Generally, non-compete provisions are unenforceable in California. However, there are exceptions.

One of those exceptions is when an owner of a business sells the company’s goodwill or interest in the company. Business and Professions Code section 16601 provides, in part, that “any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity” may agree with the buyer to refrain from carrying on a similar business within a specified geographic area. The important factors
that should be carefully considered are the business entity, its goodwill and its impact within a specified geographic location.

The term “business entity” means a partnership, limited liability company, or corporation. Business and Professions Code section 16602.5, permits a member of a limited liability company to agree not to compete “upon or in anticipation of a dissolution of, or the termination of his or her interest in” the limited liability company.

An LLC operating agreement can, and should, set forth the terms and conditions of the non-compete provision in the event a member decides to sell his or her goodwill of the business and consider the fair market value of the goodwill. A limited liability company’s operating agreement that contains a provision for departing members to sell their interests back to the company for an amount less than fair market value — without including goodwill – that yet still impose a covenant not to compete, will not support the imposition of a non-compete provision.

The operating agreement should specify a reasonable geographic location taking into consideration the type of business; the market reach of the company; and the future business prospects of the departing member.

Non-competition provisions should be included in an operating agreement to avoid potential litigation when a member terminates its interest in the company and attempts to compete with the former company. If your California LLC has multiple members but does not have a noncompetition provision in its operating agreement, the LLC should consult its legal counsel to evaluate whether a noncompetition provision is necessary, its scope, terms, and conditions.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Are you a Member of a limited liability company but do not manage the day to day operations of the company? You should be cautious of how “active” you are as a Member.

In Strong v. Cochran 2017 U.S. Dist. LEXIS 170073, a California real estate investment limited liability company filed for liquidation. The trustee sued the Members of the limited liability company for breach of fiduciary duty. The Members demurred to the Complaint claiming that since they were not Managers of the limited liability company they could not be held liable for breach of fiduciary duty as they did not control the LLC.

Judge Tena Campbell ruled that the Members could be sued for breach of fiduciary duty under a “fiduciary duty in fact” theory. Under this legal theory, an individual, regardless of title, owes a fiduciary duty to a company when the individual “participates in management of the corporation” and “exercis[es] some discretionary authority”. This legal theory works similarly to how liability may be imposed on limited partners in a limited partnership. Therefore, if the Member, or limited partner, participates in the management of the entity, that participant no longer is shielded from liability for acts undertaken by the entity. The realities of how a company is operated govern rather than its formal structure.

Before you decide to become involved in the operation of companies in which you are a passive investor, seek legal counsel. The last thing a passive investor wants is to be liable to the acts and omissions of the company in which he or she passively invested.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

The California Revised Uniform Limited Liability Company Act (RULLCA) provides three ways to dissolve a California LLC:

• A triggering event requiring dissolution as set forth in a written operating agreement or in articles of organization;
•  When Ninety consecutive days has passed during which the limited liability company has no members; or
•  When a majority of the members vote to dissolve the LLC.

The California Corporations Code defines a “majority of the members” to mean “more than 50 percent of the membership interests of members in current profits of the limited liability company.”

Based on these statutes it appears what the articles of organization and operating agreement have to say about voting rights of members is irrelevant if the question is dissolution. This should not be of little moment if voting rights in the articles of organization or operating agreement are tied to a member’s interest in current profits. However, under new proposed legislation confusion on what is needed to dissolve will be pervasive if voting rights are not tied to current profits.

The newly proposed legislation, AB 1722, seeks to change the required vote to dissolve to “the vote of 50 percent of the voting interests”. However, this bill could further muddy the waters. It requires a vote of 50 percent” of the voting interests, not more than 50 percent. Also, the RULLCA does not define “voting interests.” Rather, it provides voting by members may be on a per capita, number, financial interest, class, group, or any other basis. Thus, if the articles of
organization or operating agreement do not provide for voting, then the default rule is that members vote in proportion to their interests in current profits.

We suggest you keep an eye on this new legislation. If it passes many LLCs will need to restate their articles of organization or amend their operating agreements to assure a vote of more than 50% of the those entitled to vote vote for voluntary dissolution of the California LLC.

In addition, where voting rights are not coextensive with the interests in current profits the language of the operating agreement will likely need to be revamped to assure an effective basis for voting rights that is not based on interests in current profits.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

In an effort to establish rules that allow limited liability members in a limited liability company to disassociate from the company by express will, newly enacted legislation imposes mandatory recordkeeping on limited liability companies.

Aside from offering new exit strategy opportunities for members, the new amendments to the California Revised Uniform Limited Liability Company Act require limited liability companies to:

• Designate and continuously maintain in California an office, which need not be a place of its activity in this state, and an agent for service of process. In addition, limited liability companies must now maintain in writing at their designated office in the State:
• A current list of the full name and last known business or residence address of each member and of each transferee set forth in alphabetical order, together with the contribution and the share in profits and losses of each member and transferee.
• If the limited liability company is a manager-managed limited liability company, a current list of the full name and business or residence address of each manager.
• A copy of the articles of organization and all amendments thereto, together with any powers of attorney pursuant to which the articles of organization or any amendments thereto were executed.
• Copies of the limited liability company’s federal, state, and local income tax or information returns and reports, if any, for the six most recent fiscal years.
• A copy of the limited liability company’s operating agreement, if in writing, and any amendments thereto, together with any powers of attorney pursuant to which any written operating agreement or any amendments thereto were executed.
• Copies of the financial statement of the limited liability company, if any, for the six most recent fiscal years.
• The books and records of the limited liability company as they relate to the internal affairs of the limited liability company for at least the current and past four fiscal years.

And that is not all there is in the new amendments. Among other things, one gives tax assessors the right to access all of these documents upon request. Another regulates distribution of company assets. A third provides rules for amendments to Operating Agreements. Others describe acceptable and
prohibited provisions in Operating Agreements.

If you own, operate or are a member of a limited liability company, now is the time to assure your limited liability company is in compliance. In addition, you should take careful note should a member consider leaving or closing the doors of the company.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Under California Labor Code Section 407 investments and the sale of stock or an interest in a business in connection with the securing of a position are illegal. Excepted from Section 407 by Section 408(c) are business interests, investments and stock provided to an employee of the corporation or of any parent or subsidiary thereof, pursuant to a stock purchase plan or agreement or stock option plan or other statutorily permissible agreement; and in transactions connected with securing employment of corporate officers.

Until recently there were no similar exceptions for LLC’s. Effective January 1, 2016, new Corporations Code Section 17704.01(e) will except membership interests issued by any limited liability company or foreign limited liability company to the any employee of the limited liability company pursuant to a membership interest purchase plan or agreement, or a membership interest option plan or agreement and in transactions in connection with securing employment as an officer or a manager of a limited liability company.

If you are an owner of an LLC, next year you will be able to award employees and officers interests in your business just as C-corps and S-corps had in the past. However, if you intend to offer an interest in your LLC, we strongly suggest that you discuss with your legal counsel first.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.