Opinion ID: 2518474
Heading Depth: 1
Heading Rank: 5

Heading: De facto merger exception

Text: The de facto merger exception permits courts to hold the purchaser of a business's assets liable for the seller corporation's conduct when the parties have essentially achieved the result of a merger although they do not meet the statutory requirements for a de jure merger. [9] To determine whether there has been a de facto merger, courts apply a four-factor test and consider: (1) whether there is a continuation of the enterprise, (2) whether there is a continuity of shareholders, (3) whether the seller corporation ceased its ordinary business operations, and (4) whether the purchasing corporation assumed the seller's obligations. [10] We now adopt this test as the proper analysis to determine the existence of a de facto merger. At the outset, we note that courts take varying approaches to weighing the four factors. For instance, some courts give great weight to the question of whether the consideration given by the seller consists of shares of the seller's own stock. [11] These courts emphasize this requirement because when two companies merge, the shareholders of the seller become shareholders of the buyer. As a result, these individuals share in the successor corporation's profits making it just to attach the seller's liabilities to the buyer to avoid any inequity that might result from allowing a shareholder to shed liability but retain profit. [12] However, when this factor is not present these courts have concluded that sound policy does not support imposing the predecessor's liabilities upon the successor `when it has already paid a substantial price for the assets of the predecessor.' [13] In contrast, other courts have determined that the factors should be weighed equally, and therefore no single factor is `either necessary or sufficient to establish a de facto merger.' [14] This approach is more reasonable because it properly balances the successor corporation's rights to be free from liabilities incurred by its predecessor, with the important interest involved in ensuring that ongoing businesses are not able to avoid liability by transferring their assets to another corporation that continues to operate profitably as virtually the same entity. [15] We conclude that this approach is consistent with the principles underlying the de facto merger exception, which is a judge-made rule that rests on general equitable principles. [16] The New York appellate court in Sweatland v. Park Corp . noted that: Public policy considerations dictate that, at least in the context of tort liability, courts have flexibility in determining whether a transaction constitutes a de facto merger. While factors such as shareholder and management continuity will be evidence that a de facto merger has occurred ( see, Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F.Supp. 834), those factors alone should not be determinative. [17] This rationale is persuasive, and therefore we will weigh equally all of the factors to determine if a plaintiff established a prima facie case for de facto merger.