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Katz v. Bregman - 431 A.2d 1274 (Del. Ch. 1981)

Rule:

If the sale is of assets quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation then it is beyond the power of the Board of Directors.

Facts:

During the last six months of 1980 the board of directors of Plant Industries, Inc. embarked on a course of action which resulted in the disposal of several unprofitable subsidiaries of the corporate defendant located in the United States. This was under the guidance of the individual defendant Robert B. Bregman, the present chief executive officer of such corporation. As a result of these sales, by the end of 1980, Plant Industries, Inc. disposed of a significant part of its unprofitable assets. Mr. Bregman, thereupon, proceeded on a course of action designed to dispose of a subsidiary of the corporate defendant known as Plant National (Quebec) Ltd., a business which constituted Plant Industries, Inc.'s entire business operation in Canada and allegedly constituted Plant's only income producing facility during the past four years. On April 2, 1981, Plant Industries, Inc. and Vulcan Industrial Packaging, Ltd. entered into a formal contract for the purchase and sale of Plant National (Quebec) despite a higher bid by Universal Drum Reconditioning Co. The plaintiff Hyman Katz, allegedly being the owner of approximately 170,000 shares of common stock of the defendant Plant Industries, Inc., sought to preliminarily enjoin the proposed sale between the aforementioned parties. In its complaint, the plaintiff alleged that the proposed sale constituted the sale of substantially all of Plant Industries, Inc.’s assets and because of that, the sale required not only the approval of such corporation's board of directors but also a resolution adopted by a majority of the outstanding stockholders of the corporation entitled to vote thereon at a meeting duly called upon at least twenty days' notice.

Issue:

Does the proposed sale of 51% of Plant Industries, Inc.’s shares constitute the sale of substantially all of its assets, and if it is, must the corporation’s board of directors obtain shareholder approval in order to enter into an asset purchase agreement?

Answer:

Yes

Conclusion:

The Court held at common law that a sale or all or substantially all of the assets of a corporation required unanimous vote of stockholders. In this case, the Court concluded that the proposed sale of Plant Industries, Inc.’s assets, which constituted over 51 percent of total assets and which generated approximately 45 percent of Plant Industries, Inc.’s 1980 net sales, would constitute a sale of substantially all of the corporation’s assets. Thus, Court issued an injunction to prevent consummation of sale at least until it had been approved by a majority of the outstanding stockholders of corporation entitled to vote at a meeting duly called on at least twenty days' notice.

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