Gimbel v. Signal Companies, Inc.

Delaware Court of Chancery

316 A.2d 599 (Del. Ch. 1974)

Rule of Law
The sale of a wholly owned subsidiary by a conglomerate does not require majority
stockholder approval if the sale does not constitute a sale of all or substantially all of the
conglomerate's assets.

Facts
Signal Companies, Inc. (Signal) (defendant) was incorporated as an oil business. Signal then
became a conglomerate that engaged in a variety of industries. Signal transferred its oil and gas
business to its wholly owned subsidiary, Signal Gas & Oil Co. (Signal Oil). Signal’s operation
involved constant acquisition and disposal of corporate branches. Signal’s board of directors
approved a proposal to sell Signal Oil to Burmah Oil Inc. (Burmah). Signal’s books showed that
Signal Oil represented 26 percent of Signal’s total assets, 41 percent of its net worth, and 15 percent
of Signal’s revenues and earnings. Louis Gimbel (plaintiff), a Signal shareholder, sought a
preliminary injunction to prevent the sale. Gimbel alleged that the approval by the Signal board
was insufficient and that majority shareholder approval was necessary to authorize the sale, as it
accounted for all or substantially all of Signal’s assets.

Issue
Does the sale of a wholly owned subsidiary by a conglomerate require majority stockholder
approval if the sale does not constitute a sale of all or substantially all of the conglomerate's assets?

Holding and Reasoning (Quillen, J.)

No. Delaware statute requires majority stockholder approval for a sale of "all or substantially all"
of the assets of a Delaware corporation. Del. C. tit. 8, § 271(a). The sale of a wholly owned
subsidiary by a conglomerate does not require majority stockholder approval if the sale does not
constitute a sale of "all or substantially all" of the conglomerate's assets. A sale of assets should be
measured both quantitatively and qualitatively. If the sale is "of assets quantitatively vital to the
operation of the corporation" and is "out of the ordinary and substantially affects the existence
and purpose of the corporation," it constitutes a sale of all or substantially all assets and majority
stockholder approval is required. In Philadelphia Nat’l Bank v. B.S.F., 199 A.2d 746 (1964), the court
held the sale of stock was a sale of substantially all assets, because the asset sold was the
corporation's principal asset and constituted at least 75 percent of the total assets. In this case,
Signal Oil represents only about 26 percent of the total assets of Signal. While Signal Oil
represents 41 percent of Signal's total net worth, it produces only 15 percent of Signal’s revenues
and earnings. Thus, quantitatively, the sale of Signal Oil does not constitute a sale of all or
substantially all of Signal's assets. Further, although Signal's original business was oil and gas,
Signal is now a conglomerate whose operation involves constant acquisition and disposal of its
corporate branches. Thus, acquisition and disposal of corporate branches, including the oil and
gas subsidiary, has become part of Signal's ordinary course of business. Therefore, the sale of
Signal Oil by Signal does not constitute a sale of all or substantially all of Signal's asset, both
quantitatively and qualitatively. Accordingly, majority stockholder approval is not necessary.

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Farris v. Glen Alden Corporation

Supreme Court of Pennsylvania

143 A.2d 25 (Pa. 1958)

Rule of Law
A shareholder may be entitled to appraisal rights even if a combination of two corporations is
consummated by contract and not in accordance with the statutory merger procedure.

