When is a Merger Not a Merger? (When You Don’t Pay Attention to Details)
A recent New York case highlights the importance of complying with statutory requirements when implementing mergers.
Preston v. APCH, Inc. was decided by the Appellate Division of the Supreme Court, Fourth Department (an intermediate appellate court) on October 7, 2011. It involved claims by the estate of a welder who died in an industrial accident at a plant in Western New York. At the time the fatal accident occurred in 2008, the welder was an employee of Alstom Power, Inc., a Delaware corporation. APCH, Inc., another Delaware corporation, was also named as a defendant. APCH was a former wholly owned subsidiary of Alstom that had held title to the plant where the accident occurred from 2002 until it was merged into Alstom in 2007.
APCH sought dismissal of the action against it claiming that ownership of the plant had been transferred to Alstom by virtue of the merger before the accident. Alstom, in turn, sought dismissal on grounds that the Workers’ Compensation Law precluded plaintiff’s action against it.
The Court examined the merger of APCH into Alstom. It found that Alstom had completed a short-form merger of APCH into Alstom in accordance with the Delaware General Corporation Law. It also found, however, that nothing with respect to the merger had been filed either with the Department of State of the State of New York (“DOS”) or the county clerk of the county in which the plant was located. In fact, the Court found that APCH had never been qualified in New York to do business as a foreign corporation despite owning the plant, an activity that would generally constitute “doing business” in the State.
Examining the law applicable to the transfer of New York real property by a foreign corporation, the Court cited Section 1307 of the New York Business Corporation Law (“BCL”) which states simply that: “A foreign corporation may acquire and hold real property in this state…and may convey the same by deed or otherwise in the same manner as a domestic corporation.”
The Court noted that a New York corporation can transfer real estate by merger provided the requirements of the BCL are satisfied. BCL §904(a) requires the filing of a certificate of merger signed by each constituent corporation with DOS. BCL §904(b) provides that a copy of that certificate of merger, certified by the DOS, must be filed in the recording office of each county in which a corporation that is disappearing in the merger holds real property.
BCL §906(b)(2) relating to the effects of mergers states that when the merger becomes effective, all property, including real property, owned by each constituent corporation vests in the surviving corporation “without further act or deed.” BCL §906(a) provides that upon the filing of the certificate of merger with the DOS, the merger “shall be effected.” Therefore, the Court found that a merger is not effective in New York unless and until a certificate of merger is filed with DOS.
Thus, the Court held that, whether or not the merger of APCH into Alstom was effective in Delaware, it was not effective in New York for purposes of transferring New York real property. APCH was, therefore, still subject to suit in New York as the owner of the plant.
With respect to Alstom’s Workers’ Compensation Law defense, the Court held that an exception applied to the general rule that Workers’ Compensation is the sole remedy of an employee injured in the course of employment. Under the so-called Billy exception, (so named for a 1980 decision of New York’s high court, the Court of Appeals, Billy v. Consolidated Mach, 51 NY2d 152), an employer that voluntarily assumes the assets, obligations and liabilities of a third-party tort-feasor cannot avail itself of the exclusive remedy provision of the Workers’ Compensation Law.
The rationale behind the Billy exception is that Workers’ Compensation has never precluded a worker from suing a third-party (i.e. non-employer) tort-feasor, such as the company that designed or manufactured the tool that injured the worker. If the employer later acquires the assets and liabilities of that tort-feasor, for example by merger, the third-party claim can still be maintained and the now employer cannot claim the benefit of the serendipity of that status.
The Court held that the Billy exception applied here because Alstom had voluntarily assumed the assets, obligations and liabilities of APCH in the merger. Thus, paradoxically, the Court refused to dismiss the case against APCH on the grounds the merger did not happen (at least for purposes of transferring New York real property), while refusing to dismiss Alstom on the grounds that it did.
The lesson here is that the requirements of New York law must be followed where a foreign constituent corporation to a merger holds New York real property. Preston may also be emblematic of the cascade of ills that can result for an initial mishap. In this case, the failure to qualify APCH to do business in New York when it acquired the plant in 2002 may have influenced the failure to file a copy of the Delaware certificate of merger with the DOS in 2007. While BCL §1311 provides a procedure for filing certificates of merger from sister states with respect to disappearing foreign constituent corporations that are qualified to do business in New York, there is no such procedure for filings with respect to foreign corporations that are not qualified. That makes sense since New York would have little interest in what becomes of foreign corporations that are not qualified in New York and thus presumably not “doing business” within its borders.
Had Alstom tried to file the Delaware certificate of merger in New York, the DOS would have found no record of APCH. DOS would have likely required Alstom to qualify APCH in New York and to file reports and tax returns for the entire period APCH owned the plant. Confronted by this likelihood, the architects of the Alstom/APCH merger may have decided to take their chances. In hindsight, a poor decision.
The application of the Billy exception to Alstom is also cautionary. Where a company is cobbled together through mergers and acquisitions, an injured employee may be able to avoid the rule of Workers’ Compensation exclusivity if the injury can be traced to the act of a now-merged constituent.
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