Weather Underground, Incorporated v. Navigation Catalyst Systems, Incorporated et al

Filing 186

APPENDIX re: 178 MOTION for Summary Judgment filed by Epic Media Group, Incorporated. by Epic Media Group, Incorporated (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13) (Delgado, William)

Exhibit 4

182 A.2d 22
40 Del.Ch. 326, 182 A.2d 22
(Cite as: 40 Del.Ch. 326, 182 A.2d 22)

Page 1

for the right which he had at common law to prevent a merger. 8 Del.C. § 271.
Court of Chancery of Delaware, New Castle
County.
Martin HARITON, Plaintiff,
v.
ARCO ELECTRONICS, INC., a Delaware corporation, Defendant.
June 13, 1962.
Action challenging validity of purchase of corporation's assets. The Chancery Court, New Castle
County, Short, V. C., held inter alia that where negotiations which ultimately led to transfer of assets
by first corporation to second corporation were conducted by representatives of the two corporations at
arm's length, and after sale first corporation continued in existence as corporate entity following exchange of securities for its assets for purpose of
winding up its affairs by distribution of second corporation's stock, transaction was not a de facto merger with consequent right of appraisal in dissenting
stockholder.
Defendant's motion for summary judgment
granted.
West Headnotes
[1] Corporations and Business Organizations
101
2671(1)
101 Corporations and Business Organizations
101X Mergers, Acquisitions, and Reorganizations
101X(B) Mergers and Consolidations
101k2666 Rights and Remedies of Dissenting Shareholders
101k2671 Proceedings for Appraisal
101k2671(1) k. In general. Most
Cited Cases
(Formerly 101k584)
The right of appraisal accorded to a dissenting
stockholder by merger statute is in compensation

[2] Corporations and Business Organizations
101
2717
101 Corporations and Business Organizations
101X Mergers, Acquisitions, and Reorganizations
101X(C) Sale, Lease, or Exchange of Substantially All Corporate Assets
101k2716 Rights and Remedies of Dissenting Shareholders
101k2717 k. In general. Most Cited
Cases
(Formerly 101k182.4(4))
At common law, a single dissenting stockholder could prevent a sale of all of assets of a corporation.
[3] Corporations and Business Organizations
101
2719
101 Corporations and Business Organizations
101X Mergers, Acquisitions, and Reorganizations
101X(C) Sale, Lease, or Exchange of Substantially All Corporate Assets
101k2716 Rights and Remedies of Dissenting Shareholders
101k2719 k. Proceedings for appraisal.
Most Cited Cases
(Formerly 101k584)
Where negotiations which ultimately led to
transfer of assets by first corporation to second corporation were conducted by representatives of the
two corporations at arm's length, and after sale first
corporation continued in existence as corporate entity following exchange of securities for its assets
for purpose of winding up its affairs by distribution
of second corporation's stock, transaction was not a
de facto merger with consequent right of appraisal
in dissenting stockholder. 8 Del.C. § 271.

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182 A.2d 22
40 Del.Ch. 326, 182 A.2d 22
(Cite as: 40 Del.Ch. 326, 182 A.2d 22)

[4] Corporations and Business Organizations
101
2251
101 Corporations and Business Organizations
101IX Corporate Powers and Liabilities
101IX(A) Extent and Exercise of Powers in
General
101k2251 k. Constitutional and statutory
provisions. Most Cited Cases
(Formerly 101k370(1))
The various sections of Delaware corporation
law conferring authority for corporate action are independent of each other and the given result may be
accomplished by proceeding under one section
which is not possible, or even forbidden under another.
**23 *327 Irving Morris and Joseph A. Rosenthal,
of Cohen & Morris, Wilmington, for plaintiff.
Samuel S. Arsht and Walter K. Stapleton, of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendant.
SHORT, Vice Chancellor.
Plaintiff is a stockholder of defendant Arco
Electronics, Inc., a Delaware corporation. The complaint challenges the validity of the purchase by
Loral Electronics Corporation, a New York corporation, of all the assets of Arco. Two causes of action are asserted, namely (1) that the transaction is
unfair to Arco stockholders, and (2) that the transaction constituted a de facto merger and is unlawful
since the merger provisions of the Delaware law
were not complied with.
Defendant has moved to dismiss the complaint
and for summary judgment on the ground that the
transaction was fair to Arco stockholders and was,
in fact, one of purchase and sale and not a merger.
Plaintiff now concedes that he is unable to sustain the charge of unfairness. The only issue before
the court, therefore, is whether the transaction was
by its nature a de facto merger with a consequent
right of appraisal in plaintiff.

