Successor liability de facto merge required company paid for with own stock?

[BirdFeeder]

What is the name of your state? Utah

Is it a requirement that a company pay for the company with its own stock in order to prove De Facto Merger?

What if the owners of the 2 companies work out some other deal involving cash, forgiving loans, etc.. and the end result is the 2 companies effectively merging?

One company is representing themselves as the other company, doing work for the other company, the operation consolidate under 1 roof, employees combine efforts etc..

I understand paying with the company's own stock may be a red flag for regulators however is this method of payment 100% REQUIRED to be with its own stock for the de facto merger standard to be considered?


Thanks.

 

[FlyingRon]

There's nothing that REQUIRES it. However, stock for stock swaps may be tax advantaged.

 

[Taxing Matters]

I understand paying with the company's own stock may be a red flag for regulators however is this method of payment 100% REQUIRED to be with its own stock for the de facto merger standard to be considered?

What makes you think that it creates a red flag for regulators? Corporate stock deals are done all the time. What is it exactly that you are trying to accomplish? Are you contemplating a merger and want a specific result? Or do you have a claim against one of these companies and are looking for a way to sue the alleged merged entity for it?

 

[BirdFeeder]

What makes you think that it creates a red flag for regulators? Corporate stock deals are done all the time. What is it exactly that you are trying to accomplish? Are you contemplating a merger and want a specific result? Or do you have a claim against one of these companies and are looking for a way to sue the alleged merged entity for it?

I mean its a red flag if you are trying to prove de facto merger. In other words, its an item to avoid if you are trying to buy a company assets without their liabilities.

I am trying to avoid de facto merger and the opposing side claims there can't be defacto merger since the merger was not paid for with their own stock. My position is the method of payment is not relevant.

 

[FlyingRon]

Prove for what purpose? Why would the IRS care?

 

[Taxing Matters]

I mean its a red flag if you are trying to prove de facto merger. In other words, its an item to avoid if you are trying to buy a company assets without their liabilities.

I am trying to prove de facto merger and the opposing side claims there can't be defacto merger since the merger was not paid for with their own stock. My position is the method of payment is not relevant.

In Utah, for an actual de facto merger it is required that the payment was made with the buyers stock. But it appears that what you are trying to do is hold the buyer liable for a debt of the seller and de facto merger is just one of the circumstances that can make an asset buyer liable for the seller's debts. The general rule, of course, is that a buyer of assets is not liable for the debts of the seller. But the Utah Court of Appeals goes on to say:

But, four well-settled exceptions qualify that rule:​

“(1) the purchaser expressly or impliedly agrees to assume such debts; (2) the transaction amounts to a consolidation or merger of the seller and purchaser; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently in order to escape liability for such debts.”​

​

Id. (quoting Florom, 867 F.2d at 575 n. 2.) The second exception, the “de facto merger,” considers whether the business operations and management continued and requires that the buyer paid for the asset purchase with its own stock. See Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974). In contrast, the third exception, the “mere continuation,” considers not whether the “business operation" continued, but whether the “corporate entity” continued. Polius v. Clark Equip. Co., 802 F.2d 75, 86 (3d Cir.1986) (Mansmann, J., dissenting) (quoting Travis v. Harris Corp., 565 F.2d 443, 447 (7th Cir.1977)). “A continuation demands ‘a common identity of stock, directors, and stockholders and the existence of only one corporation at the completion of the transfer.’ ” Id. (quoting Travis, 565 F.2d at 447).​

​

Decius v. Action Collection Serv., Inc., 2004 UT App 484, ¶ 8, 105 P.3d 956, 958–59.

Note that the court specifically states that for a de facto merger buyer had to pay with its own stock. So if that did not happen then you are out of luck in pressing the argument for de facto merger. But perhaps one of the three other exceptions might help you.

Prove for what purpose? Why would the IRS care?

Where did you get the idea that the IRS or taxes are an issue? The OP has not mentioned either.

 

[FlyingRon]

I guess I misunderstood what "regulator" he was afraid was coming.

 

[BirdFeeder]

Prove for what purpose? Why would the IRS care?

Sorry, when did I say it involved the IRS? Did I post in the wrong forum?

