August 2022 in Brief: Mergers & Acquisitions

Domestic M&A

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.

Delaware Chancery Court finds fair price despite imperfect process.

By Chauncey Lane, Partner, Holland & Knight LLP

In In re BGC Partners, Inc. Derivative Litigation, an action challenging the fairness of BGC Partners, Inc.’s (“BGC”) acquisition of Berkeley Point Financial, LLC (“Berkeley”), from an affiliate of Cantor Fitzgerald, L.P. (“Cantor”), BGC purchased Berkeley for $875 million and simultaneously invested $100 million in a Cantor affiliate’s mortgage-backed securities business. The theory of the lawsuit is that Howard Lutnick—the controlling stockholder of both BGC and Cantor—caused BGC to undertake a deal that benefited him at the expense of BGC’s stockholders. The plaintiffs maintain that the transaction was not entirely fair to BGC and cannot pass muster in terms of price or process.

BGC, a brokerage and financial technology company that trades on the NASDAQ, is a successor entity to BGC Partners L.P., which was formed in 2004 through a spin-off from Cantor, a privately owned financial services and brokerage firm. At the time of the transaction, Lutnick was the Chairman and Chief Executive Officer of both Cantor and BGC and was the sole stockholder of Cantor’s managing partner, CF Group Management, Inc. (“CFGM”). Lutnick had voting control of BGC through CFGM and his indirect ownership of about 55% of Cantor. Berkeley, a private commercial real estate finance company, was (and remains) one of the few government-sponsored enterprises pre-approved agency lenders. It also services commercial real estate loans, including those it originated.

At a meeting of the BGC Audit Committee on February 17, 2017, the BGC Audit Committee was constituted as a special committee (the “Special Committee”) to consider the sale of Berkeley to BGC. At the meeting, Lutnick informed the Special Committee that BGC was considering an acquisition of Berkeley in the low $700 million range. Lutnick participated in the selection of advisors to the Special Committee and identified the co-chairs of the Special Committee. Members of the Special Committee consulted with Lutnick throughout the due diligence and negotiation process, including discussions on transaction structure and price.

Applying the entire fairness standard of review, the Delaware Chancery Court found that despite an “imperfect” process that included Lutnick’s large presence in working up the deal, the transaction closed at a fair price after fair dealing. It was undisputed that Lutnick and his interests stood on both sides of the transaction. Given his relative ownership of Berkeley Point and BGC (54% and 23% respectively), Lutnick had an incentive to cause BGC to overpay for Berkeley Point. Nonetheless, the Court concluded the special committee and its advisors were independent. Though the process was marred by Lutnick and the actions of members of the Special Committee, Lutnick extracted himself from the special committee’s deliberations after it was fully empowered. Members of the Special Committee pushed back on Lutnick when needed and worked tirelessly on the Special Committee’s behalf. The Special Committee’s diligence requests were met, and it had the information it needed to negotiate on a fully informed basis. The committee members—each engaged and diligent—bargained with Cantor and obtained meaningful concessions. The price the Special Committee agreed to pay for Berkeley Point was in line with what its financial advisor determined to be appropriate and falls within what the Court determined to be the range of fairness.