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MONTH-IN-BRIEF (Apr 2018)

Business Litigation

The Narrowing of Dissenting Shareholder’s Non-compete Enforcement

By Zackary G. Smith, Greensfelder, Hemker & Gale, P.C.

In Crocker v. Greater Colorado Anesthesia, P.C., 2018 Colo. App. 33, the Colorado Court of Appeals affirmed a trial court ruling that a shareholder/employee was no longer bound by a non-compete agreement because the exercise of his dissenter’s rights terminated his employment. Therefore, the terms of the non-compete agreement essentially penalized the shareholder/employee for dissenting. Mr. Crocker was an anesthesiologist and shareholder of Greater Colorado Anesthesia, P.C. (“old GCA”). During his employment, he signed a shareholder employment agreement (the “Agreement”), which stated that “[a]s a condition of employment, ‘Employee must agree to hold their share of the Corporation’s stock in accordance with the Corporation’s Stock Sale Agreement.’” Crocker, 2018 Colo. App. 33, ¶ 13. The Agreement also stated that Mr. Crocker could not compete with old GCA by practicing within fifteen (15) miles of a hospital serviced by old GCA. In 2015, Mr. Crocker objected to a merger between old GCA and USAP (“new GCA”). Notwithstanding Mr. Crocker’s objection, the merger proceeded, and Mr. Crocker demanded payment of his shares of old GCA, which effectively terminated his employment with old GCA. Thereafter, Mr. Crocker began employment at Guardian Anesthesia Services and Greater Colorado Anesthesia, Inc. New GCA sued for breach of the non-compete agreement. The court found that under the terms of the non-compete agreement, Mr. Crocker’s shareholder rights were tied to his employment. SincHe Mr. Crocker exercised his dissenter’s rights, he was forced from his employment. The court then examined his dissenter’s rights to determine if the non-compete agreement was reasonable and enforceable. The court found that as a dissenter, Mr. Crocker was protected from oppressive conduct by the majority of shareholders who voted for the merger. The court found that an anesthesiologist must reside within 30 minutes of where they work. The court reasoned “[a]s a practical matter, because Crocker lives well within the region covered by the non-compete provision of the Agreement, enforcement of the non-compete provision would require Crocker either to move or to pay GCA damages to practice his profession.” Crocker, 2018 Colo. App.  33, ¶ 21. Thus, the court held that the Agreement was unenforceable because it would penalize Mr. Crocker for exercising his right to dissent. This opinion suggests that companies should narrow their non-compete agreements for shareholder/employees, if their rights, as shareholders, are tied to their employment. Colorado courts following Crocker may find non-compete agreements unenforceable to the extent they penalize shareholder employees for opposing or dissenting against a proposed merger.

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