November 12, 2018

November 12, 2018

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Court: Operating Agreement Did Not Grant Terminated Employees Lifetime Jobs

An employment agreement is one thing and an operating agreement quite another.  In ITV Gurney Holding Inc. v. Gurney, Cal. Ct. Appeal Case No. B281694, the board of a limited liability company fired two employees who were also managers.  The two employees did not challenge the LLC’s right to terminate their employment, but they contended that under the operating agreement they could not be removed from managing the LLC’s day-to-day operations.

The First District Court of Appeal found that the operating agreement reserved to the LLC’s board of managers the authority to manage the LLC’s affairs.  A provision in the operating agreement that authorized the employees to manage the LLC was an accommodation to the employees to exercise executive authority, not an “irrevocable grant to continue managing the Company indefinitely”.

The Court noted that the employment agreements included detailed procedures for termination and found that it “would be unimaginable for ITV and the Gurneys [the former employees] to go to this much trouble to describe the procedures surrounding the Gurneys’ termination, if they intended that the Gurneys would continue to ‘manage the day-to-day business and affairs of the Company,’ ‘hire and fire employees,’ and exercise other functions ordinarily reserved for CEO’s, even after they were removed from those positions.”

The Court never mentions the jurisdiction of formation of the LLC nor does it cite any LLC Act.  It does make the debatable assertion that “the operating agreement must be interpreted in light of common understandings in corporate law”.  Some might argue that a more accurate statement would be that the operating agreement must be interpreted in light of common understandings in limited liability company law.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...