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Prior to the transaction of which plaintiff complains Arco was principally engaged in the business
of the wholesale distribution of components or parts
for electronics and electrical equipment. It had outstanding 486,500 shares of Class A common stock
and 362,500 shares of Class B common stock. The
rights of the holders of the Class A and Class B
common stock differed only as to preferences in dividends. Arco's balance sheet as of September 30,
1961 shows total assets of $3,013,642. Its net income for the preceding year was $273,466.
Loral was engaged, primarily, in the research,
development and production of electronic equipment. Its balance sheet shows total assets of
$16,453,479. Its net income for the year ending
March 31, 1961 was $1,301,618.
In the summer of 1961 Arco commenced negotiations with Loral with a view to the purchase by
Loral of all of the assets of Arco in *328 exchange
for shares of Loral common stock. I think it fair to
say that the record establishes that the negotiations
which ultimately led to the transaction involved
were conducted by the representatives of the two
corporations at arms length. There is no suggestion
that any representative of Arco had any interest
whatever in Loral, or vice versa. In any event, Arco
rejected two offers made by Loral of a purchase
price based upon certain ratios of Loral shares for
Arco shares. Finally, on October 11, 1961, Loral
offered a purchase price based on the ratio of one
share of Loral common stock for three shares of
Arco common stock. This offer was accepted by the
representatives of Arco on October 24, 1961 and an
agreement for the purchase was entered into
between Loral and Arco on October 27, 1961. This
agreement provides, among other things, as follows:
1. Arco will convey and transfer to Loral all of
its assets and property of every kind, tangible and
intangible; and will grant to Loral the use of its
name and slogans.
2. Loral will assume and pay all of Arco's debts

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182 A.2d 22
40 Del.Ch. 326, 182 A.2d 22
(Cite as: 40 Del.Ch. 326, 182 A.2d 22)

and liabilities.
3. Loral will issue to Arco 283,000 shares of its
common stock.
4. Upon the closing of the transaction Arco will
dissolve and distribute to its shareholders, pro rata,
the shares of the common stock of Loral.
5. Arco will call a meeting of its stockholders
to be held December 21, 1961 to authorize and approve the conveyance and delivery of all the assets
of Arco to Loral.
6. After the closing date Arco will not engage
in any business or activity except **24 as may be
required to complete the liquidation and dissolution
of Arco.
Pursuant to its undertaking in the agreement for
purchase and sale Arco caused a special meeting of
its stockholders to be called for December 27,
1961. The notice of such meeting set forth three
specific purposes therefor: (1) to vote upon a proposal to ratify the agreement of purchase and sale, a
copy of which was attached to the notice; (2) to
vote upon a proposal to change the name of the corporation; and (3) if Proposals (1) and (2) should be
adopted, to vote *329 upon a proposal to liquidate
and dissolve the corporation and to distribute the
Loral shares to Arco shareholders. Proxies for this
special meeting were not solicited. At the meeting
652,050 shares were voted in favor of the sale and
none against. The proposals to change the name of
the corporation and to dissolve it and distribute the
Loral stock were also approved. The transaction
was thereafter consummated.
Plaintiff contends that the transaction, though
in form a sale of assets of Arco, is in substance and
effect a merger, and that it is unlawful because the
merger statute has not been complied with, thereby
depriving plaintiff of his right of appraisal.
Defendant contends that since all the formalities of a sale of assets pursuant to 8 Del.C. § 271
have been complied with the transaction is in fact a

