Applestein v. United Board & Carton Corp.
159 A.2d 146, 60 N.J. Super. 333 (1960)
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Rule of Law:
A corporate transaction structured as a purchase of assets or exchange of stock will be treated as a de facto merger if its substance and consequences are functionally identical to a statutory merger, thereby triggering appraisal rights for dissenting shareholders of the acquiring corporation.
Facts:
- United Board & Carton Corporation ('United') was a publicly-traded New Jersey corporation with widely dispersed stock ownership.
- Interstate Container Corporation ('Interstate') was a New York corporation wholly owned by Saul L. Epstein ('Epstein').
- On July 7, 1959, United, Interstate, and Epstein entered into an agreement for a corporate combination.
- Under the agreement, United would issue 160,000 unissued shares of its stock to Epstein in exchange for all of Epstein's shares in Interstate, giving Epstein a 40% stock interest and effective control of United.
- The agreement required United to amend its by-laws to expand its board from seven to eleven directors, with the new board being controlled by Epstein and his associates.
- The plan stipulated that Interstate would be dissolved after the exchange, and its assets and liabilities would be recorded on United's books, with the transaction accounted for as a 'pooling of interests.'
- As part of the deal, United expressly agreed to assume a nearly $1 million debt owed by Interstate to a third party.
Procedural Posture:
- Plaintiff stockholders of United filed actions in the Superior Court of New Jersey, Chancery Division, against United, Interstate, and Epstein.
- United sent a proxy statement to its shareholders for a meeting to approve the transaction, stating that it was not a merger and that shareholders would have no appraisal rights.
- The court issued an order restraining the scheduled stockholder meeting, which was later modified to permit the meeting but enjoin the implementation of any resolution passed.
- The parties submitted the case on cross-motions for partial summary judgment to resolve the single issue of whether the proposed transaction constituted a merger.
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Issue:
Does a transaction structured as an 'exchange of stock,' where one corporation acquires all the stock of another in exchange for newly issued shares, absorbs its assets and liabilities, dissolves it, and cedes effective control to the former owner of the acquired corporation, constitute a de facto merger entitling the acquiring corporation's dissenting stockholders to statutory appraisal rights?
Opinions:
Majority - Kilkenny, J.S.C.
Yes. A corporate combination that is in substance and effect a merger must be treated as one, regardless of the labels used by the parties. Courts will look beyond the form of a transaction to its substance to protect the statutory rights of shareholders. Here, the transaction resulted in the absorption of Interstate by United, the assumption of its liabilities, the dissolution of Interstate, and a fundamental shift in control of United to Epstein. These are the hallmarks of a merger. To allow the parties to evade the statutory requirements of a merger, including the appraisal rights of dissenting shareholders, by labeling the transaction a 'purchase of stock' would frustrate the legislative intent behind the corporation law. The doctrine of de facto merger applies equally to the shareholders of the acquiring corporation as it does to the acquired corporation, as they are being forced into a fundamentally different enterprise than the one in which they originally invested.
Analysis:
This case is a landmark application of the de facto merger doctrine, establishing that substance prevails over form in corporate combinations. The court's decision prevents corporations from using alternative transactional structures, like stock-for-stock acquisitions or asset sales, to circumvent statutory merger requirements, such as supermajority shareholder approval and appraisal rights for dissenters. This precedent significantly impacts corporate law by ensuring that fundamental changes to a corporation's structure and control trigger shareholder protections, regardless of how the deal is framed. It forces corporate attorneys and executives to consider the real-world consequences of a transaction on shareholders, not just its technical classification.
