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Nevada Supreme Court Applies De Facto Merger Doctrine To Debt Forgiveness Transaction

Last month, Professor Stephen Bainbridge posed the question of whether California recognizes the de facto merger doctrine outside of the successor liability context.  Here was my response.  Less than two weeks later, the Nevada Supreme Court addressed the same question under Nevada law in  Peddie v. Spot Devices, Inc., 2018 Nev. Unpub. LEXIS 901.  

In an earlier decision, Village Builders 96, L.P. v. U.S. Laboratories, Inc., 121 Nev. 261 (2005), the Nevada Supreme Court identified the following four factors in determining whether to apply the de facto merger doctrine:

  • Continuity of enterprise
  • Continuity of shareholders
  • Seller's cessation of ordinary business operations; and
  • Assumption of seller's obligations.

In Peddie, the plaintiff in a dissenters' rights action challenged two debt-to-equity transactions, one in 2011 and one in 2013.  The Supreme Court upheld the trial court's finding that the de facto merger doctrine did not apply to the earlier transaction because the plaintiff had failed to make a prima facie case as to three of the Village Builders factors.  The plaintiff succeeded in obtaining a reversal of the trial court as to the second transaction which involved the forgiveness of debt and the transfer of the corporation's remaining assets. 

Ironically it seems that that the defendants success on the earlier transaction made it possible for the plaintiff to succeed as to the second.  Had the plaintiff succeeded as to the earlier transaction, the corporation would have been merged out (at least de facto) and presumably was incapable of being merged out again.  YODO?

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
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