June 1, 2009
DGCL 303 and Sales of Substantially-All-the-Assets in Bankruptcy
Almost lost in the big news of the day that GM has
filed for bankruptcy (bankruptcy petition here)
was the announcement that over the weekend Judge Gonzalez approved the sale of
substantially all the assets of Chrysler in bankruptcy to Fiat for
approximately $2 billion. The judge’s
ruling is here.
The sale will close quickly and New
Chrysler will emerge to try to rebuild the American auto industry. But wait a minute. A sale of substantially all the assets of
Chrysler? Isn’t there supposed to be a
shareholder vote? Well, yes, but no. (For purposes of this example, I’m assuming
Chrysler is a corporation, which it’s not.
It’s an LLC.)
First, there is the issue of Federal preemption by the bankruptcy code. Second, the Delaware corporate code Section 303 recognizes that in bankruptcy a judge may order a sale of assets or a merger and that such a sale/merger occur without further action by directors or stockholders. Any sale or merger ordered in bankruptcy also eliminates appraisal rights to the extent there might have been any. Although a sale of substantially all the assets of Chrysler to Fiat in January (so, pre-bankruptcy) would have required a vote of the Chrysler stockholders. The same transaction in bankruptcy, if approved by the bankruptcy judge go through without a vote, however.
In Chrysler’s case, the issue of a shareholder approval would not likely have been a problem given that it is (was) controlled by Cerberus. However, in a corporate setting where share ownership is more widely distributed the decision whether to do a transaction in or out of bankruptcy may at times turn on questions of shareholder approval.
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