Corporations all across the world merge with other companies. It happens every day and most of us don’t blink an eye or even know about some of these mergers. Here in New Hampshire, when two companies merge, they need to be aware of whether they are simply taking over the assets or if they are obtaining the other company’s debts as well. The transaction is always completely different if one company needs to be held liable for any debts the other company had.
Thankfully, in the state of New Hampshire, successor liability is normally limited. That means most companies are not liable for the other company’s debts when they merge. But there are exceptions to this rule and that exception is the de facto merger.
The De Facto Merger
The de facto merger ensures a merger is being claimed when acquisition of assets occurs. If the de facto merger was not in place, many companies would benefit from the assets they were acquiring and avoid all of the risks that would ensue if they were to take over the liabilities as well.
Courts can now utilize the de facto merger to impose successor liability if a true merger has taken place between corporations, even if all of the statutory requirements for a merger were not met.
The 4 Non-Exclusive Factors
To determine whether a de facto merger is taking place, the courts will take four non-exclusive factors into consideration. These factors are considered non-exclusive, because the courts do also consider many other facts for every merging transaction.
- The Continuation of the Enterprise
The continuation of the enterprise would include keeping the management and personnel of the seller’s company. This also includes keeping the physical location and general business operations the same.
A court isn’t going to usually impose successor liability when the purchasing corporation replaces employees, changes the location of the business and how it is run, and takes over the board of directors.
2. The Continuation of Ownership
There are times when the purchasing corporation will pay for assets with its own shares of stock. The shareholders of the seller’s corporation now have shares of that stock and are part of the purchasing corporation. This can create confusion, on occasion, as to whether or not the ownership of the new company has changed.
3. Assumption of Necessary Obligations
If the purchasing company is only purchasing the assets necessary to keep the business running, the de facto merger is likely taking place.
There are times when a corporation will simply purchase assets to preserve the value of those assets. When that occurs, other factors are considered since it may not be a de facto merger after all.
4. Cessation of the Business
When the seller ceases all of its business operations and liquidates as soon as they can, it is an indication that it is not part of a de facto merger. Now if the purchasing corporation continues the business to prevent the loss of the value of those assets that would occur with the cessation of the business, the result would not be the de facto merger.
The de facto merger comes into play when the courts are trying to determine if the companies are trying to avoid a full merger, due to the possibility of successor liability. Anytime a company purchases another company and continues to run the business like it did in the past, the de facto merger will be in effect. And if the new company is simply preserving the assets’ value, and can prove that, the de facto merger will never be considered.
Are you considering merging your company with another company? Do you have other legal questions in your business? Contact me today and see how I can help.