Farris v. Glen Alden Corporation

Supreme Court of Pennsylvania
393 Pa. 427 (1958)

ELI5:

Rule of Law:

A corporate transaction formally structured as a sale of assets will be treated as a de facto merger if it fundamentally changes the nature of the purchasing corporation and the relationship of the shareholders to that corporation. In such cases, dissenting shareholders of the acquiring corporation are entitled to statutory appraisal rights.

Facts:

Glen Alden Corporation was a Pennsylvania company primarily engaged in coal mining, with substantial tax loss carryovers.
List Industries, a diversified Delaware holding company, purchased 38.5% of Glen Alden's stock and placed three of its directors on Glen Alden's board.
Glen Alden and List entered a 'reorganization agreement' under which Glen Alden would acquire all of List's assets and assume all of its liabilities, including a $5 million debt List incurred to buy Glen Alden stock.
In consideration, Glen Alden was to significantly increase its authorized shares and issue over 3.6 million new shares to List for distribution to List's shareholders.
The agreement stipulated that Glen Alden's name would change to List Alden, all of List's executives and directors would take control of the new company's management and board (11 of 17 seats), and List would then dissolve.
As a result of the transaction, Glen Alden would be transformed from a coal company into a diversified holding company, and the ownership stake of its original shareholders would be diluted from 100% to approximately 23.5%.

Procedural Posture:

Farris, a shareholder of Glen Alden, filed a complaint in equity in a Pennsylvania trial court against the corporation and its officers.
The complaint sought an injunction to prevent the execution of the reorganization agreement with List Industries.
The defendants (Glen Alden) answered, arguing the transaction was a purchase of assets for which shareholders had no dissenters' rights, and moved for judgment on the pleadings.
The trial court concluded the transaction was a de facto merger, rendering the shareholder notice defective, and entered a final decree granting the injunction sought by Farris.
The defendants (Glen Alden) appealed the trial court's decision to the Supreme Court of Pennsylvania.

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Issue:

Does a 'reorganization agreement,' structured as an acquisition of assets, constitute a de facto merger under Pennsylvania law when it results in the radical transformation of the acquiring corporation's business, a shift in control, and a significant dilution of its original shareholders' interests, thereby triggering dissenters' appraisal rights?

Opinions:

Majority - Mr. Justice Cohen

Yes. A corporate combination that fundamentally alters the character of a corporation and the shareholders' interests is a merger, regardless of the form it takes, entitling dissenting shareholders to appraisal rights. The court must look to the substance and consequences of a transaction, not merely its label. The rationale for appraisal rights is to protect shareholders from being forced to continue in a fundamentally different enterprise. Here, the transaction would transform Glen Alden from a coal company into a large, diversified holding company, double its assets, multiply its debt, shift control to List's management, and severely dilute the original shareholders' ownership and the book value of their shares. This combination is a merger in substance, and statutory amendments regarding asset sales do not eliminate dissenters' rights in a transaction with all the hallmarks of a merger, including the dissolution of the selling corporation and assumption of its liabilities and management.

Analysis:

This case establishes the influential 'de facto merger' doctrine, which prioritizes the substance of a corporate transaction over its form. It serves as a critical check on corporate structuring, preventing companies from evading statutory shareholder protections, such as appraisal rights, by labeling a merger an 'asset sale.' The decision forces courts and corporate planners to analyze the practical consequences of a combination—such as changes in business operations, control, and shareholder equity—to determine its true legal character. This precedent significantly impacts corporate reorganization law by ensuring that fundamental corporate changes trigger fundamental shareholder protections.

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