What Constitutes a Sale of “All or Substantially All” of a Company’s Assets

Gail Weinstein is Senior Counsel, Amber Banks and Roy Tannenbaum are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Ms. Banks, Mr. Tannenbaum, Matthew V. Soran, Andrea Gede-Lange, and David L. Shaw and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo, and Guhan Subramanian.

In Altieri v. Alexy (May 22, 2023), the Delaware Court of Chancery dismissed a lawsuit that challenged the sale by Mandiant, Inc. (the “Company”) of its “crown jewel” division based on the Company’s failure to obtain stockholder approval of the transaction. The plaintiff claimed that a vote was required, under DGCL Section 271, because the sale constituted a sale of “all or substantially all” of the Company’s assets. The court determined that the sale did not constitute a sale of all or substantially all of the Company’s assets and therefore a vote was not required. The decision is consistent with past precedent and breaks no new ground—but it is useful as a reminder of the facts-intensive and nuanced nature of the judicial analysis as to what constitutes a sale of all or substantially all of a company’s assets, and provides helpful guidance as to the factors the court views as most critical in making the determination.

Key Points

  • Amplification of what constitutes a sale of “all or substantially all” of a company’s assets. There has been relatively sparse judicial development as to what constitutes a sale of all or substantially all the assets of a corporation. Previous cases have established that there are no bright line tests; and that the concept does not include all significant asset sales, but only those that, based on a combination of quantitative and qualitative factors, “strike at the heart of [the company’s] corporate existence and purpose.” Practitioners generally have considered judicial precedent as creating a significant degree of unpredictability on this issue.
  • Fundamental change in the type of business versus a significant change in how the business is operated. In Mandiant, the Company’s sale of its primary operating division altered the course of the Company’s operations—changing the Company from a business focused primarily on cybersecurity detection and prevention services to a business providing only cybersecurity response services. The court emphasized that, notwithstanding the significant change in operations, both before and after the sale the Company was “a cybersecurity company.” The critical factor for the court appeared to be that the Company, which had grown through regular acquisitions and dispositions of various businesses, was returning to a focus on what had been “a historical part of its business.”
  • Issue arises in the non-public company context as well. Cases on the issue whether a transaction constitutes a sale of all or substantially all the assets are relatively rare. The issue may arise, as in Mandiant, in the context of the requirement under DGCL Section 271 for a stockholder vote for a sale of all or substantially all of a company’s assets. The issue also may arise in connection with a preferred stockholder’s rights in a charter; other contractual rights of investors (such as a veto or consent right) or the company (such as a drag-along right) in a stockholders’ agreement or LLC operating agreement; a lender’s negative covenants under an indenture; or a financial advisor’s engagement letter with respect to the types of transactions that trigger payment of advisory fees.

Background. In 2004, Kevin Mandia formed the Company to provide “incident response and consulting services” to companies that experience data security breaches (the “Old Mandiant Business”). The Old Mandiant Business pursued growth through mergers and acquisitions. In 2013, the Company combined with FireEye, Inc., which created products designed to detect and prevent cyberattacks (the “FireEye Business”). The Company then could both detect attacks and respond to them. In 2016, the Company acquired other businesses, such as one that gathered information about cyberhacker groups and one that provided security automation technology.

From 2016 to 2020, the Company was growing and the FireEye Business represented 62% of the Company’s revenues. In 2021, however, the board projected that the FireEye Business would decline as a percentage of overall revenue (down to 42% in 2023). In June 2021, the Company sold the FireEye Business to Symphony Technology Group for $1.2 billion. The Company did not seek stockholder approval of the Sale. Mandia described the Sale as an opportunity to let the Company “concentrate exclusively on scaling [its] intelligence and frontline expertise”; and stated that the FireEye Business would fare better with STG as STG was focused on growing innovative market leaders in software and cybersecurity.

In reaction to the Sale, the Company’s stock price dropped 17.62%. Analysts expressed concern about the Company’s lower gross margin and stability absent the FireEye Business. In November 2021, a stockholder brought suit against the Company and the board, claiming that the Sale should be voided, and that the directors had breached their fiduciary duties as they had knowingly failed to put the Sale to a stockholder vote although it was a sale of all or substantially all of the Company’s assets. Following briefing and oral argument, Chancellor Kathaleen St. J. McCormick found that the Sale was not a sale of all or substantially all of the Company’s assets, and granted the defendants’ motion to dismiss.


