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Keywords

corporation
plaintiffdefendantcorporationcompliance

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Orzeck v. Englehart, 41 Del.Ch. 361, 195 A.2d 375

Facts

Bellanca Corporation, which had ceased its airplane manufacturing operations and become an empty shell, negotiated to purchase all the outstanding stock of seven California corporations engaged in the egg business. The purchase agreement included a total price of $5,150,000, to be paid in stock and other considerations. After the acquisition, Bellanca changed its name to Olson Brothers, Incorporated and began conducting the egg business, with the Olson brothers controlling its affairs.

Bellanca Corporation for many years was in the business of manufacturing airplanes. In recent years it ceased this business and had been used as a holding company by its president. It had in fact become an ‘empty shell’. For more than three years prior to March, 1961, it had engaged in no business operations, had been delisted by the American Stock Exchange, but had accumulated large losses available for Federal tax loss carry-over purposes.

Issue

Did the transaction between Bellanca Corporation and the California corporations constitute a de facto merger, thereby violating the merger provisions of the Delaware Corporation Law?

The complaint alleges three causes of action, viz., (1) that the transaction set forth above constitutes a de facto merger, and is accordingly unlawful since the merger provisions of the Delaware Corporation Law were not complied with; (2) that the payment to Morris Sullivan as a ‘finder's fee’ was excessive and a waste of corporate assets, and (3) that certain stock options granted to some of the individual defendants were invalid.

Rule

The Delaware Corporation Law allows for the purchase of stock by one corporation from another without constituting a merger, provided that the transaction complies with the relevant statutory provisions.

The basic fact in this cause is that the transaction complained of was the purchase by one corporation of all of the stock of seven other corporations. On its face there is nothing illegal in this. On the contrary, it is specifically authorized by 8 Del.C. § 123.

Analysis

The court analyzed the transaction under the Delaware Corporation Law, emphasizing that the purchase of stock does not equate to a merger. It noted that the purchasing corporation merely becomes a stockholder and does not gain ownership of the assets of the other corporation. The court distinguished this case from others where a de facto merger was found, asserting that the actions taken were legally independent and valid under the law.

Despite this, however, plaintiff argues that the end result of the acquisition by Bellanca of all the stock of the California corporations has been to merge Bellanca into them, and put Bellanca in the egg business. Thus, it is argued, a merger has in fact taken place of the apparent purchasing corporation into the apparent selling corporation without compliance with the merger provisions of the Delaware Corporation Law, including the right of a dissenting stockholder to withdraw from the enterprise and be paid the value of his stock.

Conclusion

The court affirmed the lower court's ruling, concluding that the transaction was a valid purchase of stock and did not constitute a de facto merger, thus upholding the legality of the acquisition.

The judgment below is affirmed.

Who won?

Olson Brothers, Incorporated prevailed in the case because the court found that the stock purchase was valid under Delaware law and did not constitute a merger.

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