*1
2007).
16,
(C.P.Indiana,
5-6,
July
XLN, INC., System in Interest Successor Group,
Development Inc.
v. Consultants, Ltd., Gregg Montgomery, Shore A. David Binder, Solutions, and XLNT Software Inc. Products, Appeal of Fizzano Brothers Concrete Inc. Supreme Pennsylvania. Court of Argued Nov. 2010.
Decided March *4 Bucco, Ardizzi, Bucco Ardiz Robert Daniel Paul A. Davis & Conshohocken, Products, zi, Fizzano for Brothers Concrete Inc. Zimmerman, May, May, Metzger, Hartman
John L.L.P., Lancaster, Solutions, XLNT Inc. Software SAYLOR, EAKIN, CASTILLE, C.J., BAER,
BEFORE: MELVIN, TODD, McCAFFERY, JJ. ORIE OPINION Justice McCAFFERY. successor appeal question
At issue is the de doctrine or liability exception. under Solutions, that XLNT Inc. trial court concluded Software (“XLNT”) XLN, Inc. judgment was liable for a owed (“XLN”), XLNT and XLN lacked exception. to this pursuant however, higher management; common shareholders and *5 corporations each the same two employed key employees who, times, positions authority and at all relevant were principal owners of the essential asset which around business of the two corporations operated.
The Superior Court determined that the trial court misap- and, hence, plied de exception reversed. We granted allowance of appeal to determine the following issues:
1. Does the always doctrine require proof defacto ownership? 2. Did the Superior Court improperly substitute its own
fact-finding for that of the trial court?
Products,
XLN, Inc.,
Fizzano Bros. Concrete
Inc. v.
606 Pa.
(2010)
curiam).
I. BACKGROUND Appellant, Products, Inc., Fizzano Brothers Concrete pur- chased a license for accounting software, and manufacturing known as the (“the XLN Enterprise Management Software Software”), from System (“SDG”) Development Group, Inc. sometime to prior $66,818.25 2000. Appellant paid for the license, Software implementation, tax, training, sales based on assurances or expectations that the Software would update and Appellant’s sales, streamline ability to track main- receivable, tain accounts improve keeping. record How- ever, Appellant was never able to implement the Software. 19, 2000,
On April XLN all acquired of the stock and assets SDG, liabilities, addition all of its pursuant to a stock purchase agreement. Appellant filed a cause of action against 25, 2001, XLN on October alleging breach of contract and breach of express warranty arising from the failure of the Software’s implementation. XLN denied Appellant’s essential allegations. 4,
On or about September after securing leave of court, Appellant filed an amended complaint, XLNT joining and its president, Alan Gregg Montgomery (“Montgomery”), joined additional defendants. Appellant these defendants 29, 2003, after that on learning August or about XLNT had XLN, pursu- with purchase agreement into an asset entered *6 virtually all of XLN’s assets. purchased which XLNT ant to over the the transfer of control in the was agreement Included the former shareholders of Software, which was owned SDG, notes. subject promissory Appellant to of two payment in a fraud- engaged that the additional defendants had alleged assets, that XLNT was alleged transfer of and further ulent warranty breach of contract and original liable under the the Following of XLN. corporation actions as the successor objections, XLNT and preliminary court’s denial of their trial the critical in denying allegations filed an answer Montgomery complaint. the amended XLN was no that had as
Although dispute there purchase of the liabilities of SDG under the stock sumed all arising licensing liabilities from the agreement, including those that, as mere the to XLNT contended Appellant, Software XLN, responsibility of the assets of it had no purchaser lawsuit, XLNT had not expressly from arising Appellant’s This potential liability concerning Appellant. assumed XLN’s corporation supported by general principle contention is not, law that a of a assets does purchaser corporation’s alone, selling corporation, such reason assume the debts of the unlike a of the stock. See Continental purchaser corporation’s Schneider, Inc., v. 582 Pa. 873 A.2d Ins. Co. (“Schneider II”). (2005) to this exceptions principle (1) to a include circumstances where the asset sale amounted (2) purchasing or a de or the merger;1 consolidation merely selling corpora was a continuation of corporation liable argued tion. Id.2 XLNT was under these Appellant jure, statutory, in 1. A or de results the successor assuming predecessor corporation(s). the liabilities of the 15 Pa.C.S. 1929(b). § specifically, recognized following excep- 2. More this Court has five general rule: tions to (1) (2) implicitly agreed liability, purchaser expressly or to assume merger, [a ] the transaction amounted to a consolidation or de facto (3) merely purchasing corporation was a continuation of the (4) fraudulently selling corporation, entered into the transaction was (5) liability, adequate escape or the transfer was without consider- two Because exceptions. Appellant’s factually contentions are based, thorough a more review of the essential transactional background must be undertaken. XLN,
At the time of the sale of SDG to shareholders, Software was transferred from SDG to SDG’s Fritsch, Jr., Hamlin, Theis, Daniel T. R. Michael Phillip C. (“the Shareholders”). Paul J. Stehlik XLN purchased SDG’s $5,420,000, stock for with the majority of the purchase price being paid to the Shareholders the form of two promissory $5,100,000. totaling *7 paid notes, notes were in full. both promissory Under Share- holders Fritsch and Hamlin were each to receive 42.223% the value of the note.3
The right to license the primary Software was the asset of value acquired by XLN. Two of developers, who were also the primary Software, owners of the Shareholders Fritsch and Hamlin, were given employment contracts XLN by and worked at the company on a daily basis. neither Fritsch nor Hamlin XLN, was a shareholder of nor were the other two Shareholders.4 XLN out of the operated same Lancaster, Pennsylvania location where SDG had conducted 17, 2003, its business. January On XLN terminated Fritsch and Hamlin from their employment part of an effort to stop cash outlays while XLN attempted to sell the company. (“N.T.”), 10/24/06, Notes of Testimony at 82. provisions ation and selling no were made for creditors of the corporation. Schneider, Inc.,
Continental Ins. Co. v. 582 Pa. 873 A.2d (2005) (“Schneider II"). 5%, 3. Shareholder Theis was to receive and Shareholder Stehlik was to 10.554%, payments receive made under the notes. 4. The shareholders of XLN companies. were all investment The Board Binder, Baxendale, Baxendale, members were Robert Richard Scott Kernan, Tony (“N.T.”), Testimony and Chuck Austin. Notes of 10/24/06, at 86. in New York. 5, 2003, incorporated XLNT was August
On and Richard Montgomery of XLNT are The sole shareholders stock, is who owns 75% of XLNT’s Montgomery, Alexander. incorpo- In the month of its that corporation’s president. also with ration, agreement into the asset purchase XLNT entered XLN, virtually all purchased to which XLNT pursuant receiv- assets, intellectual accounts including property, XLN’s trademarks, will, licenses, able, lists, trade good customer names, only two workstations XLN retained copyrights; undeveloped and servers and an derivative Software. in Lancaster to premises XLN also its lease of the assigned XLNT, improve- thus further obtained all leasehold which ments from XLN. The two aforesaid workstations and servers location. retained XLN were to remain at this business customers, XLN retained two but agreement, Under the also and business name.5 change was its required SDG, “key from asset” purchase As with XLN’s stock acquired by right XLNT was the to license Software. 4/11/07, Trial of Fact No. 27. Opinion, Finding dated (1) testimony that to license right The trial court credited value; XLN of only significant the Software was the asset of (3) (2) software; company a software “lives and dies” its of XLN’s assets without the inclusion of the purchase XLNT’s meaningless; to license the would have been right Software (4) Software, without the to license the XLN would right Id., difficulty Findings have had in business. remaining *8 Indeed, Fact 29-31. the asset was purchase agreement Nos. contingent coming contemporane- XLNT to a expressly upon ous with the the agreement whereby Shareholders Sharehold- ers would transfer their ultimately Software XLNT, the again contingent upon promissory to satisfaction notes held the Shareholders.6 XE, requirement, changed In accordance with XLN its name to Inc. agreement, purchased 6. Under the XLNT also a half-interest in a "T-Rex,” derivative of the Software known as "TreX” or with XLN retaining remaining it was established at trial that the share. out,” nothing functionali- T-Rex was more than "a screen laid with "no upon also the agreement contingent The asset was purchase with of em- delivery, execution and simultaneous the closing, and Hamlin. ployment contracts between XLNT Fritsch and XLNT, These had independently negotiated individuals -with consent, with XLN’s the value the source for the codes Software, terms of of their and the conditions employment They with were to the same XLNT perform XLNT. duties for XLN. they had for XLNT hired from XLN its sole also remaining employee.