Facts
Glen Alden Corporation (Glen Alden) (defendant), a coal mining company, and List Industries
Corporation (List), a holding company with interests ranging from theatres to textile companies
to real estate, entered into a “reorganization agreement” which was subject to stockholder
approval and provided that (1) Glen Alden would acquire List’s assets; (2) Glen Alden would
issue over 3 million shares of stock to List’s shareholders; (3) Glen Alden would assume all of
List’s debt; (4) Glen Alden would change its name to List Alden; (5) List would be dissolved; and
(6) List Alden would carry on the business of both corporations. Under the agreement, stock in
List Alden would only be worth $21 per share, as opposed to $38 per share, the value of Glen
Alden stock. The agreement was approved at the next Glen Alden annual meeting. Farris
(plaintiff), a Glen Alden shareholder, brought suit, seeking to enjoin the “reorganization” on the
grounds that notice of the meeting was insufficient in that it did not disclose a merger as the true
purpose of the meeting, did not give shareholders notice of their right to dissent and invoke their
appraisal rights, and did not contain a copy of certain parts of the Business Corporation Law as
was required. Glen Alden admitted to all of the claims and moved for summary judgment on the
theory that the transaction was merely a purchase of corporate assets and so Farris did not state
a claim on which relief could be granted. The trial court denied the motion, found that the
transaction was a de facto merger, and therefore found that the notice was insufficient and
granted Farris injunctive relief. Glen Alden appealed.

Issue
May a shareholder be entitled to appraisal rights if a combination of two corporations is
consummated by contract and not in accordance with the statutory merger procedure?

Holding and Reasoning (Cohen, J.)

Yes. Under the de facto merger doctrine, a shareholder may be entitled to appraisal rights even if
a combination of two corporations is consummated by contract and not in accordance with the
statutory merger procedure. Where the combination of two corporations results in the same
consequences that a statutory merger would, a shareholder is entitled to his opportunity for
appraisal rights. In the current case, the agreement between Glen Alden and List was a de facto
merger, effectively completely altering the corporation that Farris would own stock in. Under the
agreement, List Alden would be engaged in numerous activities (theatre, real estate, etc.) that
Glen Alden was not originally engaged in; List Alden would have seven times the long-term debt
of Glen Alden; and stock in List Alden would only be worth $21 per share, as opposed to the
value of Glen Alden, $38 per share. These results are akin to the results of a merger and the
agreement in general is akin to a merger agreement. As a result, proper notice of the merger and
of the Glen Alden shareholders’ appraisal rights should have been given to Farris and the other
shareholders. Because such notice was not given, the annual meeting at which the agreement was
approved is invalid. The trial court is affirmed.

Hariton v. Arco Electronics, Inc.

Delaware Supreme Court

188 A.2d 123 (Del. 1963)

Rule of Law
A sale of assets accompanied with a mandatory plan of dissolution and distribution is legal
even if no appraisal rights are given to shareholders.

Facts
Arco Electronics Corporation (Arco) (defendant) and Loral Electronics (Loral) entered into a
“reorganization agreement” under section 271 of Delaware corporation law. The agreement was
subject to stockholder approval and provided that Loral would acquire Arco’s assets; Loral would
issue 283,000 shares of stock to Arco’s shareholders; and Arco would dissolve. The agreement
was approved by Arco shareholders. Hariton (plaintiff), an Arco shareholder, brought suit,
seeking to enjoin the “reorganization” on the grounds that it was illegal because it resulted in the
same thing as a merger, but he was not given a chance to invoke his right of appraisal. The
Delaware Court of Chancery granted Arco’s motion for summary judgment. Hariton appealed.
Issue
Is a sale of assets accompanied with a mandatory plan of dissolution and distribution legal even
if no appraisal rights are given to shareholders?

Holding and Reasoning (Southerland, J.)

Yes. A sale of assets accompanied with a mandatory plan of dissolution and distribution is legal,
even if it achieves the same results as a merger and no appraisal rights are given to shareholders.
In Delaware, corporations may combine by either a sale of assets under section 271 or under the
merger statute. The types of “reorganizations” are independent and both are legal although
achieving the same results. A sale of assets under section 271 does not involve the merger statute
and so it is not necessary to give shareholders appraisal rights under that type of reorganization.
Consequently, the sale of assets agreement between Arco and Loral is legal even though it did
not offer Hariton and other shareholders their appraisal rights. The trial court’s grant of summary
judgment to Arco is affirmed.