Gimbel v. Signal Companies, Inc.

Delaware Court of Chancery · 1974 · Corporations

CorporationsSale of assetsShareholder votingBusiness judgment rulePreliminary injunction8 Del. C. § 271all or substantially allqualitative and quantitative test

Facts

Signal's board approved the sale of all outstanding stock of Signal Oil to Burmah for consideration exceeding $480 million, with closing scheduled shortly thereafter. Plaintiff, part of an investment group holding about 12% of Signal's stock, argued that the sale required shareholder approval under 8 Del. C. § 271(a) and that the board accepted a wholly inadequate price. Signal Oil accounted for about 26% of Signal's total assets, about 41% of net worth, and about 15% of revenues and earnings, while Signal had long since become a diversified conglomerate engaged in several unrelated businesses. The board approved the transaction after a short special meeting on December 21, 1973, without obtaining an updated appraisal, and the parties submitted sharply conflicting valuation affidavits on Signal Oil's fair value.

Issue

Did Signal's sale of all stock of Signal Oil constitute a sale of 'all or substantially all' of Signal's assets requiring shareholder approval under 8 Del. C. § 271(a)? If not, had plaintiff nevertheless shown a reasonable probability of success on a claim that the board acted recklessly under the business judgment rule by approving a grossly inadequate sale price, sufficient to justify a preliminary injunction?

Rule

Under 8 Del. C. § 271(a), shareholder approval is required only when a corporation sells all or substantially all of its assets. The test is both quantitative and qualitative: if the sale is of assets quantitatively vital to the corporation and is out of the ordinary in a way that substantially affects the corporation's existence and purpose, it is beyond the board's power alone. In challenging board approval of an asset sale, directors are protected by the business judgment rule unless the plaintiff shows actual fraud or that the price was so clearly inadequate as to imply fraud, improper motive, or reckless indifference to shareholder interests; inadequacy is judged as of the time of contracting.

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Summit Harbor Industries, a Delaware corporation based in Chicago, owns four unrelated operating businesses: freight equipment, medical devices, data services, and marine fuel. Its board approves the sale of all stock of its wholly owned marine-fuel subsidiary to a buyer in Houston. The subsidiary represents 24% of Summit Harbor's total assets, 18% of revenue, and 16% of earnings, and Summit Harbor has spent the last decade buying and selling business lines as part of its diversification strategy.

Does the sale most likely require shareholder approval under Delaware's sale-of-assets statute?

Explanation. The majority applied a combined quantitative and qualitative test. Shareholder approval is required only if the sale is of assets quantitatively vital to the corporation and is out of the ordinary in a way that substantially affects the corporation's existence and purpose. In a diversified company whose business includes acquiring and disposing of business branches, selling a subsidiary that accounts for roughly a quarter of assets and less of revenues and earnings would not likely be deemed a sale of all or substantially all assets. The rule is not that sale of an important branch automatically triggers a vote, and the form of subsidiary stock versus direct assets is not itself dispositive.