A schedule to the asset listed five purchase agreement XLN, in existing against claims both those litigation, including action, Appellant’s yet litigation. cause and those not XLNT agreed only to assume for one claim not in liability Further, litigation. the agreement required XLN to refrain from with XLNT competing by engaging activity in any involving the or any product. Following Software similar sale, website, create, XLNT’s which helped Hamlin to identi- Id., fied XLNT as the successor to XLN. company Finding of Fact No. 43.
II. TRIAL COURT PROCEEDINGS Appellant filed a motion summary judgment against XLN, Indeed, which not file a response. September did on 23, 2005, XLN’s counsel was leave granted to withdraw from the case. Because of the granted trial court non-response, Appellant’s summary motion judgment against XLN $114,105. amount of against Montgomery case XLNT and then to proceeded conclusion, trial. three-day bench trial’s Following
court entered a verdict for Appellant against XLNT for $114,000, consistent with the court’s extensive of fact findings of law. specifically, conclusions More the trial court the “de Appellant concluded that XLNT was liable to under merger” and “mere exceptions gen- continuation” ty," existing thirty and that it. none XLN's customers used Trial Findings Opinion, of Fact Nos. 32-33. *9 non-liability following purchase rule of
eral assets, rationale. following to pursuant the court merger exception, to the de
With respect to determine are examined generally that four factors noted of this exception: the existence (1) of the seller enterprise There is a continuation of continuity management, so that there is corporation, location, assets, general and business personnel, physical operations.
(2) which results from There is a of shareholders for the assets corporation paying acquired the purchasing stock, ultimately coming this stock to with shares of its own the seller so that corporation held the shareholders of be part purchasing corpora- become a constituent they tion.
(3) ordinary oper- its business The seller ceases ations, legally and dissolves as soon as liquidates, practically possible.
(4) obligations assumes those purchasing corporation necessary uninterrupted the seller for the contin- ordinarily of the seller operations corpora- uation of normal business tion.
Id., Electric (quoting Philadelphia Conclusion of Law No. 5 (3d Cir.1985)). Hercules, Inc., 762 F.2d Co. v. that, respect The trial court determined with to the asset XLNT, transfer between XLN and all of the above elements met, continuity of regarding had been save for the second one factor, With to the first the court respect shareholders. continuity management observed that there was a because XLN,” Fritsch and “key personnel namely from SDG and Hamlin, Hamlin, were also at XLNT: as Chief key personnel Officer, day-to-day operations, controlled XLNT’s Operating Officer, Fritsch, as Chief controlled XLNT’s Technology Id., of Law No. 11. The court technology issues. Conclusion remaining employ- further noted that XLNT hired XLN’s sole ee, evidencing employees. thus a continuation of an continuation of undisputed physical
The court then noted Further, location, XLN XLNT. XLNT passed from SDG to *10 XLN, customers, all acquired of the assets of for two except workstations, computer two servers with and XLN’s stock. involved, With to the asset respect primary the court observed that the Software continued to be owned by the Shareholders under both XLN XLNT purchase until the price fully was id., paid. Findings See of Fact Nos. Finally, 3ÍM0. the general business of XLN and XLNT operations were the same, asset, involving same essential personnel, key cus- XLN), tomers (except for the two retained by and office location. factor,
With to the respect third the court observed that because of the asset purchase agreement, XLN “essentially Id., operating.” ceased Conclusion Law No. 17. Although XLN had changed customers, its name and retained two it had “dormant,” ultimately become in the words of its and one CEO shareholders, Binder, and, of its David as determined court, trial “can be considered out of business.” Id. factor,
Concerning last the court concluded that “XLNT clearly assumed all of the obligations of XLN that were ordinarily necessary the uninterrupted continuation of Id., normal business operations.” Conclusion of Law No. 18. These obligations included the lease of the work premises, payment of salary key same employees, servicing clients, same assuming clients, debt owed to one of the taking “responsibility Id., for XLN’s accounts receivable.” Further, Conclusion of Law No. 19. the court noted that the most significant obligation of XLN that was assumed XLNT Software, was the debt owed for the which asset was Id., vital to the operation of XLNT’s business. Conclusion of Law No. 20. reasons,
For the above the court determined that “it is clear that there was a de merger [arising the asset from] facto purchase agreement Id., between XLN and XLNT.” Conclu- sion of Law No. 21. In determination, arriving this court explicitly rejected argument XLNT’s that all four de merger factors or must prongs present be in order to find corporate liability doctrine, successor under this noting required has ever decision Pennsylvania appellate no
such. XLNT was also on to determine that
The trial court went general to the exception” the “mere continuation liable under is a liability where there rule of no successor many of the consider- of assets. The court noted transfer to those of the de are identical concerning exception ations doctrine, determined already which the court had v. substantially citing Keystone U.S. present. to be (M.D.Pa. Inc., Co., 43 ERC 1996 WL Sanitation continuation 1996), exception the court observed that the mere *11 out to be company holding on the new itself places significance Here, the evi- company. of the predecessor the continuation held itself out to be the specifically dence showed that XLNT hence, determined, SDG; trial court XLNT “successor” to the to XLN. Trial necessarily was therefore the successor Court of Law Nos. 22-26. Opinion, Conclusions rejected the court claims that either Finally, Appellant’s under a fraudulent Montgomery responsible XLNT or was carry because failed to its burden Appellant transfer assets on claims. because the court deter- proof these the existence of both the de supported mined that the evidence to exceptions and the mere continuation the merger facto there is general liability rule of no successor where assets, for judgment Appellants a transfer of the court entered XLNT. against and
III. SUPERIOR COURT DECISION XLNT, Superior judgment against reversed the Court (1) support the record did not trial determining factors for the de findings court’s that three of four facto (2) met; purportedly had been merger exception XLN absent fourth between factor— indispensable establishing XLNT—was de facto determination, this latter merger exception.7 Regarding court held: footnote, By the trial court had Court also noted that exception. Bros. “made reference” to the mere continuation Fizzano regard
With to continuity of ownership, the trial court acknowledged none of the owners of XLN became itself, owners of XLNT. This finding, by should have ended the trial court’s consideration of XLNT’s potential successor liability. Continuity of ownership key is a element that must exist in order apply doctrine, the de since in the absence of a transfer of stock for assets the consequence the transaction is not the functional equiva- Instead, lent of a merger. where there is no continuity of ownership^] the transaction merely is an trans- arms-length action between two corporations and not in any sense a merging of two corporations into one. As one federal court it, appeals put without “continuity interest, of shareholder the two corporations are strangers, both before and after the sale.”
