There’s No Insolvency Exception to a Shareholder Vote Requirement to Transfer a Corporation’s Assets in DelawareJuly 14, 2022 – Herrick Restructuring Review
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In a recent Delaware Supreme Court decision, the Court held that there is no “insolvency exception” to the requirement in Section 271 of the DGCL that a transfer of all or substantially all of a corporation’s assets foreclosure transfer be approved by the corporation’s shareholders.
The Delaware Supreme Court overruled a decision by the Delaware Chancery Court that used Section 271—which requires a shareholder vote when a corporation sells all or substantially all of its assets—to interpret a Class Vote Provision in Stream TV Networks, Inc.’s charter. The Chancery Court also read a Delaware common law board-only insolvency exception into Section 271 while doing so.
Stream TV, an insolvent corporation, had entered into an Omnibus Agreement that would have effectively transferred all of Stream TV’s assets to a newly formed entity controlled by its secured creditors in satisfaction of the secured creditors’ notes. A Resolution Committee of two independent directors approved the deal even though Stream TV’s controlling shareholders, Mathu Rajan and Raja Rajan, stridently objected. The Rajan brothers sued to enjoin the agreement, but the Chancery Court found the Omnibus Agreement was valid under an insolvency exception.
The Supreme Court disagreed that the Class Vote Provision tracked Section 271 and declined to use it to interpret the Class Vote Provision, which did not include an insolvency exception. But the Supreme Court went on to clarify that to the extent a common law insolvency exception did exist it did not survive the enactment of Section 271 and its predecessor.
This ruling may have far-reaching consequences to the extent it requires shareholder approval to enter into a consensual foreclosure like the one contemplated in the Omnibus Agreement. While the Supreme Court did not address whether a consensual foreclosure constitutes a “sale, lease, or exchange” of property under Section 271 (and in fact found that Class Vote Provision language did nottrack the statute), the plain text of Section 271 makes that conclusion likely. Thus, even if a corporation’s charter does not have a shareholder vote requirement, Section 271 may require it absent contrary languagein the charter. The decision does not affect a board’s ability to mortgage or pledge corporate property without shareholder approval under Section 272 of the DGCL, there are now barriers to a full transfer of assets for a Delaware corporation.
The case is Stream TV Networks, Inc. v. SeeCubic, Inc., No. 360,2021 (Del. June 15, 2022).
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