Can My Business Partner Sell Without My Consent? California Business Law, Explained

As a California business owner, discovering that your business partner wants to sell their share—or worse, the entire business—without your consent can be alarming. This scenario raises critical questions about your rights, the legal boundaries of partner authority, and how to protect your business interests.

At TONG LAW, we regularly assist California business owners with partnership disputes, including unauthorized sale attempts. In this comprehensive guide, we’ll examine the legal frameworks governing business sales in California partnerships, LLCs, and corporations and outline strategies to protect your ownership interests.

Authority Limits in Different Business Structures

The answer to whether your business partner can sell without your consent largely depends on your business structure and governing documents. Let’s explore the rules for each common business entity in California:

General Partnerships

In a general partnership in California, the default rule under the Uniform Partnership Act (California Corporations Code Section 16100 et seq.) is that no partner can sell the entire business without unanimous consent from all partners. Each partner can only transfer their individual ownership interest, not the entire business.

Key limitations include:

• A partner can sell their own partnership interest (essentially their right to profits and losses)
• The buyer typically becomes only an “assignee” with economic rights but no management authority
• The sale of the entire partnership requires consent from all partners
• Partnership assets remain partnership property and cannot be sold by one partner alone

Limited Liability Companies (LLCs)

For California LLCs, the California Revised Uniform Limited Liability Company Act (RULLCA) governs transfer restrictions, but your operating agreement takes precedence if it addresses sales and transfers.

Without specific provisions in your operating agreement:

• A member can transfer their economic interests (right to distributions) but not their management rights
• The transferee does not become a full member with voting rights unless approved by other members
• One member cannot sell the entire LLC without proper authority
• The operating agreement typically specifies transfer restrictions or approval requirements

Corporations

In California corporations, shareholders own shares of the company, but the board of directors controls major decisions like selling the business.

Key considerations for corporations include:

• A shareholder can sell their shares subject to any restrictions in a shareholders’ agreement
• The board of directors (not individual shareholders) has authority to sell corporate assets
• Major corporate decisions typically require board approval and sometimes shareholder approval
• A 50% shareholder cannot unilaterally sell the entire corporation

When Your Business Partner Attempts an Unauthorized Sale

If your business partner attempts to sell without proper authority or consent, several legal principles come into play:

1. Fiduciary Duty Violations

In California, business partners owe each other fiduciary duties of loyalty and care. Attempting to sell the business without proper authority may constitute a breach of fiduciary duty, potentially making your partner legally liable for damages.

Under California Corporations Code Section 16404, partners owe each other and the partnership:

• The duty of loyalty
• The duty of care
• The obligation of good faith and fair dealing

2. Lack of Authority Issues

Even if your partner attempts to sell the entire business, the transaction may be legally void or voidable without proper authority. California courts generally recognize that a partner cannot bind the business beyond their authority.

This principle is reflected in California Corporations Code Section 16301, which outlines the limits of partner authority in binding the partnership.

3. Third-Party Buyers’ Rights

A critical consideration is whether a potential buyer would be protected as a good-faith purchaser. In California, someone who purchases from a partner without knowledge of the partner’s lack of authority may receive some legal protections, though these are limited.

However, sophisticated buyers typically conduct due diligence that would reveal:

• The ownership structure of the business
• Requirements for authorization of major transactions
• Limitations on individual partner/member authority

This due diligence usually prevents unauthorized sales from being completed.

How to Protect Your Business

The best protection against unauthorized sales is establishing clear agreements before disputes arise. Consider implementing these preventive measures:

1. Comprehensive Written Agreements

For each business type, ensure you have proper documentation:

For Partnerships:

• A detailed partnership agreement specifying sale and transfer restrictions
• Clear provisions requiring unanimous consent for major business decisions
• Buy-sell provisions outlining procedures if a partner wishes to exit

For LLCs:

• A thorough operating agreement with transfer restrictions
• Right of first refusal provisions giving existing members first opportunity to purchase
• Clear approval requirements for admitting new members
• Specific procedures for handling membership transfers