Fizzano Products, XLN, Bros. Inc., Concrete Inc. v. 973 A.2d 1016, 1020 (Pa.Super.2009) (quoting v. Travis Harris Corp., (7th 565 F.2d Cir.1977); added; emphasis citation to omitted). Trial Opinion
The Superior Court then rejected Appellant’s argument that the Superior Court had previously ruled that continuity of ownership is not an essential element of the de exception in Schneider, Continental Ins. Co. v. 810 A.2d *12 (“Schneider I”), (Pa.Super.2002) aff'd, 582 Pa. (2005). A.2d 1286 that, The court said although Schneider I did indeed state that not all four factors need be present for exist, the exception to Schneider I ultimately held that the trial court had improperly granted summary judgment favor of the successor corporation, concluding that no de facto occurred, merger had because genuine issues of material fact regarding the continuity of ownership factor remained. The Superior Court here emphasiz- characterized that holding as Products, XLN, Inc., (Pa.Su- Concrete Inc. v. 973 A.2d 1019 n. 2 (In fact, per.2009). the trial court had Appellant concluded that had proven exception support verdict.). and it was used in of the court’s Superior The Court stated that exception the mere continuation "could possibly not apply” in this case commonality because of a lack of officers, directors, between the and shareholders of XLNT and those of
XLN, which had continued its existence. Id. in establish- the ing the importance merger exception. the ing defacto record did not that the to its determination respect With the other three regarding conclusions the trial court’s support factors, the first turned to Superior the Court de facto the seller’s business after to the cessation of pertaining factor that the trial court’s The court concluded the transaction. a de finding factor in favor of weighed that this determination the Although the record. unsupported was “dormant,” Superi- XLN the trial court found that had become shows that at the time of determined that the record or Court sale, XLN nor XLNT had intended the asset neither The court noted that XLN had operations. XLN would cease sale, had retained remained in business after the initially and software computer equipment two customers and the code needed to service those customers. source assumption factor to the liabili- Regarding pertaining the business, the the ordinarily necessary Superi- ties to continue sufficiently developed or that neither had opined party Court rejected then Superior the record on this issue. Court XLNT time spent the trial court’s reliance on the fact that had to issues with one of XLN’s former cus- money resolve explic- tomers. The observed that XLNT had Superior agree- assumed that in the asset itly responsibility purchase ment, but disclaimed XLN’s other liabilities. explicitly
Finally, the concluded that the record did Superior Court the factor findings regarding not the trial court’s support pertaining continuity management, personnel, physi- to the location, assets, and business More general operations. cal Court determined that the record did specifically, had continued from support finding management not entity opined one to the other. The court that the record did time not contain the names of XLN’s board of directors CEO, sale, and, other than the name of the record silent XLN’s officers at the time of sale. regarding was reason, that it was impossible For this the court determined *13 continued from XLN to management conclude that had with the trial court that disagreed XLNT. The there was a management continuation of because XLNT had hired XLN’s former employees, Fritsch and Hamlin. Because XLN had terminated the two men’s services several months before the purchase asset and the evidence that showed neither individual had power legal to make or personnel behalf, decisions on XLNT’s the Superior Court concluded that XLNT’s hiring of the two did not show a continuation of XLNT did purchase XLN’s ac- management. that Noting receivable, lists, counts customer name, intellectual property, location, physical the court determined that these continu- ations of XLN’s business were “hardly surprising” considering Bros., the sale of XLN’s assets. Fizzano supra 1023. The such, court concluded: “As by itself [continuity of general business operations] does not weigh strongly favor of the imposition of successor liability. It is clearly outweighed in this case by the lack of continuity of ownership or manage- ment and continued corporate existence of XLN after the transaction.” Id.8
Throughout its opinion, the Superior Court focused narrow- ly on the transactional relationship between XLN and XLNT. focus, It did not court, as did the trial on the longer transac- tional relationship SDG, Shareholders, linked XLN, and XLNT.
TV. DE FACTO MERGER/CONTINUITY
OF OWNERSHIP The first question this Court must address is whether the Superior Court correctly held that continuity of ownership is an essential element required to support the imposition corporate successor liability under a theory of merger. defacto As question is purely law, one of our standard of review is novo, de and our scope review is plenary. Kistler v. State Commission, (Pa.2011). Ethics 223, 227 22 A.3d Judge dissenting John Bender filed a opinion. brief He concluded (1) majority that the had holding misread Schneider I required (2) was exception; the de findings substituted its own factual for those of the trial court.
258 case, that, Court Superior until this argues
Appellant or continuity ownership of single held that a has never factor— establishing merg- de a requirement otherwise—was facto er; rather, provided case law had Superior Court previous relevant “consider” each of the four simply that courts should had occurred. merger whether a de factors to determine facto I, v. (citing A.2d at 135 Commonwealth 810 See Schneider (1989) (en banc)) 356, 218, Lavelle, A.2d 227 382 555 Pa.Super. factors is merger] each of four de (“Although [the facto considered, a de will be all need not exist before facto occurred.”). asserts that it was Appellant to have deemed in the present for the to conclude Superior erroneous Court to, and must fall language tempered by, the above is case that continuity that “emphasis” I court’s purported Schneider in a the critical factor to be considered ownership of is defacto I out that the Schneider merger analysis. Appellant points summary trial court’s of merely grant court reversed the because the in favor of successor judgment of outstanding that there was an issue record established on of factor. continuity ownership Appellant material fact I court’s rather routine thus contends that the Schneider continuity factor holding ownership does not transmute element of the de indispensable “key” into an facto exception. in holding also that the Court’s
Appellant
argues
Superior
contradictory,
Superior
in that the
internally
this case is
“that courts should not ‘elevate form over sub-
emphasized
whether a successor should be liable.”
determining
stance’ in
Bros.,
(citing Dawejko
Jorgensen
Fizzano
at 1020
v.
supra
(1981)).
Co.,
Pa.Super.
Appel-
434 A.2d
Steel
lant
that the
current
Superior
position
contends
Court’s
key,
between XLN and XLNT is the
case
analysis
factor
the relevant
this
indispensable
does “elevate form
substance.”
effectively
over
case,
further notes that the
Court in this
Appellant
fashion,
contradictory
recognized
also in
the de where-
“designed
prevent
was
situation
merger exception
those
place
assets is to
specific purpose
acquiring
assets out of reach of the predecessor’s creditors.
In other
words,
the purchasing corporation maintains the same or
”
similar management and ownership, but wears a ‘new hat.’
Id. at 1019-20
Fletcher,
15 William
(quoting
Meade
Fletcher
Cyclopedia
the Law
Private Corporations § 7124.10
rev.vol.2004)).
