316 A.2d 599 (Del. Ch. 1974), aff'd, 316 A.2d 619 (Del. 1974)
This action was commenced on December 24, 1973 by plaintiff Gimbel, a stockholder of the Signal Companies, Inc. (“Signal”), as part of an investment group holding 2,400,000 shares representing 12% of the outstanding stock.1 The complaint seeks injunctive relief to prevent the consummation of the pending sale by Signal to Burmah Oil Incorporated (“Burmah”) of all of the outstanding capital stock of Signal Oil and Gas Company (“Signal Oil”), a wholly-owned subsidiary of Signal, for an effective sale price exceeding 480 million dollars.2
The sale was approved at a special meeting of the Board of Directors of Signal held on December 21, 1973.3 The agreement provides that the transaction will be consummated on January 15, 1974 or upon the obtaining of the necessary governmental consents, whichever occurs later, but in no event after February 15, 1974 unless mutually agreed.4 On December 24, 1973, counsel for Signal and Signal Oil represented to the Court that the parties would not consummate the transaction prior to the Court’s decision on the preliminary injunction application or January 15, 1974, whichever occurred first.5
The matter was set down for a hearing on plaintiff’s application for a preliminary injunction.6 Affidavits and depositions were submitted. The matter was briefed and a hearing was held on January 4, 1974.7 By agreement, additional affidavits were filed on January 7th and January 9th.8 This is the Court’s decision on plaintiff’s application for a preliminary injunction to prevent the sale of Signal Oil to Burmah pending trial on the merits.9
Signal or its predecessor was incorporated in the oil business in 1922.10 Beginning in 1952, Signal diversified its interests, acquiring a substantial stock interest in American President lines, Laura Scudders snack food business from 1957 to 1962, Garrett Corporation in 1964 engaged in aircraft, aerospace, and uranium enrichment, and Mack Trucks, Inc. in 1967.11 The oil and gas business was transferred to the Signal Oil subsidiary in 1970.12 According to figures in Signal’s 1972 annual report and September 30, 1973 quarterly report, Signal Oil represents about 26% of total assets, 41% of net worth, 15% of revenues, and 15% of earnings.
Prior to Burmah’s first contact on October 17, 1973, Signal had been negotiating a proposed merger with United Aircraft that fell through in September 1973.13 In connection with that transaction, DeGolyer and MacNaughton valued Signal Oil’s reserves as of June 30, 1973 at between 230 and 260 million dollars.14 Kenneth E. Hill valued the petroleum properties at 350 million dollars as of September 13, 1973.15 Negotiations with Burmah continued through November and early December.16 Burmah’s formal offer was communicated to Signal on December 18, 1973 and required acceptance on or before December 21, 1973.17 At the December 21 special meeting called on one and a half days’ notice, a handwritten outline was submitted and an oral presentation made; no updated evaluation of reserves was presented.18 Plaintiff’s expert Paul V. Keyser valued Signal Oil at 761 million dollars as of December 21, 1973, while Signal’s expert Hill valued it at 438 million dollars.19
Whether the proposed sale of all outstanding capital stock of Signal Oil and Gas Company to Burmah Oil Incorporated requires authorization by a majority of the outstanding stock of Signal Companies, Inc. pursuant to 8 Del.C. § 271(a)?20
Under 8 Del.C. § 271(a) a Delaware corporation may sell all or substantially all of its assets only when authorized by a majority of the outstanding stock entitled to vote.21 The statutory test examines both quantitative significance of the assets sold relative to the corporation as a whole and qualitative impact on the corporation's existence and purpose. A sale fails the test only when the assets are vital to operations and the transaction fundamentally alters the means by which the corporation accomplishes its objects.22
No. Signal Oil constitutes approximately twenty-six percent of Signal's total assets, forty-one percent of net worth, and fifteen percent of revenues and earnings according to the figures in the 1972 annual report and the September 30, 1973 quarterly report.23
Substituting the plaintiff's expert valuation of seven hundred sixty-one million dollars for the oil and gas properties still leaves the sold assets below half the value of Signal's total holdings.24 Qualitatively, Signal began as an oil company in 1922 but after 1952 systematically diversified by acquiring American President Lines, Laura Scudders, Garrett Corporation, and Mack Trucks, transferring the oil business to a subsidiary in 1970. The sale of one independent branch therefore does not destroy the means to accomplish the corporation's current multi-industry purpose.25
The transaction is consistent with the pattern of acquisitions and dispositions that have become ordinary for this conglomerate.26 The processes of corporate democracy have already operated over the years of diversification.27
The sale of Signal Oil stock does not constitute a sale of all or substantially all of Signal's assets and therefore does not require stockholder authorization under 8 Del.C. § 271(a).28
Whether the Signal Board of Directors acted recklessly in approving the sale of Signal Oil and Gas Company to Burmah Oil Incorporated for an effective price exceeding 480 million dollars so as to justify entry of a preliminary injunction?29
Directors enjoy the presumption of the business judgment rule that they acted in good faith and on an informed basis when approving a sale of corporate assets.30 The presumption is overcome only when the plaintiff demonstrates that the price is so grossly inadequate as to display reckless indifference to shareholder interests. The presumption is also overcome when the directors failed to exercise reasonable deliberation because they lacked material information at the time of decision.31
Yes. Although twelve of fourteen directors attended the December 21 special meeting, the board as a whole possessed sophisticated business experience.32 Management presented the four-hundred-eighty-million-dollar transaction on one-and-a-half days' notice without an updated reserve valuation despite the intervening energy crisis and without exploring alternative buyers.33 The board received only a handwritten outline and an oral presentation that relied on the September 1973 Hill appraisal and the June 1973 DeGolyer and MacNaughton report. No fresh analysis was supplied even though oil prices had risen sharply.34
On the present record the plaintiff's expert values Signal Oil at seven hundred sixty-one million dollars while the defendants' expert values it at four hundred thirty-eight million dollars. This discrepancy is large enough to suggest that the directors may have approved a recklessly inadequate price without sufficient information.35 Because the quantitative and qualitative factors under section 271 do not require a stockholder vote, the only remaining question is whether this valuation gap supports a reasonable probability of success on the merits sufficient to tip the balance toward preliminary relief.36