TYPES OF CALIFORNIA BUSINESS AGREEMENTS
June 14, 2016
In business, nearly everything we do today requires agreement, from participating in activities to downloading software. These are important in any running business as they protect the business from liability lawsuits. By having a user sign an agreement, they are effectively placing all of the responsibility for actions on the signee. If you have ever worked for a business and have skills that are valuable to the company, you probably had to sign a handful of agreements with your onboarding paperwork. As a new business owner, you should consider implementing similar agreements during the formation process in order to protect yourself. It is important to understand which are legal and which simply are not enforceable.
In the state of California (along with Montana, North Dakota and Oklahoma), a true non-compete agreement is illegal. The Business and Professions Code § 16600 provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."
It goes on to further say that not only is it legal for an employee to work anywhere after termination, it also is completely legal to take along other employees and accept business from clients of a former employer.
However, that is not to say that a business cannot protect itself. A non-compete is legal and enforceable during employment. It is a common law duty of loyalty to the employer, but any such agreement is void after employment is terminated. It is also true that you may have a non-compete agreement that prohibits sharing trade secrets during and after employment has ended. It should also require the employee to return any notebooks, documents, computer disks and other information storage at the time of termination.
This is also known as a shareholder buy-sell agreement and is important to any business that has more than one owner (other than a husband-wife or domestic partnership team). This is a crucial agreement to have established before it is too late. It is important to discuss this in the beginning when everyone is happy, friendly, and willing to fairly negotiate. Typically if it is not done until one of the shareholders wants out, the price to buy them out increases drastically. In short, this is a binding legal agreement that sets up provisions on the future sale of their portion of the business. Without such an agreement, upon a dissolution of a partnership, each side may spend upwards of tens of thousands of dollars valuing the company and litigation in court. Some of the provisions that should be included in such an agreement are:
What are the triggering events that would start such a sale, such as divorce, retirement, disability, retirement, bankruptcy, etc.;
The price that would need to be paid for that shareholder’s interest in the business. This may vary depending on the reason for the the sale; and
Who is eligible to purchase their share, such as the other shareholder, outside parties, or the corporation.
All businesses, young and old, will see a rotation of the staff involved, be it the new hire employee all the way up to the shareholder. It is important to set forth guidelines of what will happen upon the termination of the business relationship. If you are interested in setting up either of these legally binding agreements, it is a wise decision to have an attorney look over the documents for you, or even help you draft them. This way, you can be sure to cover all of your potential bases and protect yourself from a future situation. If you would like to speak with a skilled San Jose business attorney, contact the Law Offices of Steven E. Springer. With more than 30 years of combined experience and offices in Fremont, Morgan Hill and San Jose, we are are well established and able to help you build your business. Call us today at 408-779-4700.