 

[quincy]

Sorry, when did I say it involved the IRS? Did I post in the wrong forum?

FlyingRon said he misunderstood when you said "regulator."

Your thread is fine here.

 

[BirdFeeder]

In Utah, for an actual de facto merger it is required that the payment was made with the buyers stock. But it appears that what you are trying to do is hold the buyer liable for a debt of the seller and de facto merger is just one of the circumstances that can make an asset buyer liable for the seller's debts. The general rule, of course, is that a buyer of assets is not liable for the debts of the seller. But the Utah Court of Appeals goes on to say:

But, four well-settled exceptions qualify that rule:​

“(1) the purchaser expressly or impliedly agrees to assume such debts; (2) the transaction amounts to a consolidation or merger of the seller and purchaser; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently in order to escape liability for such debts.”​

​

Id. (quoting Florom, 867 F.2d at 575 n. 2.) The second exception, the “de facto merger,” considers whether the business operations and management continued and requires that the buyer paid for the asset purchase with its own stock. See Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974). In contrast, the third exception, the “mere continuation,” considers not whether the “business operation" continued, but whether the “corporate entity” continued. Polius v. Clark Equip. Co., 802 F.2d 75, 86 (3d Cir.1986) (Mansmann, J., dissenting) (quoting Travis v. Harris Corp., 565 F.2d 443, 447 (7th Cir.1977)). “A continuation demands ‘a common identity of stock, directors, and stockholders and the existence of only one corporation at the completion of the transfer.’ ” Id. (quoting Travis, 565 F.2d at 447).​

​

Decius v. Action Collection Serv., Inc., 2004 UT App 484, ¶ 8, 105 P.3d 956, 958–59.

Note that the court specifically states that for a de facto merger buyer had to pay with its own stock. So if that did not happen then you are out of luck in pressing the argument for de facto merger. But perhaps one of the three other exceptions might help you.



Where did you get the idea that the IRS or taxes are an issue? The OP has not mentioned either.

1. Are you saying that UTAH Law regarding successor liability(in particular De Facto Merger) is different than the other 49 states? I believe there has been other de facto merger cases in which a purchase was not made with one's own stock.
2. De Facto Merger Definition:
The de facto merger happens when a transaction between two companies is not structured as a merger but in effect has the same results. It happens during the acquisition of one firm's assets and/or voting stock by another company. "

The " or" in the definition means it could include or not include this information.

Perhaps the case you were reading only referred to that one particular case which was dealing with a public company? In other words, perhaps the judge was saying the stock was required this exact situation because the question deals with if the stock options were exercised or not. However not suppose to be for all cases?

3. Not all companies are public traded companies with stock options used to buy/merge with other companies.
Some companies may be a sole proprietorship or for example 2 dentist combining their practice or 2 lawyer combining their business.
A Ice creamshop combining with a sub switch shop. Maybe the deal involved cash, an arrange marriage, the guy's personal Ferrari, agreement to cover certain expenses, bars of GOLD or Silver, Stack of Gift card, all paid vacation to vegas etc.. Its basically if the result is the same as a merger, why would one payment method be required and disqualify de facto merger without it?

By this criteria, only public traded companies with stock available to use to purchase companies are capable to having a de facto merger.
2 companies can setup in the same building and combine employees, software, vendors, products,etc and never be considered a de facto merger because stock was not used.

The de facto merger, however, has fuzzier boundaries. Much like the alter ego analysis, found in My Bread Baking Co. v. Cumberland Farms, 353 Mass. 614, 233 N.E.2d 748 (1968), the de facto merger doctrine calls on courts to consult multiple specified factors to determine if there has been a de facto merger; however, “[n]o single factor is necessary or sufficient to establish a de facto merger.” Cargill, Inc. v. Beaver Coal & Oil Co., 424 Mass. 356, 360, 676 N.E.2d 815, 818 (1997). That is to say, the absence of any one factor will not preclude a finding of de facto merger, and, in some cases, the presence of some amount of each factor would not compel a finding of de facto merger. from -businesslawtoday

Do you still believe that all de facto mergers require the method of payment to with paying with one's own stock?
What I'm seeing is that it can be used as a factor however lacking one factor will not preclude a decision for de facto merger.

