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Court Of Appeal Finds No Property Transfer In Reverse Triangular Merger

Five years ago, I commented on the dearth of authority on whether a reverse triangular merger constitutes an assignment:

"In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration.  Does a reverse triangular merger constitute an assignment of a target corporation's contracts?  Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago.  Surprisingly, however, this isn't the case."

Now, a Court of Appeal has addressed the question in North Valley Mall, LLC v. Longs Drug Stores California, LLC.  The case involved an agreement capping common area maintenance (CAM) fees for a mall except in the event of a sale or lease of the subject property.  When the property owner became a subsidiary of another company as a result of a reverse triangular, the mall owner argued that the cap on CAM fees had been eliminated pursuant to the exception for sales or leases of the property.  The Court of Appeal held that when the form of reorganization was not chosen to disadvantage creditors or shareholders, it will not ignore the form of reorganization chosen by the corporation.  Without using the phrase, the opinion rejects the notion that a merger is a de facto sale of assets.  See Why Is There No "De Facto Asset Sale" Doctrine?

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