How is “substantially all” defined?
“[A] determination of whether there is a sale of substantially all assets so as to trigger section 271 depends upon the particular qualitative and quantitative characteristics of the transaction at issue.” Hollinger Inc. v. Hollinger Intern., Inc., 858 A.2d 342, 377 (Del. Ch. 2004). A transaction involves “substantially all” of a company’s assets if the assets sold are “quantitatively vital to the operation of the corporation, [are] out of the ordinary and substantially affect the existence and purpose of the corporation.” Id. The results of the quantitative and qualitative prongs of the test are analyzed together to find whether the totality of the circumstances indicates that the corporation disposed of “substantially all” of its assets. A corporation will not be found to have sold “substantially all” of its assets when the remaining assets are substantial and profitable. Id. at 385.
Quantitative Analysis Explained
The quantitative prong of the “substantially all” analysis considers the portion of assets sold in comparison to those retained by the corporation. The assets for sale will be considered “substantially all” of the corporation’s assets if they are quantitatively necessary to the corporation.
A corporation will not be found to have sold “substantially all” of its assets if:
- It retained other significant assets.
- The retained assets have a strong record of profitability.
- It still expects healthy future profits and growth.
The percentage of assets sold is not outcome-determinative, but it is part of the analysis. The following cases further shed light on how the quantitative analysis may be applied.
- Hollinger Inc. v. Hollinger Intern., Inc., 858 A.2d 342 (Del. Ch. 2004) — The Delaware Court of Chancery found that an international newspaper company’s sale of one of its most profitable and prestigious divisions (56% to 57% of the company’s asset value) did not satisfy the quantitative test because the surviving company would continue as a profitable enterprise even after the sale. Id. at 380.
- This conclusion was informed, in part, by the fact that the division sold accounted for: (1) less than half of the company’s revenue during the last three years; (2) less than 50% of the company’s earnings and book value; and (3) a declining percentage of the company’s EBITDA. Id. at 380-82.
- In addition, the remaining business included more than 100 newspapers, and one remaining division had been valued at $950 million. Id. at 379-80.
- Thorpe v. Cerbco, Inc., 1995 WL 478954 (Del. Ch. Aug. 9, 1995) — The Court of Chancery held that the company’s sale of its subsidiary constituted the disposition of “substantially all” of its assets because the subsidiary constituted 68% of the company’s assets and was the primary profitable segment of the company. 1995 WL 478954, at *9-10, overruled on other grounds by 676 A.2d 436 (Del. 1996) (affirming the Court of Chancery’s conclusion that the subsidiary accounted for 68% of the company, thus its sale would constitute “substantially all” of the company’s assets).
Qualitative Analysis Explained
According to then-Vice Chancellor Strine (and former chief justice of the Delaware Supreme Court), the qualitative aspect of the “substantially all” analysis is “more than a tad unclear.” Hollinger, 858 A.2d at 383.
This particular piece of the “substantially all” analysis focuses on the economic qualities of the assets, and whether the transaction leaves stockholders with an investment that, in economic terms, is different from the one they currently possess. Id. That calculus is unconcerned with the aesthetic or symbolic value of any one asset or group of assets, and instead addresses the rational economic expectation of reasonable investors. The qualitative test is said to hinge on whether the transaction “strike[s] at the heart of the corporate existence.” Gimbel v. Signal Corp., Inc., 316 A.2d 599, 606 (Del. Ch. 1974).
To determine whether the assets are qualitatively substantial, a court will consider:
- The corporation’s purpose, as stated in its certificate of incorporation or charter.
- The business the corporation actually conducts. A corporation will have sold “substantially all” of its assets if the transaction fundamentally alters the existence and purpose of the corporation or leaves the corporation unable to conduct the business it was formed to conduct.
Cases to Help Explain How A Court May Apply the Qualitative Analysis:
- Hollinger Inc. v. Hollinger Intern., Inc., 858 A.2d 342 (Del. Ch. 2004) — The court found that the “trophy” nature of the assets being sold (a group of newspapers and magazines including the prestigious British newspaper, the Telegraph) was not a factor in determining qualitative value. Id. at 384. The vice chancellor opined that it is unreasonable to assume that stockholders “invested with the expectation that [the corporation] would retain [its prized asset] even if it could receive a price that was attractive in light of the projected cash flow” of the asset. Id. at 384-85.
- The Hollinger court looked at the company’s recent history of transactions: When Hollinger International went public, it did not own the Telegraph. During the course of its existence, Hollinger International has frequently bought and sold a wide variety of publications. In the CanWest sale, it disposed of a number of major newspapers in Canada — and diminished its assets by half — all without a stockholder vote. That sale came on the heels of its departure from Australia and an American downsizing. Thus, no investor in Hollinger International would assume that any of its assets were sacrosanct. It “can be said that ... acquisitions and dispositions [of independent branches of Hollinger International’s business] have become part of the [company’s] ordinary course of business.” Hollinger, 858 A.2d at 384 (quoting Gimbel, 316 A.2d at 608).
- Katz v. Bregman, 431 A.2d 1274, 1276 (Del. Ch. 1981) — The court held that the company’s sale of 51% of its assets constituted “substantially all” of its total assets because the company deviated from its principal purpose and abandoned its historically profitable line of business.
- Oberly v. Kirby, 592 A.2d 445, 464 (Del. 1991) — The court found that stockholder approval was not required when a company sold 80% of its assets as part of its usual business. The Delaware Supreme Court held that while “unquestionably large,” the securities assets sold did not have an impact on the existence and purpose of the corporation because the company existed to hold and sell investment securities and donate profits to charity.
In attempting to reconcile the subjective and “unclear” analysis for determining whether a company has sold “substantially all” of its assets, the Court of Chancery in Hollinger stated: …when asset sales were deemed to involve substantially all of a corporation’s assets, the record always revealed great doubt about the viability of the business that would remain, primarily because the remaining operating assets were not profitable. But, if the portion of the business not sold constitutes a substantial, viable, ongoing component of the corporation, the sale is not subject to Section 271. Hollinger, 858 A.2d at 385 (internal quotation marks and citations omitted).
Given the complexities involved, it is important to consult and work closely with legal and financial advisors to help determine whether an asset sale involved “substantially all” of the corporation’s assets and requires stockholder approval.