January 21, 2006
Triangular Acquisitions After Strine's Opinion in Hollinger, Inc
Until July of 2004 most lawyers assumed that a controlled subs sale of of all its assets needed the vote of the parent corporation but not the parent corporation's shareholders. Strine change all that with dicta in the Hollinger case. He called it a "technical defense." The Delaware legislature attempted to be sympathetic to the holding rather than reject it by statute. This generated a mess. Delaware amended 271 to do two things: declare that a wholly owned and controlled subs assets were considered the parent's assets for application of the "substantially all" voting requirements of D.G.C.L. Sec. 271 and that a parent could drop down "substantially all" its assets into a sub without triggering a shareholder vote. The legislature should have affirmed the opposition on both: a sub is independent unless there are equitable grounds for collapsing structure and that a drop down is a transfer and needs a vote. The result is that the Hollinger dicta may still apply to partially owned subs and to wholly owned subs that merge into third parties (rather than sell their assets). This snake needed to be killed not nurtured. The Hollinger dicta puts into question all triangular acquisitions of whatever type unless it is reversed or strictly limited to asset acquisitions. If limited to asset acquisitions the holding will prefer triangular acquisitions that use statutory mergers over those that use asset acquisitions on an irrational ground.
On the merits, it is not technical if a transfer of substantially all the assets to the sub qualifies for a vote of the parents shareholders. A follow up transfer of the assets by the sub to a third party is a necessary consequence of the original drop down transfer. Moreover, the drop down transfer vote requirement protects both triangular mergers and triangular asset acquisitions. What we now have with the amendments to D.G.C.L. Sec. 271 and the Hollinger dicta is just another confusing complication of Delaware case law on acquisitions. The Delaware judges need to clean this entire area up.
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I'm not sure how many law students read the Business Law professors' blog, but this is a timely issue for some of them. The national Vale Moot Court Competition held at Widener in a few weeks has a complex corporate structure implicating s.271(c) when a subsidiary sells all of its assets, which arguably are substantially all of the parent's assets.
Prof. Jeff McFarland
Florida Coastal School of Law
Posted by: Jeff McFarland | Jan 23, 2006 12:59:21 PM
Business law is so interesting.
Posted by: Business Lawyer | Jan 23, 2006 3:41:58 PM