(perm.ed.,
that,
Appellant observes
as evi-
case,
denced
it is clear that by requiring evidence of a
formal continuity of ownership, businesses can avoid being
subject to the de
merger exception simply by crafting
*15
transactions that omit common shareholders. Appellant ar-
that,
gues
again
case,
evidenced
the present
the Superi-
or
opinion
Court’s
thereby opens
up
very abuse the de
merger exception
designed
was
to prevent.
facto
XLNT,
Appellee,
argues that the Superior Court’s conclu
sion that continuity of ownership
control” is “key” for
“and/or
determining corporate successor liability, where there has
been an asset rather than stock purchase, is consistent with
the holdings of several federal district and circuit court opin
ions,
including
United States Court of Appeals for the
Third Circuit. XLNT’s Brief at 11-12 (citing, e.g., Berg
Chilling Systems,
(3d
Inc. v. Hull Corp.,
that the
of the 1960s.10
Court decisions
Jersey Superior
from New
and
Pennsylvania
that those cases
XLNT further argues
factors
that not all de
that have held
elsewhere
facto
case by
from the instant
distinguishable
be
are
proven
need
XLNT’s
causes of action.
specific
facts and
their
their
I,
Lavelle,
and
supra;
supra;
(citing
Brief at 18-24
Schneider
Easton,
Molded Acoustical Products
Corp.
Fiber-Lite
v.
(E.D.Pa.1994)).
Inc.,
Thus, helpful it is no to consider an individual longer abstract[;] and[,] solely by in the reference to transaction therein[,] a the various elements determine whether it is “sale,” Instead, a to determine the “merger” properly or Corp., Applestein N.J.Super. 60 10. XLNT cites v. United Board & Carton Co., 333, (Ch. 1960); A.2d 146 and Good v. Lackawanna Leather 96 (Ch.1967). N.J.Super. 233 A.2d transaction, nature of a corporate we must refer not only to all the provisions of the but agreement, also to the conse- quences of the transaction and to the of the purposes provisions of the corporation law said to be applicable. Id.
Concerning the facts particular reorganization agree- Farris, ment at issue in we observed that the consequence of agreement would be that plaintiff shareholder would find himself an investor in unwilling vastly a different business and would suffer a serious diminution of the value of his corporate holdings, even though transaction had not been conducted as a statutory merger. We held:
So, case, as in present when part of a transaction between two corporations, dissolves, one corporation its liabilities are by survivor, assumed its executives and directors take over the management and control of the survivor, and, as transfer, consideration for the its stock- holders acquire a majority the shares of stock of the survivor, then the transaction is longer no simply purchase of assets ..., or acquisition property but a merger governed ... the corporation ... although law[ ] con- summated contract rather than in accordance with the statutory procedure merger]. [for
Id. at 31.
Although in upheld Farris we the trial court’s imposition of liability under the de merger exception, we did not facto establish a test for de merger, nor did we discuss facto whether any particular one factor was essential to establish a merger. defacto
Details regarding nature of the de merger excep- tion were later fleshed out by several cases. In an en banc panel of that court held: occur, For a de there must be *17 the successor predecessor and corporation as evidenced (1) (2) continuity of ownership; a cessation of ordinary business and dissolution of the predecessor as soon as (3) practically and legally possible; assumption by the sue- the uninter- necessary for ordinarily the liabilities cessor of of the predecessor, continuation of the business rupted location, (4) physical continuity management, personnel, a of all of these Not operation. business aspects, general rather, these merger; to demonstrate a factors are needed that tend to show a de only are indicators factors facto merger. Inc.,
Lavelle, Maglia, 227-28 Lumbard v. (quoting 555 A.2d at (S.D.N.Y.1985)). 1529, 1535 621 F.Supp. jurisdictions, from other it relevant case law
Reviewing that the difference between those courts generally appears a continuity ownership a of for de require facto not on how these courts analysis depends and those that do corporate nature and successor purpose view essential cause of relationship underlying in liability, particularly brief, out in those decisions that points action. As XLNT its commonality any requirement have relaxed or waived (but merger exception mostly under the de ownership facto here, arising, not involve causes of action always) not do law; rather, they are rooted under contract or law, other involving overarching criminal or tort or law some matter of public policy.
Lavelle, for concerned the issue of whether example, liable under the corporation criminally successor could be held for violations committed corrupt organizations statute11 from which it had all or predecessor corporation, purchased panel most of its assets.12 The en banc “whether a de successor stated that issue was of its criminally prede- can be held liable acts Lavelle, supra Reviewing cessor in interest....” at 225. factors, under the four de the court evidence formally were concluded that all but the court determined inspection, met. on closer predecessor corpora- although the sole shareholder § Pa.C.S. 11. 18 hauling predecessor corporation, an refuse and dis-
12. The industrial concern, illegally dumped of the control- posing had wastes violation ling statute. *18 tion did not own shares in the successor corporation, his family members and, owned the successor corporation as an officer of the successor corporation, he drew a salary that dwarfed that of the officer, successor corporation’s other his circumstances, (1) son. Under these the court concluded it was irrelevant there was no formal continuity of ownership between the corporations, as “an undisclosed [con- tinuing] (2) ownership evident; interest” was plainly and fraudulent transaction exception to corporate successor liabili- ty equally applied to support the imposition of criminal liabili- ty on the successor corporation. Id. at 230.
Lavelle cited several decisions
jurisdictions
from other
support of the proposition that the absence of common legal
ownership is not an impediment to
finding
asset-purchas-
ing corporation as the de
successor corporation to the
facto
asset-selling corporation. See Turner v. Bituminous Casual-
Co.,
ty
397 Mich.
(1976);
N.W.2d 873
v.
Knapp North
(3d
American Rockwell Corp.,
Cir.1974);
Many relevant jurisdictions cases from other that have taken a approach relaxed to the requirement of continuity or an exchange shares under the defacto are exception products such, liability cases. As they empha- size the dominant public policy interests of products liability law in justifying the relaxation or waiver of the commonality of ownership prong of the de merger exception. As the New Jersey Supreme Court stated:
In years recent ... the traditional corporate approach [which, as infra, discussed would not relax the requirement of common ownership under the de merger exception] has been sharply being criticized as inconsistent with the rapidly developing principles liability strict in tort unresponsive to the legitimate interests of the products liability plaintiff. have Courts come to recognize that the traditional rule of nonliability was not in developed response to the actions, interests of to parties products liability but creditors and of commercial rights
rather protect acquisitions, following corporate shareholders dissenting for tax liability well as to determine successor obligations predecessor. and contractual assessments approach the traditional corporate In an effort to make *19 the associated with devel- problems more to the responsive courts have liability!),] strict several oping products law of merger” exceptions the of “de [traditional] broadened facto suc- corporate in order to expand and “mere continuation” in certain situations. liability cessor Inc., 341-43, Industries, 332, 86 431 Ramirez v. Amsted N.J. (1981).13 811, A.2d 815-17 (1st Co., Inc.,
Thus,
In Knapp, supra, the Third of Appeals opined Circuit Court would, that this Court when presented with the appropriate case, permit products liability actions to proceed against suc- cessor corporations under the de merger exception, despite lack of indicia anof actual merger,14 pursuant to the policy consideration of spreading the risk. The court Knapp based analysis its on pronouncements made by this Court in Farris, supra, wherein we emphasized that a court must look beyond the formalities of the underlying corporate transaction in order to consider its consequences. 506 F.2d at Knapp, Farris, 28).15 (citing 143 A.2d at
Finally, courts from jurisdictions other have noted that the *20 approach relaxed to the de merger has been exception facto applied where causes of action raise public policy concerns other than those concerning products liability. “Courts in jurisdictions, Indiana, various including have relaxed successor liability requirements contexts, in certain limited for example, injuries address caused products defective manufactured by a predecessor corporation or to vindicate policies incorpo- however, Knapp, In corporate seller had received stock in the corporation payment successor as substantially for the sale of all of its assets, and the stock was to be distributed to the seller's shareholders dissolution,
upon its eventual
which
approximately eighteen
came
months after the sale of assets.