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sale of assets and not a merger. In this connection it
is to be noted that plaintiff nowhere allege or claim
that defendant has not complied to the letter with
the provisions of said section.
The question here presented is one which has
not been heretofore passed upon by any court in
this state. In Heilbrunn v. Sun Chemical Corporation, Del., 150 A.2d 755, the Supreme Court was
called upon to determine whether or not a stockholder of the purchasing corporation could, in circumstances like those here presented, obtain relief
on the theory of a de facto merger. The court held
that relief was not available to such a stockholder.
It expressly observed that the question here presented was not before the court for determination. It
pointed out also that while Delaware does not grant
appraisal rights to a stockholder dissenting from a
sale, citing Argenbright v. Phoenix Finance Co., 21
Del.Ch. 288, 187 A. 124, and Finch v. Warrior Cement Corp., 16 Del.Ch. 44, 141 A. 54, those cases
are distinguishable from the facts here presented,
‘because dissolution of the seller and distribution of
the stock of the purchaser were not required as a
part of the sale in either case.’ In speaking of the
form of the transaction the Supreme Court observes:
‘The argument that the result of this transaction
is substantially the same as the result that would
have followed a merger may be readily accepted.
As plaintiffs correctly say, the *330 Ansbacher enterprise [seller] is continued in altered form as a
part of Sun [purchaser]. This is ordinarily a typical
characteristic of a merger. Sterling v. Mayflower
Hotel Corp., 33 Del. 293, 303, 93 A.2d 107, 38
A.L.R.2d 425. Moreover the plan of reorganization
requires the dissolution of Ansbacher and the distribution to its stockholders of the Sun stock received by it for the assets. As a part of the plan, the
Ansbacher stockholders are compelled to receive
Sun stock. From the viewpoint of Ansbacher, the
result is the same as if Ansbacher had formally
merged into Sun.
‘This result is made possible, of course, by the

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182 A.2d 22
40 Del.Ch. 326, 182 A.2d 22
(Cite as: 40 Del.Ch. 326, 182 A.2d 22)

overlapping scope of the merger statute and the
statute authorizing the sale of all the corporate assets. This possibility of overlapping was noticed in
our opinion in the Mayflower case.
‘There is nothing new about such a result. For
many years drafters of plans of corporate reorganization have increasingly resorted to the use of the
sale-of-assets method in preference to **25 the
method by merger. Historically at least, there were
reasons for this quite apart from the avoidance of
the appraisal right given to stockholders dissenting
from a merger.’
Though it is said in the Heilbrunn case that the
doctrine of de facto merger has been recognized in
Delaware, it is to be noted that in each of the cases
cited as recognizing the doctrine, namely, Drug,
Inc. v. Hunt, 35 Del. 339, 168 A. 87 and Finch v.
Warrior Cement Corp., supra, there was a failure to
comply with the statute governing sale of assets. In
both cases the sales agreement required delivery of
the shares of the purchasing corporation to be made
directly to the shareholders of the selling corporation. It was, of course, held in each case that no
consideration passed to the selling corporation and
that therefore the transaction did not constitute a
sale of the assets of the selling corporation to the
purchasing corporation. No such failure to comply
with the provisions of the sale of assets statute is
present in this case. On the contrary, as heretofore
observed there was a literal compliance with the
terms of the statute by this defendant.
The doctrine of de facto merger in comparable
circumstances has been recognized and applied by
the Pennsylvania courts, both *331 state and federal. Lauman v. Lebanon Valley Railroad Co., 30
Pa. 42; Marks v. Autocar Co., D.C., 153 F.Supp.
768; Farris v. Glen Alden Corporation, 393 Pa. 427,
143 A.2d 25. The two cases last cited are founded
upon the holding in the case first cited which was
decided on common law principles. The basis for
the holding in the Lauman case is not at all clear.
The transaction involved was a merger of two railroads and the special Pennsylvania statute authoriz-

