Delaware Chancery Court Provides Guidance on
What Constitutes “Substantially All” of a Corporation’s Assets
October 6, 2004
To Our Clients and Friends:
On July 29, 2004, Vice Chancellor Leo Strine of the Delaware Chancery Court issued
an opinion that provides guidance for determining when stockholder approval for the
sale, lease, or exchange of assets is necessary under Section 271 of the Delaware
General Corporation Law. In Hollinger Inc. v. Hollinger Int’l, Inc.,[1] the court denies
Hollinger Inc.’s request for a preliminary injunction and rejects its contention that
stockholder approval is required for the sale of The Daily Telegraph newspaper because
the Telegraph constitutes “substantially all” of Hollinger International’s assets within the
meaning of Section 271. The court explains that if the remaining portion of a business
constitutes a substantial, viable, ongoing component of the corporation, the sale is not
subject to Section 271, and it rejects the notion that “substantially all” should be
interpreted to mean “approximately half” for purposes of Section 271.
Background
Under Section 271, the board of directors of a Delaware Corporation must have the
approval of its stockholders to sell “all or substantially all of its property and assets,
including goodwill and its corporate franchises.” In Gimbel v. Signal Cos.,[2] the
Delaware Chancery Court set forth a two-pronged test which requires analysis of both
quantitative and qualitative factors to determine whether a particular asset sale amounts
to “substantially all” of a corporation’s assets. Under Gimbel, a stockholder vote is
required if the assets sold “are quantitatively vital to the operation of the corporation”
and “substantially affect the existence and purpose of the corporation.” Gimbel has
been interpreted as requiring “the transaction to be viewed in terms of its overall effect
on the corporation” and as recognizing that a necessary qualifying percentage cannot
be articulated.[3]
Interpretation of “Substantially All”
While also addressing several other issues in the opinion, the court devotes
considerable time to defining “substantially all” of a corporation’s assets within the
meaning of Section 271 of the Delaware General Corporation Law. The court begins its
analysis by focusing on the plain meaning of “substantially all” and concludes that
“essentially everything” is the appropriate equivalent for the phrase.
In applying the Gimbel test, the court first concludes that the Telegraph is not
“quantitatively vital” to the operations of Hollinger International. The court reasons that
Hollinger International will retain “economic vitality” after the sale because it will
continue to own other significant assets, including the Chicago Sun-Times newspaper.
In reaching this conclusion, the court notes that in 2003 the Telegraph group within
Hollinger International accounted for 49% of the company’s revenue, 36% of the book
value of the company’s assets, and 57% of the company’s EBITDA.
The court does recognize that the Telegraph is a very important asset to Hollinger
International, even noting that it may be Hollinger International’s most valuable asset.
The court makes it clear, however, that the sale of a major or prestigious asset does not
automatically place the transaction within the purview of Section 271.
In applying the second prong of the Gimbel test, the court notes that the qualitative
element focuses on economic quality and “at most, on whether the transaction leaves
the stockholders with an investment that in economic terms is qualitatively different than
the one that they now possess.” The court interprets Section 271 as requiring it to focus
on the economic importance of an asset and not its aesthetic worth. The court
concludes that after the Telegraph sale, Hollinger International’s stockholders will
continue to be investors in a publication company with profitable operating assets and
that although the sale of the Telegraph is important, it does not “strike a blow to
[Hollinger] International’s heart.”
Observations
Although it is difficult to predict the precise circumstances under which Section 271 will
apply, the court makes it clear that primary consideration should be given to the
quantitative effect the sale of an asset will have on a company’s overall economic
condition. For corporations engaging in asset sales, the following factors will be
important considerations in determining whether stockholder approval will be required
under Delaware law: (i) whether the corporation is retaining other significant assets;
(ii) whether the retained assets have a record of past profitability and expectations of
growth; (iii) whether the corporation will remain economically viable after the sale; and
(iv) whether the stockholders will be left with a qualitatively different investment after the
sale.
While the Delaware Supreme Court has denied Hollinger Inc.’s appeal, we will keep you
apprised of any further developments regarding this issue.
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If you have any questions about this alert or would like more information about this
topic, please call Bill Baxley at 404-572-3580 or Jamie Bruce at 404-572-3593, or
send an e-mail to corp.clientalerts@kslaw.com.
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[1] C.A. No. 543-N, decided July 29, 2004, appeal denied, 2004 WL 1732185 (Del. July 29, 2004).
[2] 316 A.2d 599 (Del. Ch. 1974), aff’d, 316 A.2d 619 (Del. 1974).
[3] Winton v. Mandor, 710 A.2d 835, 843 (Del. Ch. 1997).
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