Opinion ID: 852396
Heading Depth: 3
Heading Rank: 2

Heading: De Facto Merger and Mere Continuation

Text: The trial court's holding that the 1967 transaction constituted a  de facto merger and mere continuation appears supportable. As for choice of law concerning de facto merger and mere continuation, Cooper cites the Indiana Code: This article does not authorize Indiana to regulate the organization or internal affairs of a foreign corporation authorized to transact business in Indiana. I.C. § 23-1-49-5(c). Cooper further says Delaware law must control. This provision from our Business Corporations Law may well prevent certain regulatory actions as respects foreign corporations granted certificates of authority to transact business in Indiana. It does not drive the judicial task of discerning the overall effect of corporate transactions on the interests of persons and entities who were not party to the earlier transactions. Our task is to understand what dealings have occurred, not to order new action affecting a corporation's internal affairs. For at least these reasons, Ind.Code § 23-1-49-5(c) does not affect our analysis of de facto merger or mere continuation nor does the statute require Delaware law to control such discussion. These two doctrines represent exceptions to the general rule against passing along liabilities in the course of an asset sale are widely accepted in the law of American states, including Indiana, New York, and Delaware. [10] Courts sometimes treat asset transfers as de facto mergers where the economic effect of the transaction makes it a merger in all but name. Some pertinent findings might include continuity of the predecessor corporation's business enterprise as to management, location, and business lines; prompt liquidation of the seller corporation; and assumption of the debts of the seller necessary to the ongoing operation of the business. See, e.g., AT & S Transport. LLC v. Odyssey Logistics & Tech. Corp., 22 A.D.3d 750, 803 N.Y.S.2d 118(2005); Berg Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455 (3rd Cir.2006); Beals v. Washington Int'l, Inc., 386 A.2d 1156 (Del.Ch. 1978). There is only modest contest that the 1967 transaction followed this pattern. Studebaker was founded in South Bend during the mid-1800s. For more than a century Studebaker conducted industrial operations in 109 buildings spread across approximately twenty-five city blocks at its headquarters in South Bend. In 1963, Studebaker began diversifying into other lines of business and stopped manufacturing automobiles in South Bend due to a weakening automotive market. In the fourteen months following the decision to stop manufacturing automobiles in South Bend in December 1963, Studebaker sold its foundry, machine shop and engine plant, stamping plant, final assembly plant, body plant, power house, engineering building, truck plant, and several other buildings. (Appellant's Br. at 4.) Studebaker also set aside a fund in the amount of sixty-four million dollars to provide for anticipated losses on the disposal of the South Bend properties and equipment. ( Id. ) Studebaker then consolidated its remaining automotive operations in Hamilton, Ontario, to be conducted through its subsidiary, Studebaker of Canada, Ltd. ( Id. ) Studebaker allegedly discontinued all automotive manufacturing in Hamilton, Ontario, on March 4, 1966. ( Id. ) As of 1966, Studebaker consisted of nine operating divisions  none of which allegedly were linked to its automotive past and the properties at issue in this case. (Appellant's Br. at 5.) In 1967, Studebaker entered into negotiations which ultimately resulted in a series of agreements and a plan of reorganization whereby Studebaker and Worthington Corporation combined to form Studebaker-Worthington (S-W) and two subsidiaries. Studebaker and Worthington Corporation both immediately dissolved after the combination of the two companies. Studebaker-Worthington expressly assumed Studebaker's liabilities in the 1967 agreements. (Appellant's Br. at 5; Appellees' Br. at 3.) The Instrument of Assumption of Liabilities and Obligations provided that Saraband Properties, Incorporated, a subsidiary of S-W, would assume all potential future arising liabilities that were existing at the first closing of the transaction. (Appellant's Br. at 5-6; Appellees' Br. at 3.) The Transaction Agreement provided that Studebaker-Worthington would assume the current obligations of Studebaker naturally associated with the business at the First Closing. (Appellees' Br. at 3.) The 1967 agreements also set aside a fund in the amount of $4 million dollars to address Studebaker's retained liabilities occurring in the normal course of business. (Appellant's Br. at 6.) This fund agreement expressly required Studebaker to pay for or provide payment for all Studebaker's liabilities, expenses, and taxes not assumed by S-W. [11] (Appellant's Br. at 6.) Moreover, the Proxy Statement sent to Studebaker shareholders and the 1967 Studebaker and 1969 Studebaker-Worthington annual reports show that