Selling or purchasing a business in California comes with its own set of rules and nuances. This article, initially shared through the OC Business Journal by our firm, demystifies the critical elements unique to California's business sale process. For an expanded discussion, listen to Addison Adams on the M&A Masters Podcast hosted by Patrick Stroth, where he provides additional insights on these specific considerations.
What Makes California Business Sales Unique?
Buying or selling a business in California involves navigating a series of unique legal requirements. Whether your M&A transaction is structured as a stock sale, an asset sale, a statutory merger, or a hybrid combination of the foregoing (such as the current popularity of an F-reorg for S-corporations), staying mindful of California’s legal quirks will help streamline the transaction both before and after the close.
- California’s Bulk Sale Law: This law applies to an asset sale of a business with finished goods inventory. After giving creditors notice of the sale, and publishing a notice of sale in the newspaper, a Buyer will be protected from unknown creditor claims after the closing.
- Employee PTO Transfer: For employees that will be hired by the buyer in an asset sale, the buyer is allowed to offer the employee an election to either cash out or rollover their accrued vacation pay.
- Avoiding Employment Misclassification: Buyers should assume that all California workers must be paid as employees and observe all of California’s employment protection laws. Any independent contractors should be carefully reviewed for employment misclassification.
- Noncompete and Non-solicitation Restrictions: California outlaws all forms of noncompete restrictions on workers, regardless of scope or duration, except for owners selling their business. Case law is expanding this restriction to preclude many non-solicitation provisions as well.
- Data Privacy & Protection: California has comprehensive cyber-security and privacy laws regarding personal data. In addition to consumer and web data, this also includes protecting employee personnel records from the buyer in an asset sale.
- Corporate Governance Requirements: California mandates cumulative voting for all California corporations, which has the effect of assuring that minority shareholders have at least one member on the board of directors. In a sale, California also mandates separate class voting of shareholders. Even foreign corporations (such as Nevada or Delaware) based in California may have to follow California’s corporate laws due to its long-arm statute found in Corporations Code 2115. In a stock sale, California securities laws (25102) require an available exemption from qualification. Savvy attorneys monitor these unique provisions in every California deal.
- Tax Considerations: Some selling owners consider efforts to mitigate California’s taxes by moving out of the state before selling their business. However, California has established a task force to investigate these efforts. In addition to structuring the sale in a tax efficient manner, we advise clients on these and other tax mitigation strategies.
Expanding the Discussion: M&A Masters Podcast Feature with Addison Adams
To further explore the nuances of California business sales, tune into the M&A Masters Podcast with host Patrick Stroth. In this episode, Addison Adams shares his insights on Non-Compete Agreements, Bulk Sale Law, Reps & Warranties Insurance and more. He also offers predictions for the upcoming year in the California business sales market.
Here is a preview of that discussion:
If you’re looking to buy or sell a California business, schedule a consultation with Adams Corporate Law today at (714) 619-9360. Our team specializes in small and mid-market business sales in the Golden State and can assist you in efficiently closing your deal.