Argued: April 9, 2015
Pierce Atwood LLP, of Portsmouth (Michele E. Kenney on the brief and orally), for the plaintiff.
Bernstein, Shur, Sawyer & Nelson, P.A., of Manchester (Andru H. Volinsky and Talesha L. Caynon on the brief, and Ms. Caynon orally), for the defendant.
Following a bench trial in Superior Court (Delker, J.), the court denied the petition of the plaintiff, Celestica, LLC (Celestica), requesting a declaration that the defendant, Communications Acquisitions Corporation d/b/a Whaleback Managed Services (CAC), is obligated to pay the balance of a judgment that Celestica had obtained against another business, the assets of which CAC had purchased at public auction. Specifically, the trial court ruled that, when CAC purchased the assets of Whaleback Systems Corporation (Whaleback), the transaction did not amount to a de facto merger between the two companies. On appeal, Celestica argues that the trial court erred by not imposing successor liability upon CAC under the de facto merger doctrine. We affirm.
I. Factual Background
The trial court found the following facts, which are not in dispute on appeal. Whaleback was founded to provide telecommunications services through Voice Over Internet Protocol (VOIP) to small and mid-sized businesses. Whaleback, which operated primarily from Portsmouth, was funded by a group of venture capital firms. The primary investors in Whaleback were: (1) Ascent Venture Partners IV, LP (Ascent), which owned 53.1% of the stock; (2) Egan Managed Capital III, LP (Egan), which owned 22.7%; and (3) Castile Ventures III, LP (Castile), which owned 17.8%. Fifteen other individuals owned the remaining 6.4% of the Whaleback stock.
Whaleback was also funded through a series of secured loans. Horizon Technology Funding Company, LLC (Horizon) lent Whaleback $3 million (Horizon Loan), and was the primary secured lender. Horizon held a security interest in all of Whaleback's assets, "including equipment, inventory, accounts receivable, and intellectual property rights." Subordinate to Horizon's secured interest, the three primary shareholders of Whaleback - Ascent, Egan, and Castile - also provided secured loans to Whaleback in the amounts of $4.8 million, $2 million, and $1.2 million respectively.
In 2011, after Whaleback defaulted on the Horizon Loan, the investors began looking for new sources of funding. Hercules Technology Growth Capital offered to lend Whaleback $2 million, provided that the equity investors invested an additional $700, 000 in the company. Ascent, however, responded that it would provide only $50, 000 of additional capital. Castile and Egan declined to invest more capital as long as Whaleback continued to operate under its existing business model. Hercules eventually withdrew its offer.
Soon thereafter, Whaleback board members Roger Walton, of Castile, and Michael Shanahan, of Egan, discussed forming a new company to acquire Whaleback's assets. Walton had a background in information technology, and believed that Whaleback had valuable technology but had a flawed business model. Walton and Shanahan met with Karil Reibold, the CEO of Whaleback, to discuss the future of the company. The three men then approached Horizon with a proposal whereby Castile and Egan would create a new company and purchase Whaleback's assets from Horizon. Under the proposal, Castile and Egan would pay Horizon $500, 000, plus $50, 000 in legal fees and costs. The plan also contemplated that Horizon would pay $125, 000 to keep Whaleback operating until the sale closed, at which time Castile and Egan would reimburse Horizon for this expense.
The parties ultimately agreed to the following terms, which were memorialized by a Letter of Intent (LOI) dated November 15, 2011. Castile and Egan would fund Whaleback's operations between the signing of the LOI and the closing. Horizon would conduct a public auction of Whaleback's assets. The minimum bid at the auction was set at $600, 000, and any interested bidder would be required to submit a $60, 000 deposit on the day before the auction. Castile and Egan also had a right of first refusal, allowing them to match any higher bid. If they chose not to match a higher bid, Castile and Egan would receive a refund of any money invested in Whaleback to keep it operational between the LOI and closing.
On November 15, the same day that the LOI was signed, Horizon sent a notice to Whaleback stating that Whaleback was in default on the Horizon Loan, thus triggering Horizon's right to sell all of Whaleback's assets at auction. Notice of the public auction was sent to all secured lenders and to Celestica. Notice was also published in the Manchester Union Leader and the Boston Globe, and posted on the auctioneer's website.
At the November 29 auction, CAC, the new company formed by Castile and Egan, was the only bidder for Whaleback's assets. [*] It bid $600, 000. Prior to the December 7 closing, George Vaughn, who was hired to serve as CEO of CAC, worked with Reibold to keep Whaleback running, because "if there was an interruption in the business for any length of time then all of [Whaleback's] customers would be lost." Thus, to ensure that it could provide uninterrupted service to its customers prior to the closing, CAC honored some of the debts owed by Whaleback to existing vendors. Vaughn was ultimately responsible for deciding which of Whaleback's contracts that CAC would honor during the interim period.
The asset sale closed as planned. CAC "acquired all of . . . Whaleback's assets, including the good will, existing customers, equipment, and intellectual property, " free from any of Whaleback's liabilities, including the judgment that Celestica had obtained against Whaleback. After the closing, Whaleback had no assets. Whaleback was not formally dissolved because it did not have sufficient funds to pay for its dissolution.
In 2012, Celestica filed a petition for declaratory judgment in superior court, seeking a declaration that the asset sale between Whaleback and CAC constituted a de facto merger of the two companies. Celestica asked the trial court to rule that, under the theory of successor liability, CAC was "fully and completely" liable for the judgment that Celestica had obtained against Whaleback. Following a ...