DealLawyers.com Blog

Earlier this week, in Assad v. Clark, et al. (Del. Ch.; 11/26), in resolving cross-motions for summary judgment, Vice Chancellor David found that a company was required to distribute “all legally available assets” following a sale of substantially all of its assets pursuant to the terms of its certificate of incorporation. The company hadn’t planned to do that and had disclosed as much.

The asset purchase agreement permitted the company to retain net operating loss carryforwards, but the company otherwise did not retain any material non-cash assets after closing. When the company announced the transaction, it told the minority stockholders that the company did not intend to liquidate and its board of directors would instead “evaluate alternatives” to use the cash proceeds from the sale, including possible acquisitions of other operating businesses “without limitation as to industry.”

The information statement said:

The Company, and not its stockholders, will receive the proceeds from the [Asset Sale]. The Company Board intends to use the proceeds from the [Asset Sale] to identify opportunities to monetize its NOLs. The Company Board may consider acquisitions of operating businesses, without limitation as to industry. Subject to certain restrictive covenants contained in the [APA], following the Closing, where beneficial, the Company intends to apply AI and automation to improve the profitability of any business it acquires. The Company Board may also consider other uses of the proceeds, which could include a return of capital to stockholders.

The company had two classes of common stock, and its charter provided that, “In the event of a Liquidation Event […] the assets of the Corporation legally available for distribution to stockholders shall be distributed on an equal priority, pro rata basis to the holders of Common Stock.” It also defined “Liquidation Event” to include any “Asset Transfer,” which included “a sale, lease, exclusive license or other disposition of all or substantially all of the assets of the Corporation.”

The transaction was approved by the board and the company’s majority stockholders and closed in September. Two days after closing, a Class B common stockholder filed suit, alleging the company breached its charter by failing to distribute all assets legally available after closing and that its directors breached their fiduciary duties by causing the charter breach.

The parties stipulated that the sale constituted a sale of substantially all of the company’s assets, making it a liquidation event. Defendants argued that the provision didn’t trigger a distribution on a liquidation event, but instead set out how a distribution would occur if and when the company determined to make one as part of a liquidation event.

VC David disagreed. She noted that the provision says the assets “shall be distributed,” rather than using words like “when, as and if,” which appear elsewhere in the charter. She also noted that the charter contained another “equal treatment” provision, and that the two would be duplicative if it did not mandate the distribution.

– Meredith Ervine