Frequently Asked QuestioNS
You didn’t plan to sell. But now your co-owner is pushing you out — offering a number that feels wrong, on a timeline that feels rushed, with paperwork you’re not sure you should sign. Here’s what California law says about forced buyouts in LLCs — and what you can do if you’re on the receiving end of one.
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A forced buyout occurs when a majority member — or a group of members —
uses control of the LLC to compel a minority member to sell their interest, often at a price the minority member didn’t negotiate and doesn’t agree with.
It can happen through:
Sometimes the operating agreement explicitly governs the process. Often it doesn’t — and that’s where California law fills the gap.
The starting point is always the operating agreement. California’s LLC law gives members significant flexibility to define their own rules for buyouts, withdrawals, and transfers of membership interest. (Cal. Corporations Code § 17701.10.) Courts will generally enforce a well-drafted operating agreement as written. (Cornerstone Realty Advisors, LLC v. Summit Healthcare REIT, Inc. (2020) 56 Cal.App.5th 771.)
But operating agreements are often silent, ambiguous, or one-sided. If the agreement was drafted by your partner’s attorney — or if it was a template nobody really reviewed — there may be provisions that appear to authorize a forced buyout but that don’t hold up under scrutiny.
Key questions to ask about your operating agreement
If your agreement is silent on valuation, California law steps in.
When a buyout is court-ordered — or when the parties can’t agree on price — California courts use “fair value” as the standard, not “fair market value.” This is an important distinction. Fair market value typically applies a minority discount, reducing your interest’s value because you hold a non-controlling stake. Fair value generally does not apply such a discount. (Legality of Minority Discounts: Cal. Corporations Code § 17707.03; see also Ryland Mews Homeowners Assn. v. Munoz (2015) 234 Cal.App.4th 705 for valuation principles in dissolution contexts.)
In practice, fair value is determined by
Courts have discretion in ordering buyouts and setting terms. Under Corporations Code § 17707.03(c), when a court finds grounds for dissolution, it may order a buyout of the petitioning member’s interest as an alternative to dissolving the LLC entirely — at a price and on terms the court determines to be equitable.
You are not required to accept the number your partner puts on the table. If you believe the offered price is below fair value, you have several options:
Even if your operating agreement doesn’t require one, you can negotiate for one — and the credible threat of litigation often makes the majority more willing to agree.
Filing — or credibly threatening to file — a dissolution petition under § 17707.03 changes the leverage dynamic. A majority member who wants to keep the business running has strong incentive to negotiate seriously rather than face a court-supervised wind-down.
used to enrich the majority at your expense, that may give rise to damages beyond just the buyout price.
If the majority failed to follow the operating agreement’s procedures, or acted in bad faith in triggering the buyout, the entire transaction may be voidable.
Even when an operating agreement gives the majority broad buyout rights, California courts impose a duty of good faith and fair dealing on all parties. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342.) This means the majority cannot exercise its contractual rights in a way designed primarily to harm you or deprive you of the benefits of your membership interest. If the forced buyout is pretextual — driven by a desire to freeze you out rather than a legitimate business reason — that matters legally.
If you’ve received a buyout offer or been told your interest is being purchased, treat it as the beginning of a negotiation, not the end of one. Before you respond:
The price your partner offered is almost never the right price. And the timeline they’re imposing is almost never as fixed as they want you to believe.
If you’ve received a buyout offer or been told your interest is being purchased, treat it as the beginning of a negotiation, not the end of one. Before you respond:
Next Steps
We’ll review your agreements, identify leverage, and create a plan to resolve disputes efficiently and protect your ownership. Contact me today to discuss your business situation and learn how I can help.
Whether you’re facing a shareholder dispute, partnership conflict, forced buyout, or questions about ownership and control, getting the right advice early can make all the difference.
With over 30 years of experience, Gregory Rutchik helps founders, shareholders, and business owners protect their interests and navigate complex business disputes with confidence.
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