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Not to Be Construed as Legal Advice: Texas de Facto Mergers  
03:06pm 31/01/2016
Mister Nihil
The next time you are playing a game of Apples to Apples, or its friend, Cards Against Humanity, or whatever descendent chooses that path to reality, remember: When the category is "Mythical Creatures," you can play your "Texas de Facto Merger" card with impunity.

"What," you say, "could that ever mean?"

Well, sit back for a moment, and I'll tell you a tale of conflict of laws.

In Farris v. Glen Alden, in the great state of Pennsylvania, in the year 1958, one company sold substantially all of its assets to another. This was, effectively, a merger of the two companies, but structured as an asset sale. Why? Because the shareholders of a corporation are allowed to vote on a merger, but they don't necessarily get to vote on a sale of assets. A sale of assets is basically the business of a corporation, and the shareholders have the board of directors to make everyday business decisions.
So, when Company A sells all of its assets except a box of paperclips, that's not technically a sale of all the assets, right?
The Pennsylvania courts said it can be. The court recognized a concept called de facto merger. This means there was not actually a merger, but the court is willing to pretend, to see that justice is done. This means that the shareholders get the rights attendant to an actual merger, even though one has not actually taken place. There are lots of shareholder rights attendant to a merger. Sometimes Batman counts them just to make himself feel crazy.

Fast forward to Texas.

In Mudgett v. Paxson Machine Co., some yahoo (the jerk, not the search company) tried to say "de facto merger" in Texas. Judge Utter explained, in no uncertain terms, that "ha ha ha, no."
What the court actually said was: "Certainly if the de facto merger doctrine is contrary to the public policy of our state, so must be the mere continuation doctrine." 709 S.W.2d 755, 758.

Mudgett was under the old Texas Business Corporation Act, though. The law must have changed considerably, right? Short answer: ha ha ha, no.

The Texas Business Organization Code has a section called 10.254. "DISPOSITION OF PROPERTY NOT A MERGER OR CONVERSION." That's not actually called "De Facto Merger, Ha ha ha, No," but that's how it's been interpreted.

Let's look at a couple more cases.

Let's not, actually. Just believe me, there are a couple of lines of cases in which the Texas courts progressively say, "Ha ha ha, no." Texas doesn't do de facto merger, except in one, very limited, nonexistent circumstance: Fraud.

"Common law fraud?", you ask. No, not common law fraud. "Actual fraud?", you follow up. No, not actual fraud. "What's up with your strange punctuation?", you ask. I don't actually know how to punctuate a declaratory statement that includes a quote of a question, so, just, chill a little.

What does all that even mean? Texas recognizes de facto merger only so far as the sale of assets is demonstrably a fraud to avoid liability. Like, for example, if a company "sold" all of its assets besides a box of paper clips to another very similar company, but the Paperclip Holding Co continued to owe its debts, but had no assets, but the new company was pretty clearly a sham to perpetrate a fraud (that's a term of art, meaning that it is a sham and that it is used to perpetrate a fraud. I guess it isn't a term of art, now that I say it out loud). In that tiny, limited circumstance, the court might decide to recognize de facto merger. But the court will not want to call it that, and that's not a guarantee, because there's not a lot of case law.

If there's a magic phrase in Texas business law, it's "but there's not a lot of case law." For example, Mudgett is a case from the court of appeals, and relies on several other appeals court decisions to make the statement that de facto merger is against public policy in Texas. There is that statutory guidance, which is helpful, but is not some kind of guarantee.

Although you can safely say there is no de facto merger in Texas, it's very hard to say exactly what that means, and what you can "get away with" while running your company. Here is a non-exclusive list of things you should feel uncertain about, all of them wrong and bad*.

  • Can you sell all your assets to avoid paying debts? Probably not, but maybe.

  • Can you sell all your assets and get out of your current business and go into the lemonade business for a summer and then wind up and not let your shareholders vote on the process until it's too late? Probably, but maybe not.

  • Can you sell the part of the company that's doing well, and keep the failing part separate and rename it and let it fail while you captain the successful part but leave the original investors with a pile of debt, while you laugh all the way to the bank? Not probably, but maybe.

  • Can you just steal all the money out of the treasury and go to Acapulco and disappear into a fruity drink? Probably not, maybe-butt. I'm out of permutations, but don't steal money, don't break the law, and don't do bad things.

OK, so, my point is, remember, if your scout master tells you to go look in the woods for a Texas De Facto Merger, you tell him to keep his snipes to himself. If he says Texas De Facto Merger is what's for dinner, bring your can opener, because you're eating beans.

This is not legal advice. Not at all. Go, do your own research and hire a lawyer, and tell your lawyer not to read this because reading this will actually invalidate any legal advice your lawyer gives you. Seriously. This is the anti-legal-advice. If this comes into contact with legal advice, they cancel each other out.
This is not legal advice, and is not to be construed as legal advice under any circumstances. This is more likely to turn into a floatation device than to be legal advice.
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