price equivalent to three times the 12-month EBITDA of the ASC, a price that must represent the fair value of the interest and not require valuation. The same company agreement may prohibit ownership of another establishment within 10 miles around the ASC and make that property an adverse shutdown event. However, for members who compete, the price is fifty percent (50%) of the price of the formula. If four times EBITDA is fair market value, double EBITDA cannot represent fair value. In this case, does the exception in Section 16601 apply? That should not be the case. The analysis is even stronger when the penalty price is based on book value (as in the Wycoff case) or on the balance of capital, which is often nominal in mature surgical operations.

It is important to remember that all prohibitions on competition must be limited in time and geographically, for example. B up to two years after sale or withdrawal within a 25-mile radius of the company`s headquarters. In addition, there are other valuable provisions that can be used effectively either to circumvent general non-compete prohibitions or to complement the valid application of non-competition clauses such as the prohibition of debauchery, confidentiality, proprietary materials and trade secret clauses. The realization here is that non-compete clauses are rarely valid in California, but don`t miss the opportunity to use them in cases where they can be implemented, when selling or dissolving a business, or other similar provisions that are valid in much broader circumstances…