the divisions, subsidiaries, and products of Studebaker became the divisions, subsidiaries, and products of S-W. (Appellees' Br. at 4.) The Proxy Statement also establishes that there was a continuity of shareholders between Studebaker and S-W. (Appellees' Br. at 4.) The officers and the employees of Studebaker also became officers and employees of S-W after the reorganization. (Appellees' Br. at 4.) Studebaker remained legally and financially available to satisfy its remaining liabilities for three years after its dissolution and provided public notice regarding the expiration of any pending claims against it. (Appellant's Br. at 6.) Then, after having fully met its responsibilities, Studebaker ceased to exist. (Appellant's Br. at 6.) We conclude that these facts suffice to warrant the trial court's finding that the 1967 transaction constituted a de facto merger such that Cooper may be held to answer South Bend's claims. The doctrine of mere continuation has a slightly different focus. It asks whether the predecessor corporation should be deemed simply to have re-incarnated itself, largely aside of the business operations. Factors pertinent to this determination include whether there is a continuation of shareholders, directors, and officers into the new entity. See, e.g., Chicago Title Ins. Co. v. Alday-Donalson Title Co. of Florida, Inc., 832 So.2d 810 (Fla.Dist.Ct.App.2002); Mickowski v. Visi-Trak Worldwide, LLC, 415 F.3d 501 (6th Cir.2005). Judge Weis helpfully laid out the development of these alternatives as respects claims by third parties. Polius v. Clark Equip. Co., 802 F.2d 75 (3rd Cir.1986). In the instant case, as in some we have noted from other jurisdictions, the stockholders, directors, and officers of old Studebaker and the former Worthington Corporation became the respective players in Studebaker-Worthington Corporation. The officers of Studebaker became the officers of Studebaker-Worthington. (1967 Annual Report, Appellant's App. 1828-1859; 1969 Annual Report, Appellant's App. 1891-1916.) The shareholders of the two former corporations between them owned 100% of Studebaker-Worthington. (Appellant's App. 2122.) The proxy statement told these shareholders what they were voting on was a merger. (Appellant's App. 2815-2827.) After selling the South Bend properties and exiting the automobile business, Studebaker entered negotiations that ultimately culminated in the November 1967 Asset Sale in which Studebaker and Worthington Corporation sold selected assets to Studebaker-Worthington Corporation and two subsidiaries. (Appellant's App. 1567-91.) All of the acquiring entities were Delaware corporations. Id. Studebaker-Worthington did not buy Studebaker's automotive business and never owned the sites at issue here. Rather, S-W bought only the assets of Studebaker's separate collection of nine non-automotive businesses. ( See Appellant's App. 1828-59.) The fact the successor corporation was incorporated in Delaware does not control. While the law of the state of incorporation may determine issues relating to the internal affairs of a corporation, different principles apply where the rights of third parties external to the corporation are at issue. See, e.g., First Nat'l City Bank v. Banco Para El Comercio Exterior, 462 U.S. 611, 621, 103 S.Ct. 2591, 77 L.Ed.2d 46 (1983), citing Restatement (Second) of Conflict of Laws § 301, which provides: The rights and liabilities of a corporation with respect to a third person that arise from a corporate act of a sort that can likewise be done by an individual are determined by the same choice-of-law principles as are applicable to non-corporate parties. Section 302 provides: Issues involving the rights and liabilities of a corporation, other than those dealt with in § 301, are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the occurrence and the parties ... (2) The local law of the state of incorporation will be applied to determine such issues, except in the unusual case where, with respect to the particular issue, some other state has a more significant relationship to the occurrence and the parties, in which event the local law of the other state will be applied. Restatement (Second) of Conflict of Laws § 302. This case is a claim about property damage. The injury occurred in Indiana. The law of the place of the wrong occurred ( lex loci delicti ) governs. In disputes such as this, particularly because it involves a third person, the law of the state with the most significant relationship to the dispute  here Indiana  applies. See, e.g., Chrysler Corp. v. Ford Motor Co., 972 F.Supp. 1097, 1103 (E.D.Mich.1997) (holding that the law of the state of incorporation is not entitled to preference with respect to successor liability issues rather than under § 302; instead, the law of the state with the greatest interest, the location of the contaminated property, should prevail over the law of the state of incorporation). The trial court properly found that the 1967 transaction was a mere continuation of the earlier corporate forms.