15. Other
rejected expansion
courts have
merger
of the de
facto
mere continuation
corporate
liability,
theories of
successor
but still
permitted products liability
proceed against
purchaser
actions to
a
of
corporation
the assets of
originally placed
that had
the defective
courts,
product
into
including
the stream of commerce. These
our
Court,
proceed against
allowed causes of action to
successor
corporations
entirely
theory
under an
new
corporate
and different
liability
"product-line
successor
exception.”
Dawejko
known as the
See
Co.,
15,
106,
Jorgensen
(1981):
v.
Pa.Super.
Steel
290
434 A.2d
109-11
Co.,
327,
(2011).
see also
v.
Schmidt
Boardman
608 Pa.
266 law, labor environ- in areas such as
rated in federal statutes Glentel, law[,] discrimination law.” employment mental 992, Ventures, LLC, 1001 n. 20 F.Supp.2d 362 v. Inc. Wireless cases). (N.D.Ind.2005) (citing cause of action is not one underlying when the concerns, rather is but public policy certain implicates law, case,16 in this the courts in contract or as
rooted
adhered to the “tradition
jurisdictions
notably
have
other
17
for the de
“more conservative stance”18 that
al”
or
ownership
recognized, continuity
to be
merger exception
must be
corporations
and successor
predecessor
between
(“[W]e
AG,
See,
Partner
267 purchaser corporation stock.”); be shares of its own Forrest v. (E.D.Pa.2003) (“[T]he Corp., 471, Beloit 278 F.Supp.2d transfer of key stock is a element in finding a de merger facto because it represents continuity of ownership.”); Tracey, 745 (in F.Supp. at 1110 rejecting “product-line” exception, holding that stock is the ownership “essential element” of the Ramirez, exception); N.J. at 431 A.2d defacto at 816 (“Traditionally, triggering of the ‘de merger’ has been exception held to on depend whether the assets were transferred to the acquiring corporation for shares of stock or cash[;] is, whether the stockholders of the selling corporation become the stockholders of the purchasing corpo- ration.”); Co., v. Lackawanna Good Leather 96 N.J.Super. 439, 452, (Ch.1967) (“A 233 A.2d consolidation or merger always involves a transfer of the assets and business of one corporation securities,” to another in exchange for its describing continuity of a ownership “key element” of the merger exception.). defacto
The philosophical underpinnings of those courts that require the continuity of element in ownership recognizing de are firmly rooted in general principles commercial and law. corporate As stated the Eleventh Circuit Court of Appeals:
Several courts have held that “[a] consolidation or merger always involves a transfer of the assets and business of one corporation to another in exchange for its securities.” At least, very there must be some sort of continuation of stockholders’ interests. The reason for this requirement that corporate is liability adheres not to the nature of the business but to enterprise the corporate entity itself. The corporate entity its shareholders ultimately are responsible for the disposition of the corporation’s as- sets and the payment its debts. Even if the corporation sells to another corporation its entire operation business assets, all its in exchange for some consideration other stock, than the two corporate entities remain distinct and intact. entities have not and each merged, is
268 the other debts, fraud or one of for its own absent
liable listed above. liability] successor exceptions [to (citations omitted). Antle, at 1458 and footnote supra Bud any that of the “tradi expansion courts have noted Other to the issue of approaches tional” or “more conservative” either the de or continuity of under would have a effect” on exceptions “chilling mere continuation “the general transactions and would undermine commercial use of economic assets productive of policy encouraging Glentel, 1003, 1004; at see alienability.” supra free through Inc., Int'l, 10 Agromac Inc. v. Gallenberq Equip., also (E.D.Wis.1998). 1050, Thus, these courts 1055-56 F.Supp.2d test of “unjustifiably relaxing have criticized the traditional liability importing continuity enterprise successor context into commercial product liability doctrine from the omitted); Glentel, (quotation law.” at 1003 marks see supra at 1055. Gallenberq, supra also courts, where cause of underlying some even law, commercial have taken a different action is contract or require any particular and would not the existence approach merger prong, including continuity ownership, de facto See, each be considered in the although prong analysis. would RDI/Luxliner, Inc., e.g. Luxliner P.L. v. 13 F.3d Export, Co. law) (3d Cir.1993) (“The Jersey New crucial (applying whether an intent on the inquiry part is there was effectuate a or consolidation contracting parties Plastimatic, assets.”); rather than a sale of Inc. v. Glynwed, Inc., (D.N.J.1994) (same, finding 275-77 but F.Supp. was met where a ownership prong minority of the shareholders owned predecessor corporation’s stating: “Continuity stock in the successor corporation, test.”); Fiber-Lite, not ownership, uniformity, supra is the the successor (holding although corporation pur- 609-11 chased the assets of the from a third predecessor corporation statute, corpora- the foreclosure the successor party through tion nevertheless be for the responsible predecessor would predecessor debt where the shareholder of the corporation’s of the sharehold- president was the father ers of the successor corporation, and the transaction appeared to be orchestrated a creditor bank of the predecessor corporation with the intent to rid the predecessor of other debt).
The question this Court accepted for review could suggest
the need to devise a broad holding to answer the question:
“Does the de
merger doctrine always require proof of
facto
continuity
Bros.,
of ownership?” Fizzano
However, the better course requires that we tailor our holding the narrow facts of the case judice, sub and use the above analysis for background one, and guidance. For this case does not concern an underlying cause of action that implicates issues of overarching public Indeed, policy. this Court has never adopted expansion an corporate of successor liability to accommodate Therefore, such cases. it would be improper to articulate a holding of, that would govern aspects to, or exceptions the law of corporate successor liability that this Court has not had occasion to recognize.19
Further, although the majority of the case law that we have reviewed from jurisdictions other would support rigid a hold- where, ing here, as the underlying cause of action is in contract or breach of warranty, continuity of ownership would be a necessary factor for establishing a de merger, we facto Schmidt, In 11 A.3d upon Court was asked to rule adoption product-line Court’s of exception Dawejko, However, procedural A.2d 106. matters in Schmidt obviated the neces- sity for upon product-line this Court to then rule exception whether the Further, should continue as law of the Commonwealth. Id. at 941. noted, previously product-line exception expansion is not an of merger the de and mere corporate continuation theories of succes- liability, entirely sor theory but an different successor Here, liability. only we are merger concerned with the de facto exception. mechanical, reasons. ruling un-nuanced several
resist continuity First, supra cited hold many of the cases shares, is an an exchange as evidenced ownership, recognition for the of a de requirement indispensable is a because such form of through effected jure mergers in de present circumstance law does not contem- statutory law. our statutory view. such a limited plate (“the Corporation Law of 1988 Corporation
The Business
Law”)
statutory merger.20
the elements of a
See
sets forth
authorize
provisions relevantly
§§ 1921-1932. These
Pa.C.S.
into one of the domestic
any
corporations
two
which shall
merger,
corporations participating
business
1921(a).
§
15 Pa.C.S.
Consoli-
surviving corporation.
be the
more
into a new
corporations
dation of two or
Law
also be effected.
Id.
Corporation
may
formed under the
*24
a
of
or
contemplates
plan merger
Law
Corporation
manner of conversion of shares
consolidation shall include the
obligations”
for shares “or
predecessor corporation(s)
of the
1922(a)(3)
§
surviving corporation.