Unless perhaps Utah is out of line with other states that follow the identical criteria “(1) the purchaser expressly or impliedly agrees to assume such debts; (2) the transaction amounts to a consolidation or merger of the seller and purchaser; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently in order to escape liability for such debts.”

Thanks.

 

[Taxing Matters]

1. Are you saying that UTAH Law regarding successor liability(in particular De Facto Merger) is different than the other 49 states?

No. There are at least some other states that have the same requirement. We have, however, 50 states, plus DC, territories, and possessions in this country and is very likely that the law on this is not identical in each one. But as you indicated Utah as the relevant state, I gave you what the case law in that state says on the matter. As a result, it appears that in Utah the buyer must use his own stock for the de facto merger argument to work. So if Utah is the relevant state here then it matters not what the law is in the other 49 states. Even if Utah were the only one with that requirement, that rule would still be what matters in Utah since there is no legal principle that says a state must follow what the other states do. So arguing what the law is in other states does not help you when the courts of Utah have already spoken on the issue.

But even if de facto merger does not work, perhaps some other legal principle would. You might want to consult a Utah business litigation attorney for advice on your situation.

 

[BirdFeeder]

No. There are at least some other states that have the same requirement. We have, however, 50 states, plus DC, territories, and possessions in this country and is very likely that the law on this is not identical in each one. But as you indicated Utah as the relevant state, I gave you what the case law in that state says on the matter. As a result, it appears that in Utah the buyer must use his own stock for the de facto merger argument to work. So if Utah is the relevant state here then it matters not what the law is in the other 49 states. Even if Utah were the only one with that requirement, that rule would still be what matters in Utah since there is no legal principle that says a state must follow what the other states do. So arguing what the law is in other states does not help you when the courts of Utah have already spoken on the issue.

But even if de facto merger does not work, perhaps some other legal principle would. You might want to consult a Utah business litigation attorney for advice on your situation.

According to the website Bloomberg law
The de facto merger is the most commonly cited, particularly where the transaction is characterized by

1. a continuity of management
2. physical location
3. general business operations
4. equity ownership (the purchase consideration is stock of the acquirer), assumption by buyer of seller’s ordinary course business liabilities, and seller’s dissolution following the sale.

There is no mention that the equity ownership had to be purchase using their own stock.

All 50 states have the same criteria for successor liability which is. Utah law mirrors every other state.

1. The buyer assumes the seller’s liabilities expressly or impliedly;
2. the transaction in substance constitutes a merger or consolidation of buyer and seller (de facto merger);
3. the buyer is “a mere continuation” of seller; and
4. the intent of the transaction is to defraud seller’s creditors

Some states have expanded on those 4 general principals to strengthen successor liability in more situation but every state has these 4 basic core principals. Utah has the standard(not extended) definition used by most other states of the 4 general principals.

Can you please cite what law article you read which clearly states that the method/mode of payment is required to be with one's own stock for a de facto merger to occur?

All law articles I read basically say that " “[n]o single factor is necessary or sufficient to establish a de facto merger.” Cargill, Inc. v. Beaver Coal & Oil Co., 424 Mass. 356, 360, 676 N.E.2d 815, 818 (1997). That is to say, the absence of any one factor will not preclude a finding of de facto merger, and, in some cases, the presence of some amount of each factor would not compel a finding of de facto merger. from -businesslawtoday "

According to Wikipedia under "De facto merger


"
Some courts require only one factor, others require all, and others still have entirely different factors when deciding if a transaction is a de facto merger. [8]

Factors:

(1) continuity of ownership [or continuity of shareholders]; (2) cessation of the ordinary business and dissolution of the predecessor as soon as practically and legally possible; (3) assumption by the successor of liabilities ordinarily necessary for uninterrupted continuation of the business of the predecessor; and (4) a continuity of [enterprise, including] management, personnel, physical location, aspects, and the general business operation. [9]

"
Wikipedia has no mention of having to use one's own stock to be the currency used to make the purchase.


The case you mentioned " There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation. "
-
379 F.Supp. 797 (1974)Donald SHANNON and Carol Shannon, Plaintiffs,
v.
SAMUEL LANGSTON COMPANY, aka Langston Company, a Division of Harris Intertype Corporation, Defendant.

