The De Facto Merger Land Mine: March 4, 2024 | McDermott

The De Facto Merger Land Mine: A Hidden Risk of Asset Purchases for Private Equity Funds, Other Financial Buyers


One of the basic principles of American corporate law is that the buyer of a company’s assets, as opposed to its equity, can avoid taking on that company’s liabilities. A hazardous exception for financial buyers – including private equity funds, hedge funds and family offices – that invest in private companies in areas in which they don’t already do business is the “de facto merger doctrine.”

This exception arises when courts find that even though a deal might be called an “asset purchase,” and the seller may yet exist after its assets are purchased, the transaction still amounts to a merger for purposes of successor liability. Although the factors for de facto merger are fuzzier and leave more room for discretion by a judge or even a jury than other exceptions, there are certain steps that financial buyers can take to put themselves in the best possible position.

Richard Salgado, Marina Stefanova and James Grossman discuss the steps that financial buyers should take to be well positioned in a recent Reuters article.