(empha-
of the
Pa.C.S.
added).
of the
Additionally,
any
any
sis
“if
of
shares of
merger
that are
to the
or consolidation
corporations
parties
into shares or other securities
solely
are not to be converted
obligations
surviving
corporation,
plan
or
of the
or new
[the
shall also include a
the shares or other securi-
description of]
cash, property
or
or
obligations
any
person
ties or
of
other
rights
in
the holders of such shares are to receive
"Merger”
Corporation
itself is not defined
Law. It has been
20.
"uniting
corporations by
elsewhere as the
of two or more
defined
them,
existence,
property
transfer of
to one of
which continues in
Fletcher,
being merged into it.”
15 William Meade
Fletcher
others
(perm.ed.,
§
Cyclopedia
Corporations
rev.vol.
the Law Private
2004);
Corporations
merger,
§
a
or
see also 9 P.L.E.
471.
"In
one
(each
merge
corporations
disappearing corporation)
a
more constituent
part
corporation
constituent
that continues
into and become
another
McLamb,
merger
John W.
to exist after the
has been consummated.”
Shiber,
Wendy
Pennsylvania Corporate
Practice
Jr. and
C.
Law and
Farm,
Croker,
(1993
Springs
Supplement).
§
See Seven
Inc. v.
9.3[b]
202,
(en banc), aff'd,
(Pa.Super.2000)
569 Pa.
748 A.2d
746-47
(2002).
Because the Corporation Law does not require an (shareholders shares, exchange of for a statutory merger the predecessor corporation surrender their may shares of “obligations” or, stock for of the successor corporation manner, “cash, partial or property, rights” lieu of shares in the successor corporation), it would be incongruous to a adopt a de blanket rule that always would require rigid that the showing shareholders of the predecessor corpo- ration have exchanged their ownership interests for shares of the successor corporation. We find the analysis of the Elev- Antle, enth in Bud Circuit of Appeals supra above, quoted instructive point. on this That court rejected the notion that a merger always involves a transfer of the assets from one another in exchange for its securities. with this court that a de facto agree we merger must show “some sort of continuation of the stockhold- ers’ ownership.” Id. This is because “corporate ad- liability heres not to the nature of the business enterprise but to the corporate entity itself. The corporate entity and its share- holders ultimately are responsible for the disposition of the corporation’s assets and the payment of its debts.” Id. How- ever, because a de merger analysis tasks a court with whether, determining for all intents and purposes, a merger or occurred, consolidation of corporations has even though 1922(a)(3) Specifically, provides Section plan that a or consolidation shall set forth: (3) converting The manner and basis of corpora- shares of each tion into shares obligations or other or surviving securities or *25 be, and, corporation, may new any as the case if any of the shares of corporations parties of the that are to the or consolidation are solely not to be converted into or shares other securities or obli- gations surviving of the corporation, or new the shares or other cash, obligations any person securities or of property other or or rights for, that the holders of such shares exchange are to receive in of, shares, upon or any conversion such and the surrender of certifi- them, evidencing cates obligations, any, which securities or any if of cash, person property rights other may or or be in addition to or in obligations lieu of the shares or surviving other securities or of the or corporation. new 1922(a)(3). § 15 Pa.C.S. used, the had not been
statutory procedure
certainly may
merger analysis
of the
ownership prong
defacto
elements of a
than the relevant
be more restrictive
not
by
legislature.
our
statutory merger
contemplated
by
as viewed
merger analysis,
a de
Secondly,
Farris,
in several
Court
supra,
case,
that a court look
requires
to the instant
decisions prior
in order to
of a transaction
formalities
beyond
superficial
consequences.
and their
the transactional
realities
examine
(“[T]o
the nature of a
properly
id. at 28
determine
See
transaction,
...
the consequences
we must refer
to
corporate
of the
of the
purposes
provisions
the transaction and to the
Gallenberq,
see also
applicable.”);
law said to be
corporation
(“Courts
scrutiny
will
close
supra
give
at 1054
test.”);
realities,
mechanical
of a multi-factor
application
not
Plan Mid-Atlantic States v.
Kaiser Foundation Health
Cir.1997)
(4th
(“We
P.C.,
Moore,
&
123 F.3d
Clary
which,
is under
allow a
all indications
cannot
legitimate
to avoid its
predecessor,
the same control as its
indicia of
As
by manipulating superficial
ownership.”).
debts
the Third
Samuel A.
then-judge
Appeals,
Circuit Court
Alito, Jr.,
“The de
is not
exception
observed:
equitable principle, ulti-
contractual because it is an
strictly
Berg Chilling
to look
the contract.”
mately designed
beyond
added).
Systems,
(emphasis
435 F.3d
revealed,
cases have
transactional realities some
As various
scrutiny
beyond
times
that extends
focus
require
asset
consequences
proximal
confines of the immediate
II,
Accordingly, we hold that in cases rooted in breach of contract and express warranty, the de merger excep tion requires “some sort of’ proof of continuity of ownership or Antle, stockholder interest. Bud supra at 1458. proof
such is not restricted to mere evidence of an exchange of assets from one corporation for shares in a successor corpora tion. Evidence of other forms of stockholder in interest successor corporation suffice; may indeed 15 Pa.C.S. 1922(a)(3) § contemplates that continuing shareholder interest pursuant to a statutory merger may take the form of “obli gations” lieu of shares the new or surviving corporation. Further, merger, including its of ownership defacto will prong, always subject be to the fact-specific nature of the particular underlying corporate realities and will not always be evident from the formalities of the proximal corporate transaction. These realities include an may issue concerning which entity is actually the true predecessor corporation. See Lavelle, (citation omitted) (“The supra issue of suffi cient degree identity is one that must be resolved on a case- basis.”). by-case Finally, the elements of the defacto are not a checklist, mechanically-applied but a map guide reviewing that, court to a determination under the facts established, for all intents and purposes, a has or has not occurred between two or more corporations, although not accomplished Farris, under the statutory procedure. See supra at case, we observe to the facts of the instant
Turning a contract of action arose from underlying cause *27 The four Sharehold Appellant into between and SDG. entered XLN, by a owned their shares to ers of SDG sold the re exchange, In Shareholders companies. investment cash, ceived, evidencing notes promissory in addition to some XLN, was obligation which obligation a considerable debt corporation, value for that the asset of by primary secured Indeed, was the asset namely, particular the Software. XLNT, assets to which was also business. When XLN sold its Software, XLN was relieved of its debt to invest in the formed assumed, the notes and XLNT promissory under obligation Shareholders, with the *28 XLNT), sale of assets from thus, XLN to ignoring instruc- tions and lessons Farris, from this in Court supra, and the guidance from jurisdictions, courts of other as.cited above. do issue,
We not opine, one, under this or the second as to whether the facts by found the trial court support the conclu- sion that a merger had occurred that permit would an defacto SDG, obligation of XLN, once by assumed to be determined XLNT, the responsibility of nor are we suggesting a result. However, above, based on the and -witha upon focus substance over form where corporate concerned, transactions are as recognized Farris, by Court we supra, reject narrow application of the continuity ownership prong adopted by the Superior Court in this case. Continuity of or ownership stockholder interest in some form must be shown,22but the manner may which it be shown is more extensive and attuned to the transactional realities than the Superior Court’s holding supports.
