At common law, before the directors could sell all the assets of a healthy corporation, they had to obtain unanimous stockholder approval. The unanimity requirement gave rise to holdout problems, where a minority of stockholders could block a transaction. The proponents of a sale without unanimous support justified it with several arguments: If a corporation had a charter provision that authorized the proponents to proceed without unanimous approval, the proponents invoked that authority. If the corporation was failing or insolvent, the proponents argued that the corporation’s condition obviated the need for unanimous stockholder approval.

Over time, the common law distinguished between an unprofitable corporation and a failing and insolvent corporation. If the corporation’s business was unprofitable, then the directors could sell its assets with the approval of a majority of the stockholders. The rationale was that the minority could not force the majority to continue to operate a money-losing venture that would eventually reach the point of failure. However, if the corporation was insolvent, then the directors could sell its assets without any level of stockholder approval. The directors could also make an assignment for the benefit of creditors or declare bankruptcy.

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