Getting More Than You Bargained For

            Purchasers of a company’s assets can generally rest assured that they are not also bargaining for that company’s liabilities.  However, there are always exceptions, and in this case, that exception is a de facto merger.  

            A de facto merger will occur when the surrounding circumstances of the transaction have similar elements and effects of a merger.  To determine the existence of a de facto merger, Pennsylvania examines four factors:  (1) continuity of management, personnel, physical location, assets, and general business operations, (2) continuity of shareholders, (3) whether the seller corporation ceases to conduct business, and (4) whether the purchaser corporation continues the business of the seller corporation uninterrupted.   

            In a recent case, the Supreme Court of Pennsylvania considered the importance of the first factor:  continuity of management.  See Fizzano Bros. Concrete v. XLN, Inc., 2012 Pa. LEXIS 636 (Pa. 2012).  In Fizzano, Appellant, Fizzano Brothers sought relief from XLN based on breach of contract and breach of express warranty claims from appellant’s inability to properly implement XLN’s software.  After Appellant purchased the software from XLN, XLN sold virtually all its assets to XLNT.  Based on the general rule that an asset purchase transaction does not subject the purchaser to seller’s liabilities, XLNT argued that they were not liable to appellant for any breach which occurred as a result of the software sale.  The case turned on the importance of the first factor:  continuity of ownership.  XLN argued that this was an essential element in determining de facto merger while Appellant argued it was a mere factor to consider in light of the others.  Traditionally, in a cause of action such as this which is rooted in contract law rather than public policy concerns, continuity of ownership must be shown for a finding of de facto merger.  

            Ultimately, the court reached a decision which broadened the Superior Court’s narrow application of continuity of ownership.  Rather than merely analyze form of the transaction, Pennsylvania will look to the substance and surrounding circumstances of the transaction to determine if a de facto merger transpired.