V. FACT-FINDING ON APPELLATE REVIEW
Our second issue pertains solely to the other three prongs (1) of the de a exception: cessation of degree 22. The issue of the or stockholder proved interest that must be is not before us. as soon predecessor dissolution of the business and ordinary (2) assumption by possible; and practically legally for the uninter- ordinarily necessary of the liabilities successor predecessor; of the business of continuation rupted location, (3) physical continuity management, personnel, a Lavelle, supra general operation. business aspects, that the evidence established 227-28. The trial court found that determined Superior these The Court prongs. each of not these prongs. the evidence of record did establish Superior is whether the Court by Appellant raised question such findings, made its own factual and substituted improperly court, arriving of the trial at this “findings” for those determination.23 the one which the prongs, upon
Of these three was whether the emphasis predeces- its placed primary Court Bros., a continued existence. Fizzano sor had See and the Superior at 1023. Both the trial court Court supra XLN XLN did predecessor corporation. focused on as the for a of time after the date corporate entity period survive as trial determined purchase. of the asset court ordinary prong cessation of business was met based of the asset purchase agree- on credible evidence because ment, ultimately XLN had “essentially operating;” ceased “dormant,” of its and one of its become the admission CEO shareholders, Binder; and, David “can be considered out Trial of Law No. 17. Opinion, business.” Conclusion asset change pursuant XLN did its name to the Although XLNT, with and had retained two cus- purchase agreement *29 tomers, that T-Rex software retained the trial court found functionality,” XLN “had no and that XLNT had hired Id., of Fact Nos. 38. remaining employee. Findings XLN’s however, Court, The held: Superior not reflect that either XLN or appeal The record on does [ ] operations XLNT had intention that XLN would cease any legally its existence as soon as and end To the con- after the sale of assets. practically possible findings and the Court’s review of 23. The trial court’s factual summarized, supra. findings respectively, parts II and III those are XLN trary, only not remained business after the sale (changing its name to XE Corporation) but also retained (Genco two customers Distribution Systems and Novartis Pharmaceutical Corp.), along with the physical and intellec- tual property assets necessary service them (including computer equipment and the source code for the T-Rex software). derivative Plaintiffs Exhibit 1. Far convey- from ing any understanding by parties that XLN would cease activities, its business the Asset Purchase Agreement even includes a covenant not to compete XLN from forbidding alia, inter to, its marketing products former SDG or XLN customers. Bros.,
Fizzano
Further, the Superior Court’s analysis appears to contradict the trial court’s factual finding XLN became dormant and ceased operations because of the purchase asset agreement. Again, the trial court’s factual are findings supported by the See N.T., 10/24/06, record. Indeed, at 85. XLN’s president, Binder, David testified that “we just closed the company down,” apparently a “few weeks” after the asset sale. Id. Superior Court asserted that XLN “remained in business Bros., after the sale.” Fizzano 973 A.2d at 1022. According- ly, the Superior Court erred to the extent that it did make factual findings different from the trial court on these matters. *30 analysis on of the Court’s Superior
The remainder record than a over the factual dispute issue seems less of ordi of the cessation legal requirements over the dispute That merger exception. of the de nary prong business consider is, important that an Court determined Superior corporations the intent of the two prong ation for this was The trial court agreement. the asset purchase evidenced to the intent of findings pertaining make factual any did not the issue of why to the We are unsure agreement. the parties is purchase agreement from the asset intent as evidenced that a analysis requires when a de consequential transaction; of a the mere formalities beyond court look however, To the extent of law is not before us. question such course would important, appropriate of intent is the issue remand to the trial court Superior have been for the Court to what to be a necessary findings appears to make the on question. factual the successor assumption by
The next concerns prong uninterrupted for the ordinarily necessary of the liabilities For this predecessor. continuation of the business of the record that “XLNT the trial court concluded from prong, all of XLN that were clearly obligations assumed of the for the continuation of ordinarily necessary uninterrupted Trial operations.” Opinion, normal business Conclusion included the lease of the obligations of Law No. 18. These key employees, to the same premises, payment salary work clients, the same a debt owed to one of the servicing assuming clients, for XLN’s accounts receiv taking “responsibility Id., Further, the court able.” Conclusion of Law No. obligation that the most of XLN was significant noted Software, for the which by XLNT was the debt owed assumed the asset vital to the of XLNT’s business and operation was vital to the of XLN’s business. operation had been asset Id., of Law No. 20. Conclusion Court, however, held as follows: factor, of liabilities assumption to the third respect
With necessary uninterrupted continuation ordinarily business, appear this factor does not the factual basis for *31 have been extensively developed by party. either The trial court noted that XLNT only spent significant time and money to resolve with issues former XLN customer Cardi- however, nal In the Agreement, IG. Asset Purchase XLNT specifically obligation assumed the for prob- remediation of with lems Cardinal while expressly disclaiming responsi- IG bility for XLN’s other liabilities. Bros., (citations
Fizzano
Based on the it would appear that the Superior Court disregarded trial court’s actual factual findings and legal conclusions on this prong, instead shifted the focus to the trial ancillary court’s concern that XLNT did not address claim Appellant’s in the manner that it addressed the claim by made another XLN customer. The trial court’s central conclusions, however, are based on its factual that are findings supported by record. See Trial Opinion, Court Findings 25-26, record). of Fact Nos. (citing Indeed, 36-40 to the there does not appear any be dispute among the parties assets, XLNT bought nearly all of XLN’s assumed the re- maining debt for the purchase, Software hired XLN’s current consultants, and former employees and and set up shop XLN, same location as assuming the lease there and holding itself out as the Thus, successor to XLN. the Superior Court is clearly incorrect that the record was not developed for this prong, and it erred by the trial disregarding court’s essential findings and the support for them in the record.
The final prong concerns the continuity management, personnel, location, physical aspects, and general business operation. Many of these elements overlap with those of the previous (1) prong. The trial court found that there was an undisputed location, continuation of physical from passed SDG (2) XLNT; to XLN to XLNT acquired all of the assets of XLN, except stock, customers, for XLN’s two and two com- (3) puter workstations; servers with the Software continued to be owned the Shareholders under both XLN and XLNT (4) until the purchase price was fully paid; the general business operations same, of XLN and XLNT were the involv- asset, (except key customers personnel, essential
ing the same Moreover, XLN), location. and office the two retained there was a continuation concluded the trial court “key personnel,” because XLNT retained management Officer, Fritsch; Operating Hamlin as Chief Hamlin and Tech- and Fritsch Chief controlling day-to-day operations, Id., Officer, issues. controlling technology XLNT’s nology trial court noted Additionally, Law No. 11. Conclusion and made only remaining employee hired XLN’s that XLNT Id., of Law No. Manager. him the Conclusion General supports that the record acknowledged general finding regarding the trial court’s *32 that this the court determined operations. business moment, noting no that a of business finding was of result where there has been a surprising was not a operations Rather, re- emphasized, the court purchase. asset general not support that the factual record does garding prong, concerning continuity manage- trial court’s a of findings ment. The court held: however, these appeal support the record on does not
Again, continuity management. at least with to of findings, regard no information the identities regarding The record contains directors, of the members of XLN’s board of and thus any for whether there was determining no basis provides the directors of XLN and XLNT. And overlap between Binder, CEO, there like- other than identified as XLN’s is identity in record of regarding wise no information assets, the officers of XLN at the time of the sale of and connections between determining any thus no basis for sale, no XLN officers and XLNT. After the Binder had role at XLNT. continuing employees
The trial court out that two former pointed XLN, Fritsch, Hamlin were hired XLNT connec- and At the time of the sale of tion with the sale of assets. however, assets, Hamlin Fritsch were no em- longer XLN, terminated employment having their been ployees such, to the transaction. As XLNT’s prior several months support Hamlin and Fritsch no employment provides a a finding Moreover, continuation of personnel. while recognizing that Hamlin and Fritsch “had a direct part XLNT,” the day-to-day operations of the trial court also acknowledged that the evidence at trial demonstrated that neither of them had any “power to make legal and/or personnel decisions on XLNT’s behalf.” Trial Opin- ion, 11/7/07, result, at 18. As a XLNT’s employment Fritsch, more, Hamlin and without did not establish a continuity of management personnel required sup- to port merger claim. defacto Bros.,
Fizzano
In a the Superior Court noted: Hamlin’s title at XLNT was Operating “Chief Officer” and N.T., 10/23/06, Fritsch’s was “Chief Technology Officer”. 99-102. Although these titles suggest they were both offi- XLNT, cers at as noted above neither had any authority to make legal personnel decisions on XLNT’s behalf. and/or Likewise, it is not clear that they held officer positions at either, XLN as their employment contracts with XLNT both provided that “Employee has no authority, either express or implied, act on behalf of XLN in any matter without written express consent and permission from an officer of 13,14. XLN.” Defendants’ Exhibits *33 Id. at 1023 n. 5.