Page 4

ing the merger made no provision for a dissenting
shareholder to be allowed the fair value of his
shares. The theory of the court's holding was to the
effect that a shareholder could not be compelled to
exchange his shares for stock in a new corporation
since to do so would be to deprive him of his property without due process of law. The later
Pennsylvania cases adopt the de facto merger approach and stress the requirement of dissolution and
distribution of the purchaser's stock among the
seller's shareholders. The Farris case demonstrates
the length to which the Pennsylvania courts have
gone in applying this principle. It was there applied
in favor of a stockholder of the purchasing corporation, an application which our Supreme Court expressly rejected in Heilbrunn.
[1][2] The right of appraisal accorded to a dissenting stockholder by the merger statutes is in
compensation for the right which he had at common
law to prevent a merger. Chicago Corporation v.
Munds, 20 Del.Ch. 142, 172 A. 452. At common
law a single dissenting stockholder could also prevent a sale of all of the assets of a corporation. 18
C.J.S. Corporations § 515, p. 1194. The Legislatures of many states have seen fit to grant the appraisal right to a dissenting stockholder not only
under the merger statutes but as well under the sale
of assets statutes. Our Legislature has seen fit to expressly grant the appraisal right only under the merger statutes. This difference in treatment of the
rights of dissenting stockholders may well have
been deliberate, in order ‘to allow even greater
freedom of action to corporate majorities in arranging combinations than is possible under the merger statutes.’ 72 Harv.L.Rev. 1132, ‘The Right of
Shareholders Dissenting From Corporate Combinations To Demand Cash Payment For Their Shares.’
[3] While plaintiff's contention that the doctrine of de facto merger should be applied in the
present circumstances is not without *332 appeal,
the subject is one which, in my opinion, is within
the legislative domain. Moreover it is difficult to
differentiate between a case such as the present and

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182 A.2d 22
40 Del.Ch. 326, 182 A.2d 22
(Cite as: 40 Del.Ch. 326, 182 A.2d 22)

one where the reorganization plan contemplates the
ultimate dissolution of the selling corporation but
does not formally require such procedure in express
terms. **26 The Supreme Court of Iowa in Graeser
v. Phoenix Finance Co., 218 Iowa 1112, 254 N.W.
859, wherein the court considered the identical state
of facts which were presented to this court in Argenbright v. Phoenix Finance Co., supra, had this to
say: ‘We think the evidence fairly shows that, while
the plan pursued contemplated the ultimate dissolution of the old Phoenix Corporations, this was not
inconsistent with the sale of their corporate assets
to the Phoenix Finance Corporation, in accordance
with the provisions of the Delaware statute. * * *
Under the agreements thus made, the cash, stock,
and securities of Phoenix Finance Corporation,
which were given in exchange for the assets of the
St. Louis and Des Moines companies, became the
property of these respective companies, and these
corporations did not cease to exist, as would be the
necessary result of a consolidation, but still continued in existence as corporate entities.’ By the same
token, Arco continued in existence as a corporate
entity following the exchange of securities for its
assets. The fact that it continued corporate existence only for the purpose of winding up its affairs
by the distribution of Loral stock is, in my mind, of
little consequence. The argument underlying the applicability of the doctrine of de facto merger,
namely, that the stockholder is forced against his
will to accept a new investment in an enterprise foreign to that of which he was a part has little pertinency. The right of the corporation to sell all of its
assets for stock in another corporation was expressly accorded to Arco by § 271 of Title 8, Del.C.
The stockholder was, in contemplation of law,
aware of this right when he acquired his stock. He
was also aware of the fact that the situation might
develop whereby he would be ultimately forced to
accept a new investment, as would have been the
case here had the resolution authorizing dissolution
followed consummation of the sale. Argenbright v.
Phoenix Finance Co., supra; Finch v. Warrior Cement Corp., supra. Inclusion of the condition in the
sale agreement does not in any way add to his posi-

