Opinion ID: 2575254
Heading Depth: 1
Heading Rank: 6

Heading: Asset purchases are distinct from mergers

Text: Although the court in Traffic Control lacked a similar opportunity, the Florida Supreme Court in Corporate Express Office Products v. Phillips addressed whether different forms of corporate transactions affect whether consent is necessary to effect a valid assignment of a covenant not to compete. 847 So.2d 406. Notably, while Corporate Express was cited in Traffic Control as authority for requiring consent to assignability in the context of an asset purchase, 120 Nev. at 174 n. 10, 87 P.3d at 1058 n. 10, as the certifying court expressed in its order denying Bymoen's and AZP's motion to dismiss HDS's contract claims, the citation of Corporate Express in Traffic Control is ambiguous because it was unclear whether we would adopt the remainder of the Florida Supreme Court's reasoning regarding mergers. For purposes of these certified questions, we consider Corporate Express's reasoning regarding mergers to be persuasive. In Corporate Express, a corporation sued three former employees to enforce noncompetition covenants that purportedly passed to it from two of its predecessors, one of which the corporation claimed to have acquired through a 100-percent stock purchase and a subsequent merger, and the other via an asset purchase and a subsequent merger. 847 So.2d at 407-08. Thus, unlike in Traffic Control with three types of transactions before itan asset purchase, a 100-percent stock purchase, and mergers the court in Corporate Express was able to squarely address whether the nature of the... transaction affects whether ... consent to an assignment of a noncompete agreement is necessary. Id. at 409. In answering affirmatively, the court sharply distinguished between the nature of an asset purchase and a merger. Unlike in a merger, in which two corporations ... unite into a single corporate existence, the acquiring corporation in an asset purchase becomes, in effect, a wholly new employer. Id. at 412-14. Accordingly, based on its recognition of a merging corporation's shared existence with its successor, the court concluded that, under Florida's merger statute, the surviving corporation in a merger assumes the right to enforce a noncompete agreement entered into with an employee of the merg[ing] corporation by operation of law, and no assignment is necessary. Id. at 414. Although under a slightly varied rationale, these sharp distinctions were recently reiterated in Aon Consulting v. Midlands Financial, 275 Neb. 642, 748 N.W.2d 626 (2008). There, the Nebraska Supreme Court considered whether a successor corporation could enforce a former employee's nonsolicitation covenant under Maryland's merger statute, which controlled under the merger agreement. Id. at 636. However, even though the Maryland and Florida statutes were based on similar language, compare Md.Code Ann., Corps. & Ass'ns § 3-114 (Lexis Nexis 2008) with Fla. Stat. Ann. § 607.1106 (West 2007), instead of embracing Corporate Express's corporate continuity rationale, the court in Aon Consulting concluded simply that a nonsolicitation covenant is a corporate asset, and as such passes by operation of law to a successor corporation as the result of a merger, regardless of whether the agreement would otherwise be assignable. 748 N.W.2d at 637. Notably, despite some superficial differences in their rationales, Corporate Express and Aon Consulting looked directly to the relevant merger statuteas opposed to contract principlesto resolve whether a restrictive covenant transferred to a successor corporation following a merger. Indeed, when a relevant merger statute exists, the issue of a covenant's assignability is not controversial. See 19 C.J.S. Corporations § 909 (2008). As 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. [2] See, e.g., UARCO Inc. v. Lam, 18 F.Supp.2d 1116, 1122 (D.Haw.1998); Corporate Express, 847 So.2d at 414; Alexander & Alexander, Inc. v. Koelz, 722 S.W.2d 311, 313 (Mo.Ct.App.1986); Aon Consulting, 748 N.W.2d at 637; Farm Credit Services v. Wysocki, 243 Wis.2d 305, 627 N.W.2d 444, 450-53 (2001). While this particular issue has never been directly confronted in Nevada, historically, this court has recognized a hard-and-fast distinction between the implications of a merger, which is a statutory creature, and an asset purchase, which is not. Specifically, in Lamb v. Leroy Corp., a case involving whether an acquiring corporation was liable for a selling corporation's debts, the court contrasted an asset purchase, in which an acquirer does not assume the liabilities of the seller, with a merger, which imposes upon the surviving corporation all liabilities of the constituent corporations so merged. [3] 85 Nev. 276, 279, 454 P.2d 24, 26 (1969). Thus, in light of Corporate Express and Aon, which treat mergers as distinct from asset purchases, and Lamb, which confirms that this basic distinction exists in Nevada, we clarify that Traffic Control's rule of nonassignability does not apply when a successor corporation acquires restrictive employment covenants as the result of a merger. [4]