A recent New York appellate ruling (Preston v. APCH, Inc., 1023 Ca 11-00169, App. Div., 4th, Oct. 7, 2011), refused to recognize the transfer of an industrial facility located in New York between a non-surviving Delaware corporation and its Delaware parent that validly completed a Delaware short form merger. As a result, the merged-out corporation that owned the facility in question prior to the merger was not dismissed from the litigation, while its surviving parent could not limit the plaintiff’s remedy to that available solely under New York’s workers’ compensation laws. The case highlights the importance of following statutory procedures for transferring title to real estate where the non-surviving entity in the merger owns real property in a jurisdiction other than its state of organization.
The father of a welder fatally injured on the job in 2008 at a New York industrial facility while employed by Alstom Power, Inc. (a Delaware corporation authorized to do business in New York) (“Alstom”) brought a wrongful death suit under New York’s state laws against Alstom and APCH, Inc. (a Delaware corporation and a former wholly-owned subsidiary of Alstom that was not authorized to do business in New York) (“APCH”). Prior to the Delaware merger of APCH into Alstom in 2007, APCH held title to the industrial facility at which the accident occurred. In its motion to dismiss, Alstom argued that APCH could not be named as a defendant as it ceased to exist once the Delaware merger became effective and that ownership of the industrial facility was transferred to Alstom prior to the accident through the merger. Further, defendants sought to limit plaintiff’s claims against Alstom to those arising exclusively under New York’s workers’ compensation laws.
Even though the appellate court confirmed that the merger of APCH into Alstom was properly completed under Delaware law, because the facility where the accident occurred was located in New York, the court applied New York law to determine the validity of the real estate transfer from APCH to Alstom. The court distinguished Delaware’s merger statute, which automatically vests the surviving corporation in a merger with title to all property, including real estate, previously held by the disappearing corporation, from New York’s statutory requirements with respect to conveyance of realty by a foreign corporation through a merger. Because Alstom did not file the certificate of merger with the New York Department of State and did not record the certificate in the office of the county where the facility was situated, the court concluded that Alstom did not validly succeed to APCH’s ownership of the plant and, consequently, APCH was the plant’s legal owner for purposes of New York law and could not be dismissed from the suit. With respect to Alstom’s workers’ compensation law defense, the court applied a well-established state law exception that an employer that voluntarily assumes the assets, obligations and liabilities of a third-party tort-feasor (in this case, through the merger of APCH into Alstom) is not protected by the exclusive remedy provision of New York’s Workers’ Compensation Law.
Relying on New York’s technical merger statute provisions, the New York Appellate Court refused to dismiss the disappearing corporation (APCH) from the plaintiff’s lawsuit, even though the liabilities associated with the plaintiff’s claims would have to be borne by Alstom as the surviving corporation in the merger. At the same time, the court enabled an injured employee to avoid the general New York rule of workers’ compensation exclusivity and maintain his negligence and pain and suffering claims against the employer in a situation where the accident was traced to actions or omissions of a now merged-out entity (APCH), the obligations of which were voluntarily assumed by the surviving corporation (Alstom) through a merger. This outcome underscores the importance of complying with the technical statutory merger and real property transfer procedures in states where the non-surviving party in a merger holds title to real estate. Failure to so comply may have the unintended consequences of not transferring real estate to the surviving corporation in the merger even though the liabilities of the non-survivor are assumed. Don’t think this is just a New York-specific issue. California, for example, imposes a similar requirement to New York in the context of a corporate merger requiring the surviving corporation to record a copy of the document evidencing the merger with the office of the county recorder of the county where the real property is located.
APCH was not qualified to do business in New York as a foreign corporation at the time it acquired the New York plant in 2002. Consequently, having no registration on file with New York, the parties and their lawyers probably did not review the New York merger procedures or consider filing the Delaware certificate of merger in New York to notify the state that APCH was merged out of existence. Had APCH been qualified in New York, that would have been a clear marker alerting Alstom to make the required New York Department of State filing and the county recording to validate the transfer of real property title.
Merger agreements between two unrelated entities typically contain a representation regarding foreign qualifications, usually qualified by a materiality standard. Because of that qualifier, the representation may be of limited utility in determining whether additional filings may be necessary to convey real estate from the non-surviving corporation in the merger. Typically, there would be no indemnification by the owners of publicly held non-surviving corporations in these types of transactions. In addition, because the determination of whether an out-of-state entity needs to be qualified to do business is a fact-intensive analysis without, in most cases, precise or objective standards, disclosure schedules to this representation to a merger agreement may not contain sufficient notice. Therefore, it is important that counsel not rely solely on those representations in determining what laws govern the transfer of real property in a merger between two corporations owning property outside their respective jurisdictions of incorporation and should insist that the merger agreement contain a schedule listing the location of all real property.
While Preston may be limited to New York real property transfer mechanics and its particular facts (or reconsidered on appeal), in a merger transaction, practitioners should consider state real estate transfer laws for each state in which the non-surviving entity owns real property and the implications to foreign qualification requirements. Though there are administrative and financial consequences of being qualified in multiple jurisdictions in the form of annual fees and reporting requirements, in light of Preston, registering an out-of-state corporation to do business in a state in which it owns property increases the likelihood that, in connection with a merger transaction, counsel will be forewarned of the necessity to comply with such state’s merger statute and real estate transfer requirements.
This article was originally published by Bingham McCutchen LLP.