Application of the De Facto Merger Doctrine to Acquisition of Corporate Assets

Companies which otherwise are attractive acquisition targets may have contingent liabilities that are difficult to assess. For example, a paint manufacturer may have used ingredients that later prove to be toxic. Present and future liability of the manufacturer for damages from sales of products with those ingredients may be anticipated, but the scope and cost of that liability may be too difficult to determine to support an acquisition value for the manufacturer.

In response to such situations, acquiring companies may choose simply to acquire desired assets of the target company and to leave the target company to deal with questions of distribution of the money or other property received through the purchase to stockholders or present and future creditors. Courts may apply the de facto merger doctrine to avoid unfairness to those stockholders or creditors.

Under the de facto merger doctrine, a sale of assets of a company may be treated as if the selling company were merging with the purchasing company. That assumption would be made in order to achieve fairness among competing interests involved in the transaction. Thus, dissenting stockholders of the selling company may wish to have the transaction viewed as a merger in order to obtain an appraised value for their stock. Similarly, present and potential creditors of the selling company may wish to have the transaction viewed as a merger so that the acquiring company will be responsible for present and future liabilities of the selling company.

To avoid possible application of the de facto merger doctrine, a condition may be imposed on the transaction requiring that the selling company may not distribute proceeds of the asset sale and may not be dissolved for some meaningful period of time. This condition could be guaranteed through a long-term payment of the purchase price or through payment of the purchase price to an intermediary to be held in trust for the selling corporation. Such arrangements should be designed to prevent the possibility of unfair treatment of stockholders or creditors of the selling company and thereby to avoid application of the equitable de facto merger doctrine.