Hariton v. Arco Electronics, Inc.
40 Del.Ch. 326, 182 A.2d 22 (Del.Ch. 1962)
Loral entered a deal with Arco
to buy all of Arco's assets in exchange for Loral stock.
After the transaction, Arco
was to dissolve and pass out the Loral stock to its shareholders.
Arco shareholders
unanimously approved the deal.
Hariton, an Arco shareholder
sued to stop the merger.
Hariton argued that the deal
was defacto merger between the two
companies. Therefore he should get appraisal rights.
Under Delaware law, when two
companies are involved in a merger, the shareholders get the right to
vote to approve the merger, and those that don't approve get the right
to sell their shares to the parent corporation at a fair price (aka appraisal
rights).
Arco argued that under Delaware
law, there is a statutory definition of a merger, and this transaction did not meet that
definition (instead it was a simple sale of assets under 8 Del.C. §271),
so there was no requirement to give the Arco shareholders appraisal
rights.
The Trial Court found for
Arco.
The Trial Court noted that
the right of appraisal was created
to compensate for the loss of the right under the common law to prevent a
merger.
Under the old common law,
mergers had to be unanimously approved. Under Delaware law, they only
had to be approved by a majority of shareholders.
The Court found that Hariton
was (or should have been) aware of §271 when he bought his stock. §271 expressly allows corporations to sell all of
their assets to another corporation in exchange of stock.
The Court found that since §271 allowed for Arco's transaction, and was a
different section than the merger Statute under Delaware
law, lawmakers could not have meant that deals like this one should be
treated as mergers.
