By Robert Milligan and summer associate Andrew Larratt-Smith
In a decision that encourages cost efficient corporate mergers in Nevada, the Nevada Supreme Court in HD Supply Facilities Maintenance v. Bymoan, 2009 WL 1635924 (June 11, 2009) recently ruled in an en banc decision that restrictive employment agreements acquired through corporate mergers do not require a showing that the agreements’ assignment provisions were negotiated at arm’s length or are supported by separate consideration.
The court clarified its previous decision in Traffic Control Servs. v. United Rentals, 120 Nev. 168, 172 (2004), which held that employee noncompetition agreements are nonassignable when acquired through an asset purchase transaction, absent an explicit assignment clause negotiated at arm’s length supported by separate consideration. The Traffic Control decision was based on the notion of “honoring an obligor’s choice to contract with only the original obligee, thereby ensuring that the obligor is not compelled to perform more than his or her original obligation.” Further, the decision supports the general proposition that personal services contract are not assignable absent consent. In its Traffic Control ruling, the Nevada Supreme Court used broad language, leading some to believe that the nonassignability of employee noncompetition agreements extended to agreements acquired as the result of mergers as well as to those acquired through asset purchase transactions.
But in HD Supply the Nevada Court distinguished employment restrictive covenants found in mergers from asset purchase transactions. The court emphasized the contractual nature of an asset purchase transaction, whereas a merger is a creation of statute. The court stated that in a merger “two corporations unite in a single corporate existence” whereas “the acquiring corporation in an asset purchase transaction becomes… a wholly new employer.” Consequently, the court reasoned that Traffic Control’s general rule of non-assignability did not apply to covenants of noncompetition, nonsolicitation, or confidentiality as a result of a merger.
The court found that when a relevant merger statute exists, the issue of a covenant’s assignability is not controversial, stating “[a]s the majority of courts have concluded when considering this issue, in a merger, the right to enforce the restrictive covenants of a merged corporation normally vests in the surviving entity.” Further, in support of its decision, the court noted that although Nevada courts have not addressed this exact issue before, the court had previously acknowledged a hard and fast distinction between the implications of a merger, which is a statutory creature, and an asset purchase, which is not.
Despite ruling that restrictive employment agreements acquired through mergers do not need to comply with the strict rule of assignability found in Traffic Control, under Nevada Revised Statute 613.200(4) and applicable case law, such covenants must still be reasonable in scope and duration. The HD Supply decision is significant because it removes a significant obstacle for businesses who obtain employment restrictive covenant agreements as a result of merger and thereby reduces additional costs arising out mergers in Nevada.