DGCL Section 271. The statute does not provide any bright line test, mathematical formula, or other guidance as to what constitutes a sale of all or substantially all of a company’s assets. Under the leading decision, Gimbel v. Signal (Ct. Ch. 1974), the determination depends on both “the quantitative and qualitative importance of the transaction at issue….” In Mandiant, the court reiterated that “[t]he purpose of the Gimbel analysis is to determine whether the transaction [at issue] struck at the heart of the corporate existence and purpose, in the sense that it involved the destruction of the means to accomplish the purpose or objects for the corporation was incorporated and actually performs.”

The quantitative test. When evaluating the quantitative metrics of a sale, the court has looked at the overall effect on the corporation of the transaction, and has considered data points such as the percentage of overall revenue and the percentage of book value that the sold assets represented, as well as the contribution of the assets sold to overall EBITDA and future earnings potential. In Mandiant, the FireEye Business accounted for 62% and 57% of the Company’s overall revenue in 2019 and 2020, respectively. At June 30, 2021, it represented about half of the Company’s goodwill. Also, it had a strong social media presence relative to the Company’s other offerings. These figures, the plaintiff contended, when paired with qualitative factors, were sufficient to satisfy the substantially-all test. The court noted that, in 2021, the board projected that the FireEye Business would decline as a percentage of overall revenue (to 48% and 42% in 2022 and 2023, respectively). The court also noted that, based on the Company’s Form 10-Q for the quarter ended June 30, 2021, the Sale price represented roughly 38% of the Company’s total assets as of December 2020 and June 2021. The court stated: “These percentages fall short of the substantially-all threshold from a quantitative perspective.”

The qualitative test. When evaluating the qualitative metrics of a sale, the court considers whether the sale is “out of the ordinary” and “substantially affect[s] the existence and purpose of the corporation.” The court focuses on “economic quality and, at most, on whether the transaction leaves the stockholders with an investment that in economic terms is qualitatively different….” The court held that the FireEye Business, while it was an “important aspect of Mandiant,” did not affect the “existence and purpose” of the Company. The court emphasized that both before and after the sale the Company was a “cybersecurity company,” even though the sale represented a significant alteration in the company’s operations. The change, while “important…[, was] not so qualitatively significant as to strike a blow to [the Company]’s heart.” The court viewed FireEye Business as an important part of the Company’s corporate identity, but not at “the heart of its existence and purpose.”

Review of precedential cases. Providing helpful clarity, the Chancellor explained how each of the cases the plaintiff cited (where the court found that there was a substantially-all sale) was distinguishable from the situation in Mandiant:

  • Katz v. Bregman (Ct. Ch. 1981)—shift from making steel drums to making plastic drums. In Katz, the company sold a business line that represented 51% of the its assets, 45% of its sales revenue, and 52% of its pre-tax net operating income. The court’s determination was not primarily based on these quantitative factors, however, but on qualitative factors. Qualitatively, the Chancellor stated in Mandiant, the sale in Katz constituted an effort by the company “to shift its overall business strategy by embarking on the manufacture of plastic drums that represented a radical departure from the company’s historically successful line of business, namely steel drums.” By contrast, the court wrote in Mandiant, the Sale by Mandiant “did not represent a stark departure from the Company’s historic line of business.” Rather, “[t]he Company was born from the fusion of FireEye with Old Mandiant, which focused on cybersecurity services. Mandiant had several businesses prior to the Sale, only one of which was the FireEye Business. The Sale was not qualitatively transformative for Mandiant.”
  • Winston v. Mandor (Del. Ch. 1997)—shift from holding and managing real property to holding real estate-related securities and mortgages. In this case, the issue arose with respect to a preferred stockholder’s contractual right to convert shares into a new security if the company sold all or substantially all of its assets. The assets that were sold represented 60% of the company’s net assets; and the sale shifted the company’s primary business from holding real property to holding real estate-related securities. The Chancellor stated in Mandiant that, by contrast, the Sale by Mandiant did not “fundamentally change[] its core practice in the cybersecurity space[; and] [m]oreover,… the FireEye Business indisputably constituted far less… of the Company’s net assets.”
  • Thorpe v. CERBCO (Ct. Ch. 1995) and B.S.F. v. Phila. Natl. Bank (Del. 1964)—sale of the primary income producing asset. In Thorpe, a pipeline service provider sold its subsidiary that provided pipelines services. The subsidiary constituted 68% of the company’s assets and was the primary income generating segment of the company. Post-sale, the holding company was left with a substantial amount of cash, a small subsidiary that was about to be liquidated, and a single operating company that was minimally profitable. In B.S.F., the issue arose out of a negative covenant in a debenture (controlled by Pennsylvania law) which prohibited the sale of all or substantially all of the borrower’s property. The company had sold a business that represented 75% of the company’ assets and that was the company’s only substantial income producing asset. The court wrote in Mandiant that, by contrast with these cases, the Sale by Mandiant, quantitatively, reflected metrics that were “much less compelling” and, qualitatively, differed in that Mandiant was not left “unable to generate income in FireEye’s absence; indeed, the Company generated total revenues of approximately $121.97 million in the fiscal quarter following the Sale.”