Page 5

tion to complain.
*333 [4] There is authority in decisions of
courts of this state for the proposition that the various sections of the Delaware Corporation Law conferring authority for corporate action are independent of each other and that a given result may be accomplished by proceeding under one section which
is not possible, or is even forbidden under another.
For example, dividends which have accrued to preferred stockholders may not be eliminated by an
amendment to the corporate charter under § 242,
Title 8. Keller v. Wilson & Co., 21 Del.Ch. 391,
190 A. 115. On the other hand, such accrued dividends may be eliminated by a merger between the
corporation and a wholly owned subsidiary. Federal United Corporation v. Havender, 24 Del.Ch.
318, 11 A.2d 331; Hottenstein v. York Ice Machinery Corp., D.C.Del., 45 F.Supp. 436, Id., 3 Cir.,
136 F.2d 944. In Langfelder v. Universal Laboratories, D.C., 68 F.Supp. 209, Judge Leahy commented upon these holdings as follows:
‘* * * Havender v. Federal United Corporation,
Del.Sup., 11 A.2d 331 and Hottenstein v. York Ice
Machinery Corp., D.C.Del., 45 F.Supp. 436; Id., 3
Cir., 136 F.2d 944 hold that in Delaware a parent
may merge with a wholly owned subsidiary and
thereby cancel old preferred stock and the rights of
the holders thereof to the unpaid, accumulated dividends, by substituting in lieu thereof stocks of the
surviving corporation. Under Delaware law, accrued dividends after the passage of time mature into a debt and can not be eliminated by an amendment to the corporate charter under Sec. 26 of the
Delaware Corporation Law, Rev.Code 1935, §
2058. But the right to be paid in full for such dividends, notwithstanding provisions in the charter
contract, may be eliminated by means of a merger
which meets the standard of fairness. The rationale
is that a merger is an act of independent legal significance, and when it meets the requirements of fairness and all other **27 statutory requirements, the
merger is valid and not subordinate or dependent
upon any other section of the Delaware Corporation

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182 A.2d 22
40 Del.Ch. 326, 182 A.2d 22
(Cite as: 40 Del.Ch. 326, 182 A.2d 22)

Law.’

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END OF DOCUMENT

In a footnote to Judge Leahy's opinion the following comment appears:
‘The text is but a particularization of the general theory of the Delaware Corporation Law that action taken pursuant to *334 the authority of the
various sections of that law constitute acts of independent legal significance and their validity is not
dependent on other sections of the Act. Havender v.
Federal United Corporation proves the correctness
of this interpretation. Under Keller v. Wilson & Co.
accrued dividends are regarded as matured rights
and must be paid. But, this does not prevent a merger, good under the provisions of Sec. 59, from
having the incidental effect of wiping out such dividend rights, i. e., Sec. 59 is complete in itself and
is not dependent upon any other section, absent
fraud. The same thing is true with most other sections of the Corporation Law.’
The situation posed by the present case is even
stronger than that presented in the Havender and
York Ice cases. In those cases the court permitted
the circumvention of matured rights by proceeding
under the merger statute. Here, the stockholder has
no rights unless another and independent statute is
invoked to create a right. A holding in the stockholder's favor would be directly contrary to the theory of the cited cases.
I conclude that the transaction complained of
was not a de facto merger, either in the sense that
there was a failure to comply with one or more of
the requirements of § 271 of the Delaware Corporation Law, or that the result accomplished was in effect a merger entitling plaintiff to a right of appraisal.
Defendant's motion for summary judgment is
granted. Order on notice.
Del.Ch. 1962
Hariton v. Arco Electronics, Inc.
40 Del.Ch. 326, 182 A.2d 22

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