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The doctrine of de facto merger has been recognized in Delaware. It has been invoked in cases of sales of assets for the protection of creditors or stockholders who have suffered an injury by reason of failure to comply with the statute governing such sales.
This suit was brought by stockholders of Sun Chemical Corporation, a Delaware corporation, against Ansbacher-Siegle Corporation, a New York corporation, and Norman E. Alexander, President of Sun and owner of Ansbacher. Plaintiffs attacked the validity of the purchase by Sun of all the assets of Ansbacher. The complaint states two grounds or causes of action: (1) that the transaction constituted a de facto merger and is unlawful since the merger provisions of the Delaware law were not complied with; and (2) that the transaction "was tainted with self-interest," i. e., is unfair to Sun stockholders. Defendants moved to dismiss the complaint. The trial court held that the transaction was one of purchase and sale and not a merger. He dismissed the complaint as to the first cause of action. He denied the motion to dismiss the second cause of action. Plaintiffs appealed, and contended that the transaction was by its nature a de facto merger.
Was the transaction a de facto merger?
The court affirmed the judgment. The court held that stockholders suffered no injury because they were stockholders of the purchasing corporation, not the selling corporation. The purchasing corporation simply acquired the selling corporation's property and paid for it in shares of stock. The business of the purchasing corporation would go on as before, with additional assets. Moreover, shareholder's allegation that their proportional voting strength had been diminished was not a ground of complaint. The transaction was in legal effect one of purchase and sale. Because shareholders conceded that if the dissolution of the selling corporation and the distribution of the purchasing corporation's stock had not been required by the plan, then the doctrine of de facto merger would not apply. Therefore, although shareholders could maintain their cause of action alleging that the transaction was tainted with self-interest, they were not entitled to pursue their action for unlawful merger.