May 25, 2023

Del. Chancery Addresses “Substantially All” Issue in Asset Deal Challenge

Section 271 of the DGCL requires stockholder approval of a sale of “substantially all” the assets of a Delaware corporation.  While a lot of ink has been spilled by Delaware courts over the years in an effort to elucidate what that standard means, those efforts have been a mixed bag at best.  In the leading Delaware case, Gimbel v. Signal Companies, the Chancery Court said that the answer depended on “whether the sale of assets is quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation.”

There is a great deal of play in this standard, and it leads to widely divergent and unpredictable results. In fact, when I taught law school, I would always tell my students that, if they went into corporate law, they would be asked to research this issue and write memos on it. America’s law firms and law departments are extremely well stocked with such memos. The case law isn’t much help, so these memos invariably conclude with some mushy variation of “who knows?” — including the memo that the person who asked them to research this stuff wrote 20 years ago. 

Fortunately, there’s a recent bit of good news when it comes to deciphering Section 271. It comes in the form of an order that Chancellor McCormick issued earlier this week in Altieri v. Alexy, (Del. Ch.; 5/23). The case involved a challenge to cybersecurity firm Mandiant’s sale of its FireEye line of business. The plaintiff contended that the transaction involved substantially all of Mandiant’s assets, and from a quantitative perspective, the plaintiff’s claim appeared to be fairly strong:

In 2019 and 2020, the FireEye Business accounted for 62% and 57% of the Company’s overall revenue, respectively. Further, the Company’s Form 10-Q for the fiscal quarter ended June 30, 2021, listed $1 billion in goodwill, approximately $500 million of which is alleged to be attributable to the FireEye Business. The FireEye Business also had a strong social media presence relative to Mandiant’s other offerings.

However, Chancellor McCormick noted that when evaluating quantitative metrics, no one factor is necessarily dispositive. Instead, the deal “must be viewed in terms of its overall effect on the corporation, and there is no necessary quantifying percentage.” Applying this standard, she concluded that the FireEye sale didn’t satisfy the substantially all test, noting that the company’s public filings indicate total assets of approximately $3.2 billion as of December 2020 and $3.1 billion as of June 30, 2021, and that the $1.2 billion sale price represented less than 40% of each of those figures.

The Chancellor also concluded that the FireEye assets didn’t meet the substantially all test from a qualitative perspective:

When considered qualitatively, the Sale does not satisfy the substantially-all test. Although the FireEye Business was an important aspect of Mandiant, Plaintiff has not pled that it affects the “existence and purpose” of the Company. Mandiant was a cybersecurity company before the Sale. It is a cybersecurity company after the Sale. Although selling the FireEye Business may alter course in how the Company operates, the change is not qualitatively so significant as to “strike a blow” to Mandiant’s “heart. Although the Sale was out of the ordinary, it does not satisfy the “substantially all” test from a qualitative perspective.

If Chancellor McCormick ended her discussion there, we’d just have another bowl of judicial mush to add to the “substantially all” muddle.  Fortunately, she didn’t do that.  Instead, she walked through each of the significant Delaware decisions interpreting the “substantially all of the assets” standard and explained what distinguished this case from each of the other cases in a way that I think will actually be helpful to lawyers working their way through this issue. It’s worth noting that she managed to pull this off in an order that’s only 14 pages long, which is a pretty impressive accomplishment.

Have a safe and enjoyable holiday weekend! We’re taking the day off from blogging tomorrow, but we’ll be back on Tuesday.

John Jenkins