Katz v. Bregman
431 A.2d 1274, 1981 Del. Ch. LEXIS 449 (1981)
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Rule of Law:
A sale of corporate assets that is quantitatively vital to the company's operations and qualitatively represents a radical departure from its historically successful line of business constitutes a sale of "substantially all" assets, thereby requiring shareholder approval under 8 Del.C. § 271.
Facts:
- Plant Industries, Inc., led by CEO Robert B. Bregman, sold several of its unprofitable subsidiaries in the United States.
- Following these sales, the company's Canadian subsidiary, Plant National (Quebec) Ltd., was its only income-producing facility for the past four years.
- The Canadian subsidiary's primary business was the profitable manufacture of steel drums.
- The Canadian subsidiary constituted 51% of Plant Industries' total assets, generated 44.9% of its sales revenue, and accounted for 52.4% of its pretax net operating income.
- The board of Plant Industries entered into a contract to sell the Canadian subsidiary to Vulcan Industrial Packaging, Ltd.
- The stated purpose of the sale was to raise cash and shift the company's focus to a new line of business: manufacturing plastic drums.
Procedural Posture:
- Hyman Katz, a stockholder in Plant Industries, Inc., filed suit against the corporation and its CEO, Robert B. Bregman, in the Delaware Court of Chancery.
- Katz sought a preliminary injunction to stop the proposed sale of the company's Canadian subsidiary to Vulcan Industrial Packaging, Ltd.
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Issue:
Does the proposed sale of a corporate subsidiary, which constitutes over 50% of the company's total assets and is its only source of profit, amount to a sale of "substantially all" of the corporation's assets requiring shareholder approval under 8 Del.C. § 271?
Opinions:
Majority - Marvel, Chancellor
Yes. The proposed sale of Plant Industries' Canadian subsidiary constitutes a sale of "substantially all" of its assets, and therefore requires shareholder approval. The determination of whether a sale is of "substantially all" assets involves both a quantitative and qualitative analysis. Quantitatively, the Canadian subsidiary is vital, representing over half of the company's assets and its sole source of profit. Qualitatively, the sale is an unusual transaction that would radically alter the company's historical business from manufacturing steel drums to making plastic drums. Citing the test from Gimbel v. Signal Companies, Inc., the court found the sale was of assets quantitatively vital to the corporation's operation and was out of the ordinary, substantially affecting the company's existence and purpose. Therefore, it is beyond the power of the board to approve without a shareholder vote.
Analysis:
This case is significant for establishing that the "substantially all" assets test under Delaware corporate law is not a rigid mathematical formula but a flexible, context-dependent inquiry. The court's decision blends a quantitative analysis (the sheer size and profitability of the asset) with a crucial qualitative one (the sale's impact on the corporation's fundamental business and identity). This precedent empowers shareholders to challenge board actions that, while not liquidating the entire company, effectively sell off its "crown jewel" or core business, thus fundamentally altering the nature of their investment.