Here, it would appear the discrepancy between the Superior Court and the trial court on the issue of management is more about how to interpret this matter in a de facto merger analysis than it is a difference over the factual record. is, That the two courts are not at odds over what the record shows concerning the composition of the corporations’ respec- tive boards of Further, directors or chief executive officers. Superior dispute Court does not that the supports record the trial finding court’s that Hamlin and Fritsch were officers of XLNT.
However, the Superior Court does not it explain why would have been necessary Appellant to show that Hamlin and XLNT in from XLN to immediate transition
Fritsch made an
Further,
from
it is unclear
merger.
a de
prove
order
the circum-
gave to
Superior
Court
weight
its
what
opinion
management between
higher
of common
stance of the lack
beyond
are
questions
XLNT.
such
XLN and
question
which concerns a
taken on appeal,
of the issue
scope
Court
Superior
to the extent
fact-finding. Except
of
factual
finding
the trial court’s
discounted
apparently
hiring
with XLNT’s
management
occurred
continuity
some
officers, the
Court did not
Superior
and Fritsch as
of Hamlin
final
fact-finding
in
in this
issue.
engage
improperly
must be vacated because it
The order
(1)
conti-
an
and mechanical
overly-narrow
erred
applying
(2)
its own
substituting
and
nuity
ownership analysis;
in
instances
for those of the trial court
several
findings
factual
of the de
remaining prongs
in its review of the
vacated,
order is
Accordingly,
Superior Court’s
exception.
with
proceedings
matter is remanded for
consistent
and this
opinion.
CASTILLE,
EAKIN, TODD, and
Chief Justice
Justices
join
opinion.
ORIE MELVIN
concurring
dissenting opinion.
BAER files a
Justice
dissenting opinion.
files a
Justice SAYLOR
BAER,
dissenting.
concurring
Justice
in
that the
join
majority’s
opinion holding
I
full the
erudite
proof
“some sort of’
merger exception requires
de facto
or
interest and that such
stockholder
an
exchange
is not restricted to mere evidence of
proof
corpora-
assets from one
for shares
a successor
corporation
271-74, 42
at 968-69. I
with the
Maj. Op.
agree
tion.
A.3d
take the form of “obli-
majority
statutory merger may
that a
in the new or surviving
lieu of shares
gations”
always
realities will not
be
underlying corporate
and that the
transac-
proximal corporate
from the formalities of the
evident
Moreover,
272-73,
I believe the
Id. at
Specifically, as noted
majority, the trial court con-
given
cluded that
the realities of the transactions between
SDG and XLN and XLN and XLNT there was a corporate
continuum
Maj.
272-74,
from SDG to XLNT.
Op. at
284 view, the trial court likewise the above facts found my
In the majority framework set forth satisfy analytical the the of of continuity ownership prong whether the determining for all test has been satisfied. Specifically, de facto of XLNT remained the ownership intents and the purposes, obligations of XLN the assumed ownership given same as the Thus, Hamlin, in lieu of shares. of XLNT to Fritsch and continuity from XLN the technical lack of shareholder despite XLNT, would, continuity ownership. to I nevertheless find otherwise, concluded I would Because the the trial court’s reverse its decision and reinstate simply determination. SAYLOR, dissenting.
Justice majority the of the test the difficulty I have with looseness de as I believe it diminishes govern mergers, devises to degree certainty attaching the to transactions. transaction, merits, a I entirely paper might were this On (albeit paper the result obtained such a scenario support would seem more similar to mere continuation rather than de continuity absolute merger, assuming Here, however, theory). should not be under either required with shareholders purchaser independent —a $250,000 of the more than consider- paid part seller— in the relevant transaction. 19 purchase ation asset C.J.S. Cf (2011) Corporations § (opining crucial factor “[t]he determining whether there has been a de facto or business, liability, continuation of in successor is resulting whether cash consideration was for the adequate paid prede- assets”). corporation’s cessor To the extent Court dilutes it ownership inquiry, believe should include an focusing guard against element on the cash consideration to in purchasing company. Notably, unfairness to stockholders any there is no discussion in the briefs of claim that XLNT was in this re- provided by inadequate consideration gard. me, record, XLNT Appellant’s against
On this claim theory should rise or fall on the merits of its that the asset purchase transaction entailed a fraudulent Notably, transfer. theory rejected such was by the trial court and is outside the scope present appeal.
v. KNOBLE, Appellee.
David S. Supreme Pennsylvania. Court of
Argued Sept. 2010.
Decided March notes purchase stock agreement provided source code for the Software would be escrow, placed and that the ownership of the Software would remain with the Shareholders until the promissory
Notes
notes through renegotiated promissory the obligation. again, debt Once corporate this considerable for this new by was secured the critical asset obligation The two Share namely principal the Software. corporation, with XLN importance held both positions holders SDG evidently and XLNT were formed and XLNT. Both XLN in and of the development licensing to invest simply Software, property which remained Shareholders the relevant timeframe. throughout of the business The record demonstrates a Fritsch, in originating formed the Shareholders and SDG. SDG, trial that he and the testified at principal Shareholder Shareholder, Hamlin, in nego- other became involved principal the asset sale between Montgomery prior tiations with to XLNT our salvage company. company, XLN and “to 10/23/06, 58; N.T., that we had started.” see also company with to his Similarly, respect id. at 59. Hamlin testified right with over the transfer of the negotiations Montgomery asset, to XLNT: “We had this we the license the Software asset, the code. We had a had this source [Shareholders I to serve trying note. weren’t was They paying.... [XLN] needs, N.T., the concern of the my company.” business 10/24/06,at 17-18. trial, all of the evidence adduced at the trial court Based on SDG, from which had the discerned a continuum Trial Opinion, contract with to XLNT. See Court Appellant, is, That the Shareholders Findings of Fact Nos. 35-43. surrendered their shares in SDG in return for promis- secured value, sory notes of considerable which were ultimately trans- ferred to XLNT. The “company,” as referred to Fritsch and Hamlin in their testimony, moved from SDG to XLN to XLNT. In court, contrast to the trial narrowly focused on whether XLN XLNT had common shareholders. We appreciate Superior Court’s attempt to adhere to the stated elements of the de howev- exception; er, by taking its a narrow and mechanical view of the continui- ty of ownership prong, (1) the court erred. This error lay restricting proof of continuity to evidence of an exchange of assets or stock shares from one corporation for (2) shares the successor corporation; and narrowly focusing on (the the formalities of one piece of the transactional reality