Delaware Chancery Court Clarifies What Constitutes a Sale of “Substantially All” Assets

In a recent decision, Chancellor Kathaleen McCormick of the Delaware Chancery Court examined what constitutes a sale of “substantially all” of a selling company’s assets for purposes of Section 271 of the Delaware General Corporation Law (DGCL), granting a company’s motion to dismiss a stockholder’s lawsuit alleging that a sale of the “crown jewel” of the company amounted to a sale of substantially all of its assets and accordingly required stockholder approval. Altieri v. Alexy, No. 2021-0946-KSJM (Del. Ch. May 22, 2023).

On June 2, 2021, cybersecurity company Mandiant, Inc. sold its FireEye business line that developed products to detect and prevent cyberattacks for $1.2 billion. Although Mandiant retained existing business lines focused on providing services to respond to cyberattacks, assess cybersecurity risks and perform security automation, the FireEye business had accounted for 62% and 57% of Mandiant’s overall revenue in 2019 and 2020, respectively, and constituted approximately 38% of its total assets. Mandiant’s board approved the sale but did not seek stockholder approval, and the company’s stock price dropped by 17.62% following the announcement of the sale. One of Mandiant’s stockholders sued the company and its board to void the sale, primarily claiming that it was a sale of “all or substantially all” of Mandiant’s assets and therefore required stockholder approval under DGCL Section 271.

The court analyzed this claim under the Gimbel test, which requires an evaluation of the quantitative and qualitative importance of the subject transaction in order to determine whether it “struck at the heart of the corporate existence and purpose.”[1] It ultimately determined that the sale in question did not meet either prong of the test. Examining first the quantitative aspects of the sale, the court held that it did not support a conclusion that Mandiant had sold substantially all of its assets. Even though the sale was for $1.2 billion, the FireEye business comprised only approximately 38% of Mandiant’s total assets. The court distinguished the sale from prior cases in which the Gimbel test had been met on quantitative grounds because each of the prior cases involved a sale of a company’s sole or primary income-producing asset that itself comprised 68–75% of that company’s total assets. The court then rejected the stockholder’s argument that the FireEye business was Mandiant’s primary income-producing asset because the stockholder had not “pled facts indicating that Mandiant is unable to generate income in FireEye’s absence.”

Next, the court assessed the qualitative factors of the sale. Although acknowledging that Mandiant’s sale of the FireEye business was “out of the ordinary” and “may alter course in how [Mandiant] operates,” the court followed the same line of reasoning in Hollinger to hold that the Gimbel test was still not met because the change to Mandiant’s corporate existence and purpose was not so significant as to “strike a blow” to Mandiant’s core business as a cybersecurity firm.[2] The court distinguished prior cases in which a sale had satisfied the Gimbel test primarily due to qualitative factors because Mandiant’s sale “did not represent a stark departure from [Mandiant’s] historic line of business.” Mandiant was at its core a cybersecurity company before the sale, and it remained a cybersecurity company with several existing business lines after the sale. Following the reasoning of Hollinger, the court concluded that Mandiant’s investors were still left with an investment in a cybersecurity company after the sale of the FireEye business, even assuming it had been the “crown jewel” of Mandiant’s overall business at the time of the sale.

A key takeaway from the quantitative analysis in this decision is its emphasis on the ratio of assets being sold as compared to the overall assets of the business. Even though the FireEye business was responsible for the vast majority of Mandiant’s overall revenue, it consisted of only about one-third of Mandiant’s overall assets. In the absence of facts to indicate that Mandiant could not generate income without the FireEye business, the ratio of assets being sold was dispositive to the court’s determination on the quantitative analysis of the Gimbel test. With respect to the court’s qualitative analysis, a significant takeaway is that the sale of a business line that may alter the course of a company’s operations or that is viewed as the “crown jewel” of its overall business will still not be deemed a sale of substantially all of the company’s assets so long as the company’s historic line of business remains largely intact. The net effect of this decision, therefore, is to narrow the circumstances in which a company’s stockholders may enjoy the right to approve such a sale under DGCL Section 271.

1 Gimbel v. Signal Companies, Inc., 316 A.2d 599, 606 (Del. Ch. 1974).

2 Hollinger Inc. v. Hollinger Int’l, Inc., 858 A.2d 342, 379 (Del. Ch. 2004).

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