M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Wednesday, May 4, 2011

Sale of substantially all the assets and the step-transaction doctrine

In Liberty Media Corp v Bank of New York Mellon Trust, Vice Chancellor Laster explained the step-transaction doctrine as they apply to claims that a series of separate asset sales over a length of time.  At issue is whether such sales can be aggregated in order to substantiate a claim that the corporation has engaged in a coordinated series of sales of assets of the corporation that would have the effect of shifting assets away from the corporation to the detriment of bondholders, and in effect be a sale of substantially of all the assets of the corporation. 

In order to determine whether Liberty Media's strategy of engaging in acquisitions and spin-offs was effectively a sale of substantially all the assets, the court applied the step-transaction doctrine:  

The step-transaction doctrine applies if the component transactions meet one of three tests.  

 *   First, under the “end result test,” the doctrine will be invoked “if it appears that a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result.”   Id. (internal quotation omitted).  

 *   Second, under the “interdependence test,” transactions will be treated as one if “the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series.” Id. (internal quotation omitted).  

 *   The third and “most restrictive alternative is the binding-commitment test under which a series of transactions are combined only if, at the time the first step is entered into, there was a binding commitment to undertake the later steps.”

 Applying this doctrine to the facts in the case, Vice Chancellor Laster concluded that one could not aggregate the transactions into a single asset sale for purposes of determining whether they constituted a sale of substantially all the assets. 

Following a consistent business strategy and deploying signature M&A tactics does not transmogrify seven years of discrete, context-specific business decisions into a single transaction.  Liberty has engaged in acquisitions and divestitures as part of the regular course of its business.  Liberty did not engage in an “overall scheme” to sell substantially all of its assets.  On the facts of this case, aggregation is not appropriate.  

The Trustee recognizes that the Capital Splitoff, viewed in isolation, does not constitute a disposition of substantially all of Liberty’s assets.  Accordingly, Liberty is entitled to a declaration that the Capital Splitoff [is not a sale of substantially all the assets of the corporation.]

 -bjmq

(H/T Morris James)

http://lawprofessors.typepad.com/mergers/2011/05/sale-of-substantially-all-the-assets-and-the-step-transaction-doctrine.html

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