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In Castle Tire Disposal v. Liberty Tire Services of Ohio, (Del. Ch.; 9/26), Vice Chancellor Will addressed a seller’s claim that a third party’s purchase of a buyer’s indirect parent was a “change of control” of the buyer that triggered an obligation to make a contingent value payment to the seller under the terms of an asset purchase agreement. Citing the language of the agreement and the principle of corporate separateness, the Vice Chancellor rejected that argument.

Under the terms of the asset purchase agreement, the seller was entitled to a contingent value payment upon the occurrence of a change of control, which the agreement defined as follows:

[T]he occurrence of any of the following events: (i) an acquisition of Buyer (or its successor) by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of any Seller), or (ii) a sale of all or substantially all of the Assets (collectively, a “Merger”), so long as in either case Buyer’s equityholders of record as of immediately following the Closing will, immediately after such Merger, hold less than fifty percent (50%) of the voting power of the surviving or acquiring entity.

Vice Chancellor Will observed that this language requires two events – a qualifying Merger and the requisite reduction in the voting power held by the buyer’s equityholders of record.  In order for there to be a qualifying merger, a transaction must involve either “an acquisition of Buyer” or “a sale of all or substantially all of the assets.”  She concluded that the transaction involving the third party’s acquisition of the buyer’s parent met neither of these criteria.

In rejecting the seller’s argument that the transaction with the buyer’s parent involved a sale of the buyer, she noted that the agreement limited a qualifying merger to the “acquisition of Buyer,” and defined that term quite specifically and in a manner that necessarily excluded other entities from the definition. She noted that Delaware corporate law is premised on the idea that “separate legal entities should be respected,” and that because the seller chose to contract with a specific legal entity, that distinction should not be disregarded.

She similarly rejected the seller’s contention that the acquisition of the buyer’s parent involved a sale of substantially all of the buyer’s assets. Again citing the principle of corporate separateness, the Vice Chancellor said that “’because a subsidiary is a separate entity, a parent and its subsidiary are not regarded as a single economic unit[.]’ The sale of a parent company’s stock is not a transfer of its downstream subsidiary’s assets.”

– John Jenkins