Gimbel v. Signal Companies, Inc.
316 A.2d 599 (1974)
Sections
Rule of Law:
Under Delaware law, shareholder approval for the sale of assets is only required if the sale involves quantitatively and qualitatively 'all or substantially all' of the corporation's assets; additionally, the business judgment rule will not protect directors who demonstrate reckless indifference by approving a transaction with a gross disparity between the sale price and fair value without adequate deliberation.
Facts:
- Signal Companies, originally an oil and gas business, diversified over twenty years into a conglomerate with interests in aerospace, truck manufacturing, and other industries.
- Signal agreed to sell its wholly-owned subsidiary, Signal Oil, to Burmah Oil for approximately $480 million in cash.
- At the time of the agreement, Signal Oil represented roughly 26% of Signal's total assets, 41% of its net worth, but only about 15% of its revenues and earnings.
- The global oil market was in a state of chaos due to the energy crisis, causing potential drastic fluctuations in the value of oil reserves.
- Signal management negotiated with Burmah for months but did not inform the outside directors of the proposed transaction until very late in the process.
- A special Board meeting to approve the sale was called on only two days' notice, and the directors approved the $480 million deal without obtaining an updated appraisal of the oil properties.
- Plaintiff's experts provided affidavits valuing the Signal Oil properties at approximately $761 million, significantly higher than the $480 million sale price.
- The contract with Burmah contained a deadline, creating time pressure for the consummation of the sale.
Procedural Posture:
- Plaintiff stockholder filed a complaint in the Delaware Court of Chancery seeking injunctive relief.
- Plaintiff applied for a temporary restraining order (TRO), which was not entered based on the parties' agreement to delay the transaction pending a decision.
- The parties submitted affidavits and depositions regarding the value of the assets and the conduct of the Board.
- The Court held a hearing on the plaintiff's application for a preliminary injunction.
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Issue:
1. Does the sale of a subsidiary representing approximately 26% of a conglomerate's total assets and 15% of its revenues require a shareholder vote under 8 Del. C. § 271(a)? 2. Is a preliminary injunction warranted to stop a corporate sale where the Board approved the transaction on short notice without an updated appraisal, and there is a massive discrepancy between the sale price and expert valuations?
Opinions:
Majority - Chancellor Quillen
No to the first question, but Yes to the second regarding the need for an injunction due to potential recklessness. Regarding the shareholder vote, the sale does not constitute 'all or substantially all' of Signal's assets. While Signal Oil represents a significant portion of net worth (41%), it represents a small portion of revenue (15%) and assets (26%). Qualitatively, Signal is a conglomerate that buys and sells businesses in the ordinary course; selling this subsidiary does not strike at the heart of the corporate existence or destroy its purpose. However, regarding the fiduciary duty issue, the plaintiff established a reasonable probability of success. The Business Judgment Rule generally protects directors, but it does not shield 'reckless indifference.' The massive gap between the sale price ($480M) and the plaintiff's expert valuation ($761M), combined with the Board's hasty approval on short notice without an updated appraisal during a volatile market, suggests the price may be clearly inadequate. Therefore, a preliminary injunction is necessary to prevent irreparable harm, conditioned on the plaintiff posting an unprecedented $25 million security bond to protect the defendants.
Analysis:
This case is a seminal decision in Delaware corporate law for two reasons. First, it clarifies the 'all or substantially all' standard under § 271, moving beyond a simple math test to a 'quantitative and qualitative' analysis. It establishes that multi-industry conglomerates have more flexibility to sell large subsidiaries without a shareholder vote than single-purpose corporations. Second, it illustrates the outer limits of the Business Judgment Rule. While courts rarely second-guess valuation, the combination of a 'hasty method' (two days' notice, no updated appraisal) and a 'shocking' price disparity allows a court to intervene. It warns directors that while they don't need to be right, they must be reasonably diligent and informed. The case is also famous for requiring a $25 million bond, recognizing that a preliminary injunction is a high-stakes intervention that can destroy a lucrative deal.
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