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Merger of California Corporations – Avoiding Transfer of Real Property and Tax Reassessment

A corporate merger is when two corporations combine to become a single firm. There are several types of mergers, including those where both corporations still exist after the merger. One type is a Triangular Merger. In this, the acquired corporation continues in existence as a wholly-owned subsidiary of the acquirer without transferring any assets. In a triangular merger there usually are two agreements which typically might be called “Agreement of Merger” and “Agreement of Reorganization”, respectively. The Agreement of Merger is the statutory agreement drafted, executed and filed with the Secretary of State pursuant to California Corporations Code.

A corporation is considered a separate legal entity apart from its owners. The transfer of corporate stock is not deemed a transfer of the real property of a legal entity because the separate legal entity still owns the property. However, a traditional merger—one in which two or more corporations merge, one survives and the others disappear—results in the transfer of the assets of each disappearing corporation to the surviving corporation. In a recent decision, parties did not want a transfer of real estate because of contractual relations that made a transfer of the property costly
(and it would trigger a property tax reassessment). They used a reverse merger so that there was no transfer of real estate. The court said that was ok… it was not intended to cheat shareholders or creditors, so the court would respect the transaction.

Sacramento-corporate-merger-attorneyIn North Valley Mall, LLC v. Longs Drug Stores California, LLC, Longs agreed to construct a drug store on property it had purchased from Plaintiff’s predecessor, FHC, and to continuously operate the building as a drug store for a period of 10 years. If Longs did not construct and operate the drug store for 10 years, or otherwise breached the terms of the construction agreement, FHC had the right to repurchase the property at cost less depreciation.

A second agreement (Further Agreement) provided that Longs would pay FHC a proportionate share of the common area maintenance (CAM) fees for the shopping center, but that Long’s proportionate share would be capped at one-fourth of 1 percent of its gross sales. However, if Longs sold or leased any portion of the property to a third party, that party’s proportional share of the CAM fees would not be limited to a percentage of gross sales. Years later Longs was the target (was bought) in a reverse merger with CVS. The plaintiff said this was a transfer of the property, and the lawsuit followed.

Sacramento-corporate-attorneyThe court first discussed reverse triangular mergers. This form of reorganization is used when the target corporation, in this case Longs, has licenses, permits, or property which is impossible or highly burdensome to attempt to transfer. They are utilized in cases where the target corporation’s assets are expensive or burdensome to transfer, or where transfer is prohibited. (But this will not bypass the type of transfer restriction that applies to a change in stock ownership.) In a reverse triangular merger, the acquiring corporation (CVS) forms a new subsidiary, which is merged into the target corporation (Longs) so that the target corporation is a surviving corporation that continues to own its assets. Here, CVS acquired all of the issued and outstanding shares of Longs. To effectuate the stock acquisition, CVS formed a subsidiary called Blue MergerSub Corp., which merged with and into Longs, with Longs being the surviving corporation. Longs became a wholly owned subsidiary of CVS, and was converted to a limited liability company named Longs Drug Stores, LLC. Longs remains vested with legal title to the property at issue.

Plaintiff argued that the court should look to the de facto structure of the transaction to determine whether it was in fact a merger that transferred the property from Longs to CVS. As evidence that a de facto merger occurred, plaintiff NVM points to the facts that

-the Longs’s headquarters was moved to CVS’s headquarters,
-all Longs executives and employees in the headquarters office were let go or resigned,
-Longs became a limited liability company,
-the sign on the property was changed from Longs to CVS,
-CVS products are now sold at the property, and
-the store on the property now possesses an alcoholic beverage license in issued to Garfield Beach CVS LLC.

The Court said no dice. A sale or transfer of corporate stock, which undisputedly occurred here, is not a transfer of the real property because the corporate entity continues to own the property. The Further Agreement indicates that the parties intended the CAM cap to be lifted if the corporate real property was sold or leased. The Court did not find that this includes a sale of the corporate stock.