The Key phrase here is that "There is a continuity of shareholders" which happen in this particular case to be a result of the purchasing corporation paying for its acquired assets with shares of its own stock.

If the continuity of shareholder resulted in other method of payment, the result would have been the same as long as there was a continutiy of shareholders.

It does not say that its REQUIRED but rather this is what happen in this particular case.

Where do you read its REQUIRED in this case law you are citing?

(1974)Donald SHANNON and Carol Shannon, Plaintiffs,
v.
SAMUEL LANGSTON COMPANY



Also, you are talking about state court vs federal court has a appellate court which covers multiple states.

What makes you think that those cases applied to every case not just the unique case in front of them?

After all, the O.J. Simpson trial " If the glove don't fit, you must acquit" doctrine does not apply to every murder trial. There are convictions and acquittals in murder trials which don't involve a glove. Just like there are case after case of de facto mergers that don't have a method of payment as their own stock.

 

[Taxing Matters]

Can you please cite what law article you read which clearly states that the method/mode of payment is required to be with one's own stock for a de facto merger to occur?

I did not rely on any law article. Law review articles in journals or elsewhere, unless specific to a particular jurisdiction, are useful to get a general sense of the issue discussed, but as each jurisdiction has its own law you cannot assume that what the article tells you is perfectly accurate for each jurisdiction. Moreover, law review articles are not law and cannot be cited as authority in court. The opinions issued by appellate courts, like the Utah Court of Appeals, on the other hand, are law and may be cited in court. That's why I gave you the Utah appellate court case.

Wikipedia has no mention of having to use one's own stock to be the currency used to make the purchase.

Yes, I know. I read the Wikipedia article and it is very general and not jurisdiction specific, and thus not all that useful for determining what the law is in any particular state. As I stated earlier in this thread, Wikipedia is not legal authority. You must also be careful with Wikipedia since anyone can write or edit articles there you have no guarantee that the persons writing it actually are experts in the topic. That's not to say that Wikipedia can't be useful, but it certainly should be used with an abundance of caution.

Also, you are talking about state court vs federal court has a appellate court which covers multiple states.

But when a federal court applies state law in making its decision, it is that state's own courts that have the final say on what state law is. A federal court has no power to make, change, or overrule a state court on a matter of state law. The federal court in that situation is simply tasked with applying that state's law to the case in front of it.

Where do you read its REQUIRED in this case law you are citing?

The Utah Court of Appeals stated "The second exception, the 'de facto merger,' considers whether the business operations and management continued and requires that the buyer paid for the asset purchase with its own stock." Decius v. Action Collection Serv., Inc., 2004 UT App 484, ¶ 8, 105 P.3d 956, 959 (bolding added). As you can see from the part that I bolded, the Utah court expressly stated that it is required that the buyer used its own stock to buy the assets. So it's not my interpretation; it is literally what the court itself stated. Whether that is an accurate interpretation of the NJ case law that the Shannon court applied doesn't really matter; it is nevertheless what the Utah court says it requires. And that statement was not simply limited to the facts of particular case. That statement was made in it's statement of the applicable law, not in the part of the opinion where it is applying law to the particular facts of the case.

I realize that you feel strongly that de facto merger ought to apply notwithstanding that the assets were purchased for cash. But the idea of it is sound: in a regular merger the seller ends up with some shares of the buyer's stock; and since the idea of de facto merger is to see if the outcome mirrors that which you would get with a merger, it would make sense.

Nevertheless, as the Utah Supreme Court has not yet ruled on what is required for a de facto merger and on the specific issue of whether the buyer must pay for the assets using its own stock, you are free to argue that the rule of the Appeals Court in Decius is wrong and that the stock requirement should be dropped. Expect that the defense will rely on the rule in Decius. Maybe the Supreme Court would be willing to adopt a different rule, should you get there.

 

[BirdFeeder]

The Utah Court of Appeals stated "The second exception, the 'de facto merger,' considers whether the business operations and management continued and requires that the buyer paid for the asset purchase with its own stock." Decius v. Action Collection Serv., Inc., 2004 UT App 484, ¶ 8, 105 P.3d 956, 959 (bolding added).

