In my view, a "friendly realm merger" is when a method
other than war and takeovers is used to join the
entirety of two realms together.
Joining the duchy of Sun Hall to Luria Nova was not a bug exploit, because the last city/stronghold in the realm was not taken.
Joining the stronghold of Balance's Retreat to Luria Nova is exploiting bug
7360, and furthermore, is a friendly realm merger, as defined by me, above. The Magistrates might come up with a different definition, of course.
The question that remains, I guess, is whether Wolfey knew that this was a bug, and how that affects the outcome of the case.