Sale of Substantially All Corporate Assets

• Jurisdiction: Colorado,United States
• Citation: Vol. 16 No. 3 Pg. 455
• Pages: 455
• Publication year: 1987

16 Colo.Law. 455 Colorado Lawyer 1987.

1987, March, Pg. 455. Sale of Substantially All Corporate Assets

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Vol. 16, No. 3, Pg. 455

Sale of Substantially All Corporate Assets

by Scott M. Reed

Colorado, like most states, has a corporate statute requiring prior approval of any "sale, lease, exchange or other disposition of all or substantially all of the property and assets" of a Colorado corporation by holders of two-thirds of the shares of the corporation entitled to vote thereon if such disposition is "not in the usual and regular course of [the corporation's] business."(fn1) In addition, the Colorado Corporation Code provides that a shareholder of a Colorado corporation shall have the right to dissent from, and to obtain payment for shares in the event of, any sale, lease, exchange or other disposition of all or substantially all of the property and assets of the corporation not made in the usual or regular course of its business.(fn2)

The expense and inconvenience involved in holding a shareholders' meeting and affording dissenters' rights can be burdensome to a corporation, especially if the corporation is a public company subject to die proxy solicitation rules promulgated under the Securities Exchange Act of 1934.(fn3) Therefore, it is important for a Colorado corporation and its counsel to determine whether a given disposition of corporate assets is covered by the corporate sale of assets statute and die concomitant dissenters' rights provisions.

This article discusses the general principles that have been employed by courts in determining whether a corporate sale of assets statute will apply to a particular transaction. The article also discusses some unusual circumstances in which corporate sale of assets statutes have been invoked and examines certain peculiarities that have arisen in the application of these statutes to particular factual situations.

Not in the Regular Course of Business Requirement

In order for a disposition by a Colorado corporation to be subject to the provisions of the Colorado corporate sale of assets statute, it first must qualify as a disposition "not in the usual and regular course of [the corporation's] business"(fn4) (hereafter, "not in the course"). Several corporate sale of assets statutes from other jurisdictions, including Delaware,(fn5) do not contain an explicit requirement that a covered disposition be not in the usual and regular course of the corporation's business. However, case law construing these statutes has imposed an implicit "not in the course" requirement. Cases interpreting such statutes appear to emphasize this requirement even more than decisions construing corporate asset sale statutes that explicitly set forth such a requirement.(fn6)

In attempting to determine exactly what is in the "usual and regular course" of a corporation's business, some courts have examined the purpose clause contained in the disposing corporation's articles or certificate of incorporation.(fn7) However, more recent decisions have emphasized the business actually being conducted by the corporation rather than the corporate purpose provision of its charter.(fn8) Corporate charter provisions allowing a corporation to engage in any activity permitted under the applicable state corporate law favors looking at the corporation's actual business rather than the powers enumerated in its charter. Otherwise, a corporation arguably could engage in any disposition of its assets in its usual and regular course of business without obtaining shareholder approval.

One situation that frequently occurs in connection with the "not in the course" requirement is the disposition of a large real estate property by a corporation engaged in the real estate business. Courts generally have excluded such transactions from the reach of corporate sale of assets statutes.(fn9) In these cases, as noted by one court, the sale of substantial corporate assets

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"far from hindering such a corporation, completely fulfills its goals."(fn10) Another issue that frequently arises in this context is whether a series of sales of a corporation's assets over a long period of time---sales that are individually small but substantial in the aggregate---constitutes a disposition outside the ordinary course of business. Courts generally have permitted such piecemeal sales to be accomplished without shareholder approval where the corporation in question has continued in business following the series of dispositions.(fn11)

Another factual circumstance resulting in judicial scrutiny has been the disposition by a corporation of a substantial portion of its assets to modernize of otherwise change the focus of the corporation's operations. Several decisions have permitted such dispositions to be accomplished without shareholder approval,(fn12) but one recent Delaware decision required shareholder approval where the disposition constituted "a radical departure from [the corporation's] historically successful line of business."(fn13)

The "not in the usual course" requirement also has been invoked to exclude substantial sales of entire businesses by corporate conglomerates from the reach of corporate sale of assets statutes.(fn14) The rationale for such exclusions is that the nature of a conglomerate's business specifically contemplates the acquisition and disposal of independent branches of its corporate business. It is unclear exactly how diversified a company must be before it can take advantage of the usual and regular course of business provisions contained in the statutes. The mere holding of one set of operating assets and another set of investment assets will not protect a disposition of one such group of assets from the provisions of a corporate sale of assets statute.(fn15)

Thus, even significant...