The Corporate Divorce

Shareholder Buyouts Under California Corporations Code Section 2000

A joint business venture is very much like a marriage. When the relationship is good it’s wonderful and when the relationship is bad it’s catastrophic. Business relationships fail for all sorts of reasons, differences of business strategy, personality conflicts, differences in vision, unequal contributions, and unequal efforts (perceived or otherwise). When taking on a partner in business it is highly advisable to have your corporate drafted to help make the eventual divorce as smooth as possible. In a marriage, the couple might get a prenuptial agreement. In business, the partners should have a shareholder’s agreement, buy-sell agreement, and a well drafted bylaws. These documents will have provisions about how one of the shareholders can exit the corporation. Absent an agreed exit, the Corporations code provides default rules for the corporate buyout.

A shareholder buyout is a process in which a majority shareholder acquires the shares of a minority shareholder in a corporation. This type of transaction can be complex and may involve challenging negotiations between the shareholders. In California, shareholder buyouts are governed by the California Corporations Code Section 2000, which outlines the procedure and rules that must be followed.

Under California Corporations Code Section 2000, a shareholder buyout can occur through two methods: i) a court-ordered buyout or ii) a negotiated buyout.

In a court-ordered buyout, the minority shareholder files a complaint in court seeking a judicial determination of the fair value of the shares. The court then orders the majority shareholder to purchase the shares at that determined value.

In a negotiated buyout, the majority and minority shareholders negotiate the terms and price of the sale. This method is typically preferred as it allows the parties to reach an agreement without the time and expense of going to court. However, if the minority shareholder does not agree with the terms offered by the majority shareholder, they can still seek a court-ordered buyout.

When negotiating a buyout, the price of the shares is a key consideration. Under California Corporations Code Section 2000, the fair value of the shares must be determined. The fair value standard is defined in the code as “[t]he fair value shall be determined on the basis of liquidation value as of the valuation date but taking into account the possibility, if any, of the sale of the entire business as a going concern in liquidation.”

Factors that can affect the fair value of the shares include the financial condition of the corporation, the market value of its assets, and the value of its goodwill.

In addition to determining the fair value of the shares, the parties must also agree on the terms of the transaction. This may include the payment schedule, the method of payment, and any restrictions on the transfer of the shares. The parties may also negotiate additional provisions, such as confidentiality agreements and non-compete clauses. Once the terms of the transaction have been agreed upon, the parties are advised to execute a written agreement.

Shareholder buyouts are an important aspect of corporate law in California. They can be a valuable tool for majority shareholders to acquire the shares of minority shareholders, and for minority shareholders to sell their shares to the majority shareholder. However, they can also be complex and require the assistance of legal counsel to ensure that the transaction complies with the requirements of California Corporations Code Section 2000.