California Court of Appeal (Third Appellate District), North Valley Mall v. Longs Drug Stores, Docket C079281, Certified for Publication

Contract (alteration): Corporation: Merger: De facto merger: (Corporate veil): Reverse triangular merger: Transfer of corporate stock: Creditors and shareholders: Assignment:

At issue in this case is whether the court should “go behind” the form of a corporate reorganization in order to alter contractual obligations, when the corporation utilized the type of reorganization it used in order to avoid altering its contractual obligations. The type of reorganization used in this case is a common one, and is referred to as a reverse triangular merger (A reverse triangular merger is one in which an acquiring corporation forms a new subsidiary, which is merged into the surviving corporation. In this case a survivor corporation, North Valley Mall, LLC, merged with Longs Drug Stores, Inc., the surviving corporation, by sale of its stock but with retention of its legal title to the property at issue). The usefulness of such a merger is to leave the target corporation intact as a subsidiary of the acquiring corporation where the target corporation has contracts or assets that are not easily assignable.

We conclude that where the form of reorganization was not chosen to disadvantage creditors or shareholders, we will not ignore the form of reorganization chosen by the corporation. We will affirm the judgment.

Corporations “ ‘have an identity apart from that of the owners.’ ” (Kraft, Inc. v. County of Orange (1990) 219 Cal.App.3d 1104, 1109.) Therefore, “the transfer of corporate stock is not deemed a transfer of the real property of a legal entity because the separate legal entity still owns the property.” (Ibid.) However, a traditional merger--one in which two or more corporations merge, one survives and the others disappear--results in the transfer of the assets of each disappearing corporation to the surviving corporation. (Marsh’s Cal. Corp. Law, (4th ed. 2013) Corporate Reorganizations § 19.10[C], p. 19-103; Phillips v. Cooper Laboratories (1989) 215 Cal.App.3d 1648, 1660.)

The transaction between CVS and Longs was a reverse triangular merger, sometimes referred to as a triangular phantom merger. This form of reorganization is used when the target corporation, in this case Longs, has licenses, permits, or property which is impossible or highly burdensome to attempt to transfer. (Marsh’s Cal. Corp. Law, supra, § 19.01[H], p. 19-18.) In a reverse triangular merger, the acquiring corporation (CVS) forms a new subsidiary, which is merged into the target corporation (Longs) so that the target corporation is a surviving corporation that continues to own its assets. (Ibid.) Here, CVS acquired all of the issued and outstanding shares of Longs. To effectuate the stock acquisition, CVS formed a subsidiary called Blue MergerSub Corp., which merged with and into Longs, with Longs being the surviving corporation. Longs became a wholly owned subsidiary of CVS, and was converted to a limited liability company named Longs Drug Stores, LLC. Longs remains vested with legal title to the property at issue.

There Was No Sale or Lease of the Property.

(…) Courts usually describe reverse triangular mergers as similar to stock acquisitions because they do not work an assignment of contractual obligations from the target to the acquiring parent company.

(…) “The intention of the parties as expressed in the contract is the source of contractual rights and duties. A court must ascertain and give effect to this intention by determining what the parties meant by the words they used.” (Pacific Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co. (1968) 69 Cal.2d 33, 38, fn. omitted.) In this case, the plain language of the agreement specifies that the trigger for removing the CAM charge cap is the “sale or lease of any portion of the subject property to any third person . . . .” When the agreement was made, Longs was a corporation. A plaintiff who chooses to deal with a corporation must have known “that shares of stock therein might be owned by different stockholders and are subject to assignment to others in the ordinary course of business.” (Ser-Bye Corp. v. C.P.&G. Markets, Inc. (1947) 78 Cal.App.2d 915, 920, superseded by statute on another point, as stated in In re Alberto (2002) 102 Cal.App.4th 421, 430, fn. 4.)

(…) The Further Agreement indicates that the parties intended the CAM cap to be lifted if the corporate real property was sold or leased. We cannot interpret this language to include a sale of corporate stock. NVM asks us to conclude that even if the property at issue was never sold or leased by Longs, we should look behind the reverse triangular merger and conclude that it was a de facto merger, resulting in the transfer of the property to CVS. We decline to do so.

(…) Some courts have concluded that reverse triangular mergers do not effect a de facto merger unless they are structured to disadvantage creditors or shareholders. (In re McKesson HBOC, Inc. Securities Litigation (N.D. Cal. 2000) 126 F.Supp.2d 1248, 1277; Binder v. Bristol-Myers Squibb, Co. (N.D. Ill. 2001) 184 F.Supp.2d 762, 769-770.) There is no evidence this transaction was structured as a reverse triangular merger for either of these purposes.

(…) We will not interfere with the reasonable economic expectations of the parties to these reorganizations where there is no effort to disadvantage creditors or shareholders.

Secondary authorities: Gutterman et al., Cal. Transactions Forms (2018) Business Entities, § 12:8.; Marsh’s Cal. Corp. Law, (4th ed. 2013) Corporate Reorganizations.

(California Court of Appeal (Third Appellate District), Sept. 25, 2018, North Valley Mall v. Longs Drug Stores, Docket C079281, Acting P.J. Blease, Certified for Publication)

Un contrat entre deux entreprises liées à un centre commercial prévoyait un versement périodique dû par la société A. en faveur de la société B. au titre de la participation à l’entretien du centre commercial. La participation ne pouvait pas dépasser un montant déterminé, cette limite maximale n’étant plus applicable en cas de vente ou de mise en location des actifs de la société A.

Ultérieurement, par le biais d’une « reverse triangular merger », une société tierce est fondée dans le seul but de reprendre le capital-actions de A. Dite société a donc repris ce capital social, A. restant propriétaire de ses actifs (sa forme juridique a toutefois été modifiée, le management remplacé, et les locaux de la direction transférés).

Constatant cette réorganisation, B. demande à A. et à sa nouvelle société-mère une participation à l’entretien du centre commercial d’un montant supérieur au maximum contractuel précité. A. s’y oppose. D’où la présente procédure. B. invoque la théorie juridique de la fusion de fait (« de facto merger »). Elle considère qu’il convient de regarder au-delà du type de fusion choisi et de prendre en compte ici une « fusion de fait » impliquant une situation contemplée par le contrat entre A. et B., soit le transfert des actifs qui permet de juger comme nulle la clause de valeur maximale de la participation à l’entretien du centre commercial.

En l’espèce, la cour rejette la théorie de la fusion de fait, et considère qu’au moment de contracter au sujet de la question de la participation des frais du centre commercial, l’intention des parties était d’abolir la limite supérieure de ces frais uniquement en cas de transfert ou de location des actifs, et non en cas de transfert de la propriété des actions de la société, ledit transfert n’impliquant aucune modification s’agissant de la propriété des actifs, qui restent en main de la même société : seul l’actionnariat change, dans le cadre d’une « reverse triangular merger » (la forme juridique de l’entreprise a elle aussi été modifiée, ce qui n’est pas relevant ici dans la mesure où c’est bien la forme sociale (peu importe laquelle) qui détient encore et toujours ses propres actifs, avant et après les opérations d’acquisition). La cour serait prête à juger autrement, et à appliquer la théorie « de facto merger », si des parties utilisaient le montage de « reverse triangular merger » pour porter préjudice aux droits des créanciers ou des actionnaires sociaux, ce qui n’est pas le cas en l’espèce.