Similarity to Hollinger. The court found that the Sale by Mandiant was similar to the sale in Hollinger v. Hollinger Intl. (Ct. Ch. 2004). In Hollinger, the court found that the sale did not meet the substantially-all test. In that case, a global newspaper publishing company sold its crown jewel newspaper. The court emphasized that, post-sale it remained a newspaper company with profitable operating divisions. While the assets sold represented about 57% of the company’s total asset value, they represented less than half the company’s revenues during the prior three years, less than half the company’s earnings and book value at the time of the sale, and a declining percentage of the company’s EBITDA. In addition, postsale, the remaining company would still be a profitable publishing company, with at least one highly valuable remaining division and at least two prestigious newspapers. Therefore, the Hollinger court concluded, “[w]hile important, the sale of the [division] does not strike a blow to the company’s heart.” In Mandiant, the Chancellor viewed the Sale similarly: “The FireEye Business was one part of the Company’s corporate identity, but the Complaint does not support a reasonable inference that the FireEye Business was the ‘heart’ of the Company’s existence and purpose.”

Highly facts-intensive and nuanced inquiry. Practitioners have generally viewed cases on the issue of the substantially-all test as somewhat inconsistent and unpredictable. Indeed, one could imagine that the court could have viewed the Mandiant Sale the way it viewed the Katz sale—that is, as involving a “radical shift” from one line of business to another— and on that basis could have found the Sale sufficiently transformational to satisfy the substantially-all test. Or, conversely, in Katz, the court could have viewed the sale the way it viewed the Mandiant Sale—that is, as not sufficiently transformational to satisfy the substantially-all test on the basis that, both before and after the sale, the company was a drum manufacturing company, even though it had significantly changed its course of operations to make plastic drums rather than steel drums. The utility of the court’s discussion in Mandiant is that it elucidates the facts-intensive and contextual analysis (beyond these semantic frameworks) that is required. Specifically, the decision highlights the kinds of qualitative factors that will be relevant—such as how different the business is post-transaction, how tied the sold assets were to the company’s corporate identity, how important the sold assets were the company’s ability to generate earnings and profits, whether the remaining business is one of the company’s historical businesses, and so on.

Practice Points

  • Among the factors that should be considered when determining whether a sale meets the substantially-all test are the following:
    • the percentage that the sold assets represent of the company’s overall revenue (historic and projected); EBITDA and future earning potential; book value; and goodwill;
    • whether the sale was out of the ordinary or, instead, part of a regular course of business of acquisitions and dispositions;
    • whether the sale reflected a “radical departure” from the company’s past line(s) of business; affected the “heart and soul” or “corporate identity” of the corporation; or “struck at the heart of the corporation’s existence and purpose” rather than simply representing an altered course (even if significant) in the company’s operations;
    • the extent to which an investment in the post-sale company is significantly different from an investment in the company before the sale, and the extent to which a reasonable investor would have expected that the company would have viewed the assets as “sacrosanct”; and
    • among the most important considerations, whether the operating assets remaining post-sale constituted a substantial, viable, ongoing component of the company that could generate earnings and profits.
  • See the article below relating to a new safe harbor from the DGCL Section 271 stockholder vote requirement, which is expected to be enacted soon and effective as of August 1, 2023: “Boards Should Consider Whether to Adopt Charter Amendment Opting Out of Safe Harbor from Stockholder Vote Requirement on Sale of Mortgaged or Pledged Assets.”
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