Hariton v. Arco Electronic, Inc.

Supreme Court of Delaware · Corporations

Corporationssale of assetsmergerdissolutionindependent legal significanceDGCL § 271DGCL § 275sale of assets

Facts

Arco and Loral Electronics Corporation negotiated an amalgamation and entered into a Reorganization Agreement and Plan on October 27, 1961. Under the plan, Arco agreed to sell all its assets to Loral in exchange in part for 283,000 shares of Loral stock, to call a stockholders meeting to approve the plan and Arco's voluntary dissolution, and to distribute the Loral shares to Arco's stockholders in complete liquidation. About 80% of the voting stockholders approved the plan, and it was consummated. The plaintiff challenged the transaction as an unlawful use of § 271 because it achieved the same result as a merger without proceeding under the merger statute.

Issue

Whether a corporation may legally use § 271 to sell all its assets for stock of the purchasing corporation and, under the same plan, dissolve and distribute that stock to its own shareholders, thereby accomplishing the same practical result as a merger. More specifically, the question was whether such a transaction is an illegal de facto merger or a valid use of independent statutory mechanisms.

Rule

The sale-of-assets statute and the merger statute are independent of each other and are of equal dignity. Therefore, if the statutory requirements are fully complied with, a corporation may lawfully use § 271 together with a mandatory dissolution and distribution plan to accomplish the same end that could have been achieved through a merger.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Redstone Signal Systems, a Delaware corporation based in Denver, agrees to transfer all of its operating assets to Lakeview Circuits, an Ohio corporation, in exchange for Lakeview shares. The same board-approved plan calls for Redstone's stockholders to approve the asset sale, approve voluntary dissolution, and receive the Lakeview shares in Redstone's complete liquidation. All statutory voting requirements for the asset sale and dissolution are satisfied.

A Redstone stockholder sues, arguing the transaction is invalid because it produces the same practical result as a merger and therefore had to proceed under the merger statute. How should a Delaware court rule?

Explanation. The majority held that Delaware's sale-of-assets statute and merger statute are independent of each other and of equal dignity. Thus, if the statutory requirements for the asset sale and dissolution are fully complied with, the transaction is legal even though it accomplishes the same practical result as a merger. The case did not turn on fairness, which was abandoned. (Derived from Hariton v. Arco Electronic, Inc. (n.d.).)