For Corporations:

• A shareholders’ agreement with share transfer restrictions
• Buy-sell provisions triggered by attempted unauthorized transfers
• Super-majority voting requirements for major decisions
• Stock certificates with transfer restrictions clearly noted

2. Buy-Sell Provisions

One of the most effective protections is implementing comprehensive buy-sell provisions that address:

• Valuation methods for ownership interests
• Procedures when a co-owner wants to exit
• Triggering events that activate buyout rights
• Payment terms for purchasing another owner’s interest
• Restrictions on transfers to third parties

3. Regular Business Entity Maintenance

Maintaining proper corporate or LLC formalities helps establish clear boundaries of authority:

• Document major decisions with written resolutions
• Hold and document regular meetings
• Maintain accurate records of ownership interests
• File required state reports and statements

Please note: These are sample terms only, not an exhaustive list. Every business has unique needs and legal obligations. For agreements tailored to your business, contact our experienced business attorney for guidance.

Legal Remedies if a Partner Attempts an Unauthorized Sale

If you discover your business partner is attempting to sell without proper authority, several legal remedies are available:

1. Temporary Restraining Order (TRO) or Preliminary Injunction

In urgent situations, California courts can issue temporary orders preventing your partner from completing an unauthorized sale while the dispute is resolved.

To obtain a TRO in California, you generally must demonstrate:

• Likelihood of success on the merits of your case
• Immediate, irreparable harm without court intervention
• The balance of hardships favors granting the order

2. Declaratory Relief

You can seek a court declaration specifying ownership rights and transfer limitations, preventing future unauthorized sale attempts.

3. Breach of Fiduciary Duty Claims

California law provides remedies for breach of fiduciary duty, including:

• Monetary damages
• Accounting of profits
• Removal of the partner from management
• Potential dissolution if the breach is severe enough

4. Specific Performance

If your agreements include rights of first refusal or other protective provisions, courts can order specific performance requiring your partner to comply with these terms.

Common Questions About Partner Sales Without Consent

Can a 50% owner sell the entire business?

No, a 50% owner typically cannot sell the entire business without consent from the other owners. In California, this would generally violate fiduciary duties and exceed the partner’s authority.

Can my business partner sell their share to anyone they choose?

It depends on your governing documents. Without restrictions in your agreements, partners in general partnerships and members in LLCs can usually transfer their economic interests (right to profits), but not their full membership rights, which typically require approval from other members.

For corporations, stock transfers may be restricted by shareholders’ agreements or corporate bylaws.

How do I stop my partner from selling their share?

The best protection is preventive: having written agreements with transfer restrictions, rights of first refusal, and approval requirements. If such agreements are in place, they can be enforced through court action if necessary.

What if there’s no written agreement addressing sales?

Without written agreements, default statutory provisions apply. In California:

• Partners can generally transfer their economic interests but not control rights
• The entire business cannot be sold without appropriate authority
• Courts will look to industry standards and the course of dealing between the parties

Taking Action to Protect Your Business Interests

If you’re concerned about a potential unauthorized sale by your business partner, taking prompt action is essential:

1. Review your governing documents to understand existing restrictions and requirements
2. Document all communications with your partner regarding the attempted sale
3. Notify any potential buyers of authorization requirements and your objection to the sale
4. Consider mediation as a first step to resolve the dispute
5. Consult with experienced business counsel to understand your specific legal options

At TONG LAW, we understand the urgency and complexity of partnership disputes involving attempted unauthorized sales. Our business attorneys have extensive experience helping California business owners protect their interests and resolve ownership disputes effectively.

We provide strategic guidance on:

• Interpreting partnership, operating, and shareholders’ agreements
• Developing sale and transfer restrictions that protect all owners
• Representing owners in disputes over unauthorized sale attempts
• Negotiating solutions that protect business continuity

If you’re facing a situation where your business partner is attempting to sell without proper authority or consent, contact TONG LAW today for a consultation. Our experienced California business attorneys will help you understand your rights and develop a strategy to protect your business interests.