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Court Rejects De Facto Merger Claim in Brokerage Buyout: Energy Intelligence Group, Inc. v. Cowen and Co., LLC
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By Jack D. Ballard

*As a general rule, a corporation that purchases the assets of another corporation is not liable for the seller’s liabilities. **Delaware courts use the de facto merger doctrine sparingly in the absence of evidence of fraud.

Energy Intelligence Group, Inc. vs. Cowen and Co., LLC, No. 14 Civ. 3789 (S.D. N.Y., 7/15/16).

How the Case Came to Court

Plaintiff Energy Intelligence Group, Inc. (“EIG”) published copyrighted newsletters and sold them to analysts with an interest in the oil and gas industry. Investment bank Dahlman Rose & Company LLC (“Dahlman”) subscribed to three of EIG’s newsletters under a license agreement that allowed for one reader only and forbade copying and forwarding the material. Despite this agreement, it came to EIG’s attention in June and again in September 2012 that its newsletters were being forwarded to and read by multiple employees at Dahlman. On both occasions, EIG warned Dahlman that if it wanted to continue to allow access by multiple employees, it would need to purchase a different license. Dahlman repeatedly assured EIG that only one person was reading the newsletters, but continued its practice of forwarding them to multiple readers.

In December 2012, Cowen and Company, LLC (“Cowen”) began conducting a due diligence review with a view to acquiring Dahlman, requesting information on all significant pending or threatened suits, actions, or litigations affecting its business operations. The parties disputed whether Cowen was shown Dahlman’s subscription agreements, but no one at Dahlman communicated to Cowen that there was any potential liability to EIG. Cowen acquired Dahlman’s assets in two steps: Cowen’s parent company, Cowen Group, formed a subsidiary called Cowen DRA, which acquired all of Dahlman’s stock in exchange for Cowen Group stock. Cowen DRA then assigned most of its assets to Cowen, and, in exchange, Cowen assumed Dahlman’s “known liabilities, contingencies and obligations.” After Cowen received a list of Dahlman’s EIG publications in April 2013, it elected to continue them. When the second phase closed, on May 31, 2013, Dahlman ceased to operate, but remained a corporation in good standing. In May 2014, EIG filed suit against Cohen, seeking to hold it liable for Dahlman’s, and its own, copyright infringement.

Was There a De Facto Merger?

The Court allowed discovery and briefing solely on the issue of Cowen’s purported liability for Dahlman’s infringement, and the parties filed cross motions for partial summary judgment. As a general rule, the Court notes, a corporation that purchases the assets of another corporation is not liable for the seller’s liabilities. EIG maintained that two exceptions applied: 1) Cowen explicitly assumed this liability, and 2) the transaction was a de facto merger. The Court concludes that, under the unambiguous agreement, Cowen did not assume liability to EIG. The agreement did not mention any such liability, and there is no evidence that either party to the transaction knew of a copyright-related claim or contingency at that time.

The de facto merger issue turns on the choice of law, as Delaware has a much stricter standard for finding a de facto merger than New York. Applying the choice of law rules of New York, the forum state, the Court considers which state has a greater interest in the outcome of the case. Under the internal affairs doctrine, issues involving the rights and liabilities of a corporation are generally governed by the law of the state of incorporation. Since all parties to the litigation are Delaware entities, Delaware law applies. Under Delaware law, a de facto merger occurs only when one corporation transfers all of its assets to another, payment is made in stock directly to the shareholders of the transferring corporation, and in exchange the transferee agrees to assume all debts and liabilities of the transferor. Delaware courts have also declined to find a de facto merger in the absence of evidence of fraud. These elements are not present and there is no evidence of fraudulent intent in the transaction. The Court grants partial summary judgment for Cowen, holding it not liable for the copyright infringement committed by Dahlman.

(J. Ballard)

(SLC Ref. No. 2017-24-03)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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