Hariton v. Arco Electronics, Inc.

Supreme Court of Delaware
188 A.2d 123 (1963)

ELI5:

Rule of Law:

A corporate transaction structured as a sale of all assets in exchange for stock, followed by the dissolution of the selling corporation and distribution of the stock, is legally valid if the statutory requirements for each step are met, even if the transaction achieves the same substantive result as a statutory merger.

Facts:

Arco Electronics, Inc. ('Arco') and Loral Electronics Corporation ('Loral') were both engaged in the electronic equipment business.
In the summer of 1961, Arco and Loral negotiated an amalgamation of the two companies.
On October 27, 1961, they executed a 'Reorganization Agreement and Plan.'
Under the plan, Arco agreed to sell all of its assets to Loral.
In consideration for the assets, Loral agreed to issue 283,000 shares of its stock to Arco.
The plan also required Arco to call a stockholders' meeting to approve its own voluntary dissolution.
As part of the dissolution, Arco was required to distribute all the Loral shares it received to its own stockholders.
Martin Hariton was a stockholder in Arco.

Procedural Posture:

Martin Hariton, an Arco stockholder, filed a lawsuit against Arco Electronics, Inc. in the Delaware Court of Chancery (a trial-level court).
Hariton sought an injunction to stop the consummation of the reorganization plan, alleging it was illegal.
Arco, the defendant, moved for summary judgment and dismissal of the complaint.
The Vice Chancellor of the Court of Chancery granted Arco's motion for summary judgment.
Hariton, as the appellant, appealed the trial court's decision to the Supreme Court of Delaware.

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Issue:

Does a corporate reorganization, structured as a sale of all assets for stock under § 271 followed by a mandatory dissolution and distribution of that stock under § 275, constitute an illegal de facto merger because it denies shareholders the appraisal rights they would have in a statutory merger?

Opinions:

Majority - Southerland, Chief Justice

No. A reorganization accomplished through a sale of assets under § 271 and a plan of dissolution is legal. The Delaware General Corporation Law's sale-of-assets statute and merger statute are independent of each other and of 'equal dignity.' Therefore, corporate planners may choose to use either statutory mechanism to achieve their desired outcome. This principle, known as the doctrine of independent legal significance, means that an action taken pursuant to the authority of one section of the law is legally valid and its validity does not depend on other sections. Because Arco fully complied with the provisions of the sale-of-assets statute, the transaction is legal, regardless of its similarity to a merger.

Analysis:

This decision effectively rejects the de facto merger doctrine in Delaware, establishing the primacy of the doctrine of independent legal significance. It solidifies the principle that the form of a corporate transaction, rather than its substance, dictates its legality and the rights of shareholders. This ruling provides corporate planners with significant flexibility, allowing them to structure transactions to avoid statutory requirements like appraisal rights that would be mandatory under an alternative structure. It is a foundational case in Delaware corporate law that reinforces the state's director-friendly legal framework.

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