## Facts

- The Panfida Group offered to buy Munford, Inc. (doing business as Majik Market), a public company, in a debt-financed buyout structured as a reverse triangular merger.
- To complete the transaction, Panfida formed Alabama Acquisition Corporation and Alabama Merger Corporation as acquisition entities; Alabama Merger Corporation functioned largely as a shell for the merger.
- Munford’s board of directors accepted the offer (subject to shareholder approval) after consulting lawyers and a financial advisor (including Shearson Lehman Brothers).
- After potential environmental liabilities were identified, the offer price was reduced; shareholders approved the merger, and the transaction closed on November 29, 1988.
- The merger converted each share of Munford common stock into the right to receive the cash merger price (ultimately $17 per share) and eliminated the former shareholders’ equity interests.
- About thirteen months later, on January 2, 1990, the Panfida-owned Munford filed for Chapter 11 bankruptcy protection.
- Acting as debtor-in-possession and on behalf of unsecured creditors under the Bankruptcy Code’s avoiding-power provisions, Munford brought an adversary proceeding seeking damages and other relief against parties connected to the buyout, including Munford’s former directors.
- In one count, Munford alleged the directors violated Georgia’s stock distribution and share repurchase restrictions by authorizing a transaction that was a prohibited distribution/repurchase because it rendered Munford insolvent or left it unable to pay debts.
- The bankruptcy court concluded the Georgia statute applied and that the directors had violated it; the district court adopted the bankruptcy court’s report and recommendations in relevant part.
- The directors moved for summary judgment, arguing Georgia’s distribution/repurchase limits do not apply when a transaction changes corporate control and cashes out all shareholders; the district court denied summary judgment, and the directors took an interlocutory appeal.

## Issues

1. Do Georgia’s statutory restrictions on stock distributions and corporate share repurchases—especially the insolvency limitation—apply to cash-out payments made to shareholders in an LBO-style transaction structured as a reverse triangular merger that changes control?
2. Were the former directors entitled to summary judgment based on a claimed “change-of-control” exception to those statutes?
3. Does good-faith approval with advice of counsel bar liability under the Georgia distribution/repurchase provisions at issue?

## Decision

- The Eleventh Circuit affirmed the district court’s denial of summary judgment to the directors.
- The court held that Georgia’s stock distribution and share repurchase statutes apply to the merger payments in this type of buyout transaction.
- The court rejected the directors’ argument that the statutes are limited to traditional dividends or repurchases where shareholders remain owners after receiving the payment.
- The court declined to follow the Fourth Circuit’s approach in C–T of Virginia, which treated merger-based buyouts as outside comparable distribution restrictions.
- The court also rejected the directors’ alternative request for protection based on good faith and reliance on counsel, explaining it would not add a defense not recognized under Georgia law for these statutory claims.
- Because factual disputes remained (including insolvency), the statutory claim against the directors could proceed.

## Legal Principles

- Georgia’s stock distribution and share repurchase limits are designed to protect creditors by restricting transfers to shareholders when a corporation is insolvent or would be made insolvent.
- Courts apply the distribution/repurchase statutes according to their text and creditor-protection purpose; they do not create an exception merely because a transaction is structured as a merger or results in a change in control.
- A merger that functions as a “paper” combination with a shell entity and results in cash paid to extinguish outstanding shares can fall within statutory concepts of a distribution or repurchase when the economic effect is a transfer of corporate value to shareholders.
- The inquiry centers on the financial effect on the corporation (including insolvency), not solely on transaction form (merger versus dividend) or on whether the recipients remain shareholders afterward.
- Federal courts interpreting Georgia law will not add a good-faith or reliance-on-counsel defense to these statutory distribution/repurchase claims absent recognition of such a defense by Georgia courts.

## Conclusion

Matter of Munford held that Georgia’s insolvency-based restrictions on stock distributions and share repurchases can apply to cash-out payments in an LBO-style reverse triangular merger, even though the transaction eliminates the selling shareholders’ ownership and transfers control; the Eleventh Circuit therefore affirmed the denial of summary judgment and allowed the debtor-in-possession’s statutory claim against the former directors to proceed, with insolvency and related elements to be determined on the facts.


Matter of Munford, Inc., d.b.a. Majik Market, Debtor, 97 F.3d 456 (1996)