The information I have which is from Google scholar show that statement to be simple quoting what is believed to be existing case law from Shannon v. Samuel Langston Co.

the "de facto merger," considers whether the business operations and management continued and requires that the buyer paid for the asset purchase with its own stock. See Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974).

In statistics you often have outlier that are outside the normal range. That statement is an outlier since no other judge in the nation have ever said that including the case that he directly quotes from Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974). which I believe was from Michigan not Utah.

The only references in Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974). to " own stock" are as a general recap for what happen in this one particular case
" Essentially, Harris Intertype acquired all the assets of the Samuel M. Langston Company, including the Langston name. Harris Intertype paid for the assets exclusively with its own stock. "

n McKee, the court, reviewing many cases from New Jersey and other jurisdictions, stated the characteristics of a de facto merger, as distinguished from an ordinary purchase and sale of assets. These can be summarized as follows:

(1) There is a continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations.

(2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation.

(3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible.

(4) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation

Applying the tests set forth in McKee and other cases, the court concludes that the transaction in question in this case was clearly a de facto merger between Harris Intertype and Samuel M. Langston Company. There was certainly a continuity of management, personnel, physical location, assets, general business operations, and shareholders.


Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974). simple recap the facts of this particular case, item #2 shows there was a continuity of shareholders(owners) which so happen to in this particular case had been created using his own stock as payment.

There is absolutely no where in this case to suggest that paying with your own stock is required. I believe he is simple explaining the facts of this particular case and/or what is the most common situation they encounter common owners in de facto merger cases.

If the seller and buyer are both owners of the new company, that is also common ownership. Regardless of if stock was used or not.


Is there any case which states that stock is required prior to Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974) ?

If you are looking at the spirit of the law, its continuity of owners which is The heart of the matter

What if someone purchased illegal drugs using precious metals nuggets instead of cash? Its still a drug deal right?
Can someone get out of debt by simple changing their name and claiming they are a new person?
The law is design to prevent someone from ripping off creditors by changing the name of their company ever month.

This entire theory of law is stated to be unpredictable, fuzzy and operating in a gray area.

 

[Taxing Matters]

In statistics you often have outlier that are outside the normal range. That statement is an outlier since no other judge in the nation have ever said that including the case that he directly quotes from Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974). which I believe was from Michigan not Utah.

The rule from case law is not an exercise in statistics or probability; you don't say "well, the rule in most states is X so it must therefore be X in this state too." 49 of the 50 states could have one rule and the 50th another. In that 50th state, what the law is in the other 49 does not matter. What matters is what the law is in that 50th state. So even if the rule in all the other states does not require the buyer to use its stock to buy the assets for a de facto merger, Utah is free to have a different rule. Looking at what rule the other states use does no good when Utah has its own case law already on the matter. And like it or not, the Utah Court of Appeals stated: "The second exception, the 'de facto merger,' considers whether the business operations and management continued and requires that the buyer paid for the asset purchase with its own stock." Decius v. Action Collection Serv., Inc., 2004 UT App 484, ¶ 8, 105 P.3d 956, 959 (bolding added). That statement in the case is pretty clear and speaks for itself, I think. And if you sue claiming de facto merger, you will have to overcome that particular statement of Utah law. As I said before, the Utah Supreme Court has not ruled on the matter, so there is the chance for you to try to convince that court that a different rule should apply if you lose at the lower courts due to the Decius decision.

The Shannon case is not a Utah case, it is a federal district court decision that applies New Jersey law to determine the outcome. While the Utah court looked to the Shannon case to help it determine the rule it made, the Shannon case itself is not binding authority in Utah; in fact it is not binding case law in any jurisdiction. You can argue that the Utah Court of Appeals drew the wrong conclusion when it stated the rule that it did, but you may have to reach the Utah Supreme Court to get a shot at a favorable result, unless the Utah Court of Appeals itself wishes to revise its own case law, which is possible but not all that common. It is not me that you have to convince, it is the Utah appellate courts.

Again, the Utah Court of Appeals made the express statement that the buyer is required to use its stock to pay for the assets. Until the Utah appellate courts change that, that is the rule in Utah. Every other state may have a different rule, but that doesn't matter. Utah trial courts will apply the rules from their own case law on a subject when there is one, even when every other state does it differently.