I awoke this morning to find I had been tagged in the following tweet:</p?
Nice potential example for corporations casebook, if it gets to an opinion. (cc: @ProfBainbridge) https://t.co/kdtAnEPpOW
— Dave Hoffman (@HoffProf) September 13, 2018
It is true that California recognizes the de facto merger doctrine in successor liability cases. In Marks v. Minnesota Mining & Mfg. Co., 232 Cal. Rptr. 594 (Cal. App. 1st Dist. 1986), for example, "plaintiff filed a complaint for strict products liability, breach of warranty, and negligence against Minnesota Mining and Manufacturing Co. (3M) and McGhan Medical Corporation. 3M and McGhan Medical Corporation" alleging that they had manufactured a defective "inflatable mammary prosthesis used in breast augmentation surgery." The prosthesis had been manufactured by McGhan. Subsequently thereto McGhan's assets were sold to 3M, but 3M did not acquire McGhan's liabilities.
In general, in such cases the liabilities remain with the seller and the purchaser takes the assets free of any attached liabilities.
As the Third Circuit has explained:
Under the well-settled rule of corporate law, where one company sells or transfers all of its assets to another, the second entity does not become liable for the debts and liabilities, including torts, of the transferor.
Four generally recognized exceptions qualify this principle of successor nonliability. The purchaser may be liable where: (1) it assumes liability; (2) the transaction amounts to a consolidation or merger; (3) the transaction is fraudulent and intended to provide an escape from liability; or (4) the purchasing corporation is a mere continuation of the selling company.
The successor rule was designed for the corporate contractual world where it functions well. It protects creditors and dissenting shareholders, and facilitates determination of tax responsibilities, while promoting free alienability of business assets. The doctrine reflects the general policy that liabilities adhere to and follow the corporate entity. However, when the form of the transfer does not accurately portray substance, the courts will not refrain from deciding that the new organization is simply the older one in another guise.[1]
As noted, California does recognize the de facto merger doctrine in successor liability cases arising from tort. But the case to which Professor Hoffman drew my attention is not a traditional tort case involving successor liability:
Sixteen former Dickstein Shapiro partners have sued Blank Rome claiming the 2016 merger between the two firms was inappropriately styled as a sale to avoid paying out more than $4 million in capital accounts owed to former partners.
“Blank Rome’s transactional attorneys tried to ‘play cute’ by structuring the merger of Dickstein Shapiro into its law firm by the artifice of labeling it as an ‘asset sale’ for the solitary purpose of defrauding former Dickstein Shapiro partners (who were necessarily not going to be a part of Blank Rome),” wrote the former Dickstein Shapiro’s lawyers at Kabateck Brown Kellner and The Kellner Law Group in Los Angeles in a complaint filed Wednesday in Los Angeles Superior Court.
“This lawsuit has no merit and we intend to vigorously defend it,” a Blank Rome spokeswoman said in email Thursday morning.
The lawsuit, filed on behalf of 15 partners who left Dickstein in the run-up to the Blank Rome deal and one who retired about a month prior to the February 2016 tie-up, seeks a declaratory judgement that the deal was a “de facto merger.” Such a finding, the former partners claim, would leave Blank Rome liable for Dickstein’s debts and in breach of the defunct firm’s partnership agreement with former partners, which required the firm to pay back departing partners’ capital accounts with interest.
Instead, this case arguably is more analogous to cases in which shareholders seek to use the de facto merger doctrine so as to obtain voting or appraisal rights in a transaction designed to deprive them of those rights.
Assume that Buyer Corporation and Target Inc. agree that Buyer will acquire Target via a reverse triangular merger. As a result, Buyer's shareholders will not be entitled to vote on the merger nor will they be eligible for appraisal rights. Disgruntled Buyer shareholders sue, arguing that the reverse triangular merger is a de facto merger. If the court agrees, the court will ignore the form of the transaction, treat the deal as a standard two‑party merger, and grant both Buyer and Target shareholders the right to vote and the right to dissent.
Why did the Delaware courts and the Pennsylvania legislature reject the de facto merger doctrine? Is it simply that they prefer corporate interests to shareholder interests? No. The statute provides various ways of accomplishing an acquisition. It does so because no one acquisition technique is always appropriate. If we let courts recharacterize the statutory alternatives, we increase uncertainty and we eliminate the wealth‑creating advantages of having multiple acquisition formats.
Assuming the court decides that this case is more akin to de facto merger cases brought by shareholders than those brought by tort claimants in products liability cases, the pertinent question is whether California recognizes de facto merger outside the successor liability context.
A quick Westlaw search this morning seemed to kick up only successor liability cases. So I’m going to tag in Keith Paul Bishop.
[1]Polius v. Clark Equipment Co., 802 F.2d 75, 77-78 (3d Cir 1986) (citations omitted).
