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Foreign LLCs Take Note: This California Legislative Oversight May Affect You Too

Section 407 of the California Labor Code provides:

Investments and the sale of stock or an interest in a business in connection with the securing of a position are illegal as against the public policy of the State and shall not be advertised or held out in any way as a part of the consideration for any employment.

In order to facility membership interest purchase or option agreements and plans, the former Beverly-Killea Act provided that

Sections 406 and 407 of the Labor Code shall not apply to membership interests issued by any foreign or domestic limited liability company to the following persons:

(1) Any employee of the limited liability company or of any parent or subsidiary thereof, pursuant to a membership interest purchase plan or agreement or membership interest option plan or agreement.

(2) In any transaction in connection with securing employment, to a person who is or is about to become an officer of the limited liability company or a manager (as appointed or elected by the members) of the limited liability company, or of any parent or subsidiary thereof.

Former Cal. Corp. Code § 17100(d).  This provision was based on Section 408(c) of the Corporations Code which applies to domestic and foreign corporations.

In enacting the new California Revised Uniform Limited Liability Company Act, the legislature failed to include an analogous provision.  While this was most likely an oversight on the part of the legislature, the absence of such a provision is troubling both for LLCs formed under the prior law (which purportedly are subject to the new RULLCA), foreign LLCs, and LLCs formed under the new RULLCA.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IV, Number 92


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...