Hariton v. Arco Electronics, Inc.

• Decision Date: 24 January 1963
• Citation: 188 A.2d 123,41 Del.Ch. 74
• Parties: Martin HARITON, Appellant, v. ARCO ELECTRONICS, INC., a Delaware corporation, Appellee.
• Court: Supreme Court of Delaware

Page 123

188 A.2d 123

41 Del.Ch. 74

Martin HARITON, Appellant, v. ARCO ELECTRONICS, INC., a Delaware corporation, Appellee.

Supreme Court of Delaware.

Jan. 24, 1963.

Appeal from an order of the Court of Chancery for New Castle County granting summary judgment for defendant and dismissing the complaint. Affirmed.

Irving Morris and J. A. Rosenthal, of Cohen & Morris, Wilmington, for appellant.

S. Samuel Arsht and Walter K. Stapleton, of Morris, Nichols, Arsht & Tunnell, Wilmington, for appellee.

SOUTHERLAND, Chief Justice, and WOLCOTT and TERRY, JJ., sitting.

SOUTHERLAND, Chief Justice.

This case involves a sale of assets under § 271 of the corporation law, 8 Del.C. It presents for decision the question presented, but not decided, in Heilbrunn v. Sun Chemical Corporation, Del., 150 A.2d 755. It may be stated as follows:

A sale of assets is effected under § 271 in consideration of shares of stock of the purchasing corporation. The agreement of sale embodies also a plan to dissolve the selling corporation and distribute the shares so received to the stockholders of the seller, so as to accomplish the same result as would be accomplished by a merger of the seller into the purchaser. Is the sale legal?

The facts are these:

The defendant Arco and Loral Electronics Corporation, a New York corporation, are both engaged, in somewhat different forms, in the electronic equipment business. In the summer of 1961 they negotiated for an amalgamation of the companies. As of October 27, 1961, they entered into a 'Reorganization Agreement and Plan.' The provisions of this Plan pertinent here are in substance as follows:

1. Arco agrees to sell all its assets to Loral in consideration (inter alia) of the issuance to it of 283,000 shares of Loral.

2. Arco agrees to call a stockholders meeting for the purpose of approving the Plan and the voluntary dissolution.

3. Arco agrees to distribute to its stockholders all the Loral shares received by it as a part of the complete liquidation of Arco.

At the Arco meeting all the stockholders voting (about 80%) approved the Plan. It was thereafter consummated.

Plaintiff, a stockholder who did not vote at the meeting, sued to enjoin the comsummation of the Plan on the grounds (1) that it was illegal, and (2) that it was unfair. The second ground was abandoned. Affidavits and documentary evidence were filed, and defendant moved for summary judgment and dismissal of the complaint. The Vice Chancellor granted the motion and plaintiff appeals.

The question before us we have stated above. Plaintiff's argument that the sale is illegal runs as follows:

The several steps taken here accomplish the same result as a merger of Arco into Loral. In a 'true' sale of assets, the stockholder of the seller retains the right to elect whether the selling company shall continue as a holding company. Moreover, the stockholder of the selling company is forced to accept an investment in a new enterprise without the right of appraisal granted under the merger statute. § 271 cannot therefore be legally combined with a dissolution proceeding under § 275 and a consequent distribution of the purchaser's stock. Such a proceeding is a misuse of the power granted under § 271, and a de facto merger results.

The foregoing is a brief summary of plaintiff's contention.

Plaintiff's contention that this sale has achieved the same result as a merger is plainly correct. The same contention was made to us in Heilbrunn v. Sun Chemical Corporation, Del., 150 A.2d 755. Accepting it as correct, we noted that this result is made possible by the overlapping scope of the merger statute and section 271, mentioned in Sterling v. Mayflower Hotel Corporation, 33 Del.Ch. 293, 93 A.2d 107, 38 A.L.R.2d 425. We also adverted to the increased use, in connection with corporate reorganization plans, of § 271 instead of the merger statute. Further, we observed that no Delaware case has held such procedure to be improper, and that two cases appear to assume its legality. Finch v. Warrior Cement Corporation, 16 Del.Ch. 44, 141 A. 54, and Argenbright v. Phoenix Finance Co., 21 Del.Ch. 288, 187 A. 124. But we were not required in the Heilbrunn case to decide the point.

We now hold that the reorganization here accomplished through § 271 and a mandatory plan of dissolution and distribution is legal. This is so because the...