Delaware Supreme Court reverses Delaware Chancery Court by concluding no insolvency exception exists to the common law rule requiring shareholder approval to sell all or substantially all assets of a corporation.
By Chauncey Lane, Partner, Holland & Knight LLP
In Stream TV Networks, Inc. v. SeeCubic, Inc., the Delaware Supreme Court reversed the Delaware Chancery Court’s finding that the board of Stream TV Networks, Inc. (Stream) could sell all of Stream’s assets without a stockholder vote due to Stream’s insolvency. The Delaware Supreme Court found that the sale agreement constituted an “asset transfer” under Stream’s charter, triggering a class vote provision that required the approval of Stream’s Class B stockholders. The court further held that a “board only” insolvency exception no longer existed following the enactment of Delaware General Corporation Law (DGCL) § 271 and its predecessor governing the sale of a corporation’s assets.
In response to financial difficulties, several shareholders proposed that Stream restructure, but Stream’s founders and directors, the Rajan brothers, rejected a proposed omnibus agreement (the Omnibus Agreement). This prompted Stream’s two outside directors to form a resolution committee with “the full power and authority of the full Board of Directors to resolve any existing or future debt defaults or claims” that subsequently approved the Omnibus Agreement. Pursuant to the Omnibus Agreement, Stream would assign its assets to a new corporate entity, SeeCubic.
On September 8, 2020, Stream, through the Rajan brothers, filed suit seeking to bar enforcement of the Omnibus Agreement. SeeCubic filed counterclaims against Stream and third-party claims against the Rajan brothers. The Delaware Court of Chancery preliminarily, and then permanently, enjoined Stream and the Rajan brothers from interfering with the Omnibus Agreement, finding that SeeCubic was entitled to injunctive relief because the resolution committee had the authority to bind Stream to the Omnibus Agreement and that neither DGCL § 271 (which permits a Delaware corporation to sell, lease, or exchange all, or substantially all, of its property and assets as its board of directors or governing body concludes is in the best interest of the corporation) nor a class vote provision (the Class Vote Provision) in Stream’s charter rendered the Omnibus Agreement invalid. In analyzing § 271, the court found that § 271 was ambiguous as to whether it applied to the type of transfer at issue. The court further concluded, however, that there was an insolvency exception to the common law rule such that a financially failing company may sell the assets of the corporation without shareholder approval.
On appeal by Stream and the Rajans, the Delaware Supreme Court agreed with Stream that the Court of Chancery improperly analyzed the issue by applying its interpretation of § 271 to the clear and unambiguous language of the charter provision. The Delaware Supreme Court held that the Omnibus Agreement effected an “asset transfer” under Stream’s charter, requiring a vote of the Class B stockholders pursuant to the Class Vote Provision. The Delaware Supreme Court rejected the Court of Chancery’s reliance on § 271’s language as an interpretive guide in construing the language of the Class Vote Provision, and held that no insolvency exception existed. Moreover, the Supreme Court found that an insolvency exception allowing a board alone to sell all of a company’s assets would inject uncertainty and potential inconsistency into the general corporate laws of Delaware.