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Is use of “client list” a breach of a non-compete contract when a partnership splits in Denver Colorado?

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The State of Colorado has specific legal requirements for business structures regarding ownership, governing structure, bylaws, tax requirements and defining what is considered a corporate asset including, in some cases a “client list.”  A client list can significantly impact the value of a company, and if the partners decide to split at some point, there can be a legal dispute as to who maintains control of the client list.  If one of the partners decides to buy the interests of the list when moving on to another entity, it will be based on a determination of value and if there can be an agreement between parties as to an equitable split of the clients for the current company versus the new entity so the current company retains its value, and the new company starts out  with that asset.  A smoother transition may call on the experience of a skilled business attorney.

Corporate restructuring of a Colorado business entity is often necessary due to changes in ownership, disputes between partners, or simple advancement in the market, to keep up with current business trends that may increase the value of a corporation and/or reveal an avenue of profit.  It is important for all parties to understand any changes and how they will impact future growth, finances and taxes.

Entity structure may need to be changed with division.

After a separation of partners, the legal entity structure that was appropriate at the outset of the corporation may need to change to reflect such things as an LLC may switch to a C corporation in order to raise money from investors, or a sole proprietorship may choose to become a limited liability company in order to minimize the owner’s personal risk in the event a client sues the business.

Draft contracts to sell assets in split.

During a company split, the selling or division of assets will be an important topic to be addressed.  A business contract will need to be drafted to specify how the sale is organized and what assets will be transferred to the new owner, including client list.  The sale will need to be approved by principals and agents in accordance to what value of the corporation the exiting partner will take.  One partner to a splitting business entity can very well accuse the other of a breach in contract if they utilize client list as part of their assets in the new start up.

Non-compete agreement.

A non-compete agreement in the state of Colorado is a legal document that allows employers and business partners to receive written consent that the person will not disclose company trade secrets or engage in competitive behavior. Although the state of Colorado allows and enforces non-compete agreements, recognizes a person’s need to earn a living. The law does not allow non-compete agreements to be used in certain professions.

Colorado allows and enforces non-compete agreements but they are not favored in court, and are only upheld when they are used appropriately to protect trade secret, business sales or when a restraint is ordered. Colorado law dictates that physicians and surgeons may not be required to sign a non-compete agreement.  Generally, it is difficult to prove the enforceability of a non-compete.  An injunction is probably the most commonly granted use of law to

Agreements within business entities.

Each type of business structure except for a sole proprietorship will have some type of agreement, either formal or informal, with regard to the business activities conducted for profit reasons or non-profit reasons.  There are specific nuances to each business that need to be tailored specifically to the mission and organizational structure of the formation

Statute of limitations for action.

In Colorado, the general breach of contract statute of limitation, whether the contract is oral or written, is three years.  The statute of limitation for tort actions arising from a breach of contract is two years.

Seek legal counsel.

The legalities involved in the enforcement of business contracts are based on the language of the corporate structure documents, and the ability for partners to waive certain restrictions as they build assets including the client list.  Hiring an experienced business law attorney to look at all of the pertinent documents is necessary before deciding on a court action.

Semler & Associates P.C.

1756 Gilpin Street
Denver, CO 80218
Phone: 303.839.1680
Fax: 303.839.1642