Nevada Supreme Court Applies De Facto Merger Doctrine To Debt Forgiveness Transaction
Friday, October 12, 2018
Last month, Professor Stephen Bainbridge posed the question of whether California recognizes the de facto merger doctrine outside of the successor liability context. Here was my response. Less than two weeks later, the Nevada Supreme Court addressed the same question under Nevada law in Peddie v. Spot Devices, Inc., 2018 Nev. Unpub. LEXIS 901.
In an earlier decision, Village Builders 96, L.P. v. U.S. Laboratories, Inc., 121 Nev. 261 (2005), the Nevada Supreme Court identified the following four factors in determining whether to apply the de facto merger doctrine:
Continuity of enterprise
Continuity of shareholders
Seller's cessation of ordinary business operations; and
Assumption of seller's obligations.
In Peddie, the plaintiff in a dissenters' rights action challenged two debt-to-equity transactions, one in 2011 and one in 2013. The Supreme Court upheld the trial court's finding that the de facto merger doctrine did not apply to the earlier transaction because the plaintiff had failed to make a prima facie case as to three of the Village Builders factors. The plaintiff succeeded in obtaining a reversal of the trial court as to the second transaction which involved the forgiveness of debt and the transfer of the corporation's remaining assets.
Ironically it seems that that the defendants success on the earlier transaction made it possible for the plaintiff to succeed as to the second. Had the plaintiff succeeded as to the earlier transaction, the corporation would have been merged out (at least de facto) and presumably was incapable of being merged out again. YODO?
Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...