Shareholders on Shaky Ground: Section 271’s Remaining Loophole

Righi, Alex | July 1, 2014

The Delaware General Corporation Law (DGCL) is the nation’s most popular and respected corporate legal regime for numerous reasons, including the DGCL’s clarity and emphasis on “private ordering,” the Delaware Court of Chancery’s unique corporate legal expertise, and the Delaware legislature’s consistent review and amendment of the DGCL. As a result, the DGCL’s application is predictable, which lends confidence to corporate decisionmaking and governance. Loopholes in the DGCL— though few—nevertheless exist, through which a corporation could potentially thwart the spirit of the DGCL. Section 271 of the DGCL is one such loophole. Section 271 of the DGCL governs the sale of “all or substantially all” of a corporation’s assets. Enacted to provide greater protection to shareholders in major corporate decisions, Section 271 requires parent-level shareholder approval for a corporation—or a parent corporation’s fully owned subsidiary—to sell all of its assets. But, despite several revisions since its incorporation in the DGCL, Section 271 fails to address shareholder approval when a corporation sells all or substantially all of its assets through a partially owned subsidiary. This Comment suggests that Section 271 contains a loophole through which a corporation could disenfranchise shareholders in a major corporate decision, and it provides a theoretical example of how the loophole might work in practice. This Comment ultimately argues that the Delaware legislature should review and amend Section 271 to close the loophole and to provide needed predictability for courts and corporations alike.