Stream TV Networks v. SeeCubic: Delaware court rejects “board only” insolvency exception

Corporate / M&A Decisions update series

In Stream TV Networks, Inc. v. SeeCubic, Inc., the Delaware Supreme Court reversed the Delaware Court of Chancery’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 – in essence, a privately structured foreclosure transaction – 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 DGCL § 271 and its predecessor governing the sale of a corporation’s assets.

Stream TV Networks, Inc. (Stream), a company developing and commercializing technology allowing viewers to watch 3D content without 3D glasses, suffered financial difficulties. In 2019, several of Stream’s shareholders proposed that Stream restructure, but Stream’s founders and directors, the Rajan brothers, rejected a proposed omnibus agreement (the Omnibus Agreement). After continuing financial difficulties through 2020, however, Stream’s two newly appointed outside directors, who together formed 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, and any existing or future,” approved the Omnibus Agreement. The Omnibus Agreement provided that Stream would assign its assets to a new corporate entity, SeeCubic. It gave holders of Stream’s Class A common stock the right to exchange their shares for an identical number of shares of SeeCubic’s common stock and issued Stream itself one million shares of SeeCubic’s Class A common stock.

On September 8, 2020, Stream, through the Rajan brothers, filed suit seeking to bar SeeCubic from seeking to enforce 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. The court found 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. Based on legislative history, the court concluded that § 271 did not supersede the traditional common law rule requiring unanimous shareholder approval before selling all of a corporation’s assets. 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.

Stream and the Rajans appealed, making four main arguments: (1) that the Class Vote Provision unambiguously required Class B stockholder approval and rendered § 271’s default voting rule irrelevant; (2) that the court erred by looking first to § 271 before construing the corporation’s charter; (3) that § 271 superseded any such common law exceptions assuming that such an exception ever existed; and (4) that the ruling, as a matter of public policy, would upset and undermine Delaware’s contractarian focus and the predictable application of its corporate laws, including § 271.

In addressing whether the Class Vote Provision required Class B majority stockholder approval of the Omnibus Agreement, 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 Delaware 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, which would, in turn, undermine the jurisdiction’s status as a contractarian state.

 

Authored by Ryan M. Philp, Allison M. Wuertz, and William Winter.

Contacts
Ryan Philp
Partner
New York
David Michaeli
Counsel
New York
Allison Wuertz
Senior Associate
New York
Jon Talotta
Global Co-Lead
Northern Virginia
Michael Hefter
Partner
New York
William Regan
Partner
New York

 

This website is operated by Hogan Lovells Solutions Limited, whose registered office is at 21 Holborn Viaduct, London, United Kingdom, EC1A 2DY. Hogan Lovells Solutions Limited is a wholly-owned subsidiary of Hogan Lovells International LLP but is not itself a law firm. For further details of Hogan Lovells Solutions Limited and the international legal practice that comprises Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses ("Hogan Lovells"), please see our Legal Notices page. © 2022 Hogan Lovells.

Attorney advertising. Prior results do not guarantee a similar outcome.