Katz v. Bregman

Delaware Court of Chancery · 1981 · Corporations

CorporationsSale of substantially all assetsStockholder approvalPreliminary injunction8 Del. C. § 271substantially all assetsordinary coursestockholder vote

Facts

Plant Industries had recently sold several unprofitable United States subsidiaries and then agreed on April 2, 1981 to sell Plant National (Quebec) Ltd. to Vulcan. Plant National constituted Plant's entire Canadian operation and, according to the record, represented 51% of Plant's remaining assets, about 44.9% of sales revenues, and 52.4% of pretax net operating income. The Canadian operation had been the profitable part of the business for several years, while the United States operations had performed poorly. After the sale, Plant proposed to move into manufacturing plastic drums, a departure from its historically successful steel drum business.

Issue

Whether Plant Industries' proposed sale of its Canadian subsidiary constituted a sale of all or substantially all of its assets under 8 Del. C. § 271, thereby requiring approval by a majority of the outstanding stockholders before consummation. If so, the court had to decide whether a preliminary injunction should issue until such approval was obtained.

Rule

A board may not consummate a sale without stockholder approval under 8 Del. C. § 271 if the sale is of assets that are quantitatively vital to the corporation's operation, is out of the ordinary course of business, and substantially affects the corporation's existence and purpose. The inquiry looks not merely to the percentage of assets sold, but also to the qualitative importance of those assets and whether the transaction is unusual rather than a regular-course business dealing.

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

Riverton Containers, Inc., a Delaware corporation based in Cleveland, manufactures aluminum shipping canisters. Its board agrees to sell its Ohio extrusion division to Lakefront Industrial Holdings, a fictional buyer, without a stockholder vote. The division represents 48% of Riverton’s assets, 46% of annual sales, and 61% of pretax operating income, and it has been the company’s only consistently profitable unit for the last three years.

If a stockholder seeks to block the sale, which is the strongest argument that stockholder approval is required?

Explanation. Under the majority opinion, the inquiry is not controlled by a mechanical percentage test. A sale requires stockholder approval when the assets are quantitatively vital to the corporation, the transaction is out of the ordinary course, and it substantially affects the corporation’s existence and purpose. Here, the division supplies nearly half the assets, almost half the sales, and most of the income, making it qualitatively and quantitatively central to the enterprise.