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CALIFORNIA CORPORATE & SECURITIES LAW

New LLC Is Not Delivered By Sale Membership Interests

Readers of this blog should be well aware of California’s general antipathy to covenants not to compete.  See The Point Of An Unenforceable Noncompete May Be Very Sharp Indeed,Covenants Not To Compete – Fourth DCA Considers A New Fine Question (Or Two), TRO Issued Enjoining Breach Of Non-Compete Agreement Clauses, No Surprises Here – California Court Won’t Enforce Non-Compete, Court Says “No Way” To No-Hire, and California’s Hostility To Non-Compete Agreements Does Not Vitiate Forum Selection Clause.  Other jurisdictions, however, are less averse.  Assuming that a covenant not to compete is enforceable, what happens when it is assigned?

In Traffic Control Services, Inc. v. United Rentals Northwest, Inc., 87 P. 3d 1054 (2004), the Nevada Supreme Court found that “noncompetition covenants are personal in nature and, therefore, unassignable as a matter of law, absent the employee’s express consent”.  This set the stage for disputes about what constitutes an assignment.  For example, would the sale of 100% of the membership interests of a limited liability company constitute an assignment?

Excellence Community Management, LLC v. Gilmore, 131 Nev. Adv. Op. 38 (2015) involved an LLC’s attempt to obtain a preliminary injunction against a former employee.  After the employment agreement was signed, 100% of the membership interests in the LLC were transferred.  The former persuaded the trial court that an impermissible assignment had occurred because a new entity was introduced after the sale.  The Nevada Supreme Court thought otherwise.  Chief Justice James W. Hardesty writing for the court concluded:

We agree and conclude that the 100-percent membership sale of the LLC that took place in this case is equivalent to the sale of 100 percent of the stock in a corporation.  Neither transaction results in a new entity.

In reaching this conclusion, the Court noted that LLCs, like corporations, have perpetual existence and are distinct from their managers and members.

Despite this setback, all was not lost for the erstwhile employee.  The Nevada Supreme Court found that the trial court had not abused its discretion in denying a preliminary injunction on the basis that the former employer failed to show that it would suffer irreparable injury.

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