Delaware Supreme Court: No "Common Law Insolvency Exception" Permitting Delaware Corporation To Transfer Assets To Creditors In Lieu Of Foreclosure Without Shareholder Consent

• Published date: 30 September 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Mr Brad Erens and Mark Douglas

In Stream TV Networks, Inc. v. SeeCubic, Inc., 2022 WL 2149437 (Del. June 15, 2022), the Delaware Supreme Court vacated and reversed a 2020 ruling by the Delaware Court of Chancery that the assets of Stream TV Networks, Inc. ("Stream"), an insolvent Delaware-incorporated 3-D television technology company, could be transferred to an affiliate of two of Stream's secured creditors in lieu of foreclosure without seeking the approval of Stream's shareholders under section 271 of the General Corporation Law of Delaware ("DGCL") or Stream's certificate of incorporation. See Stream TV Networks, Inc. v. SeeCubic, Inc., 250 A.3d 1016 (Del. Ch. 2020).

In February 2020, Stream defaulted on more than $50 million in debt secured by all of its assets. At that time, it also owed $16 million to trade creditors, could not pay its bills or operating expenses, including payroll, and was insolvent.

In March 2020, Stream's controlling shareholders and directors, Mathus and Raja Rajan (the "Rajans"), at the behest of the secured creditors, expanded the board of directors for the purpose of creating a committee to negotiate a resolution with the secured creditors and Stream's investors. In May 2020, Stream, its two secured creditors, and 52 Stream investors entered into an agreement (the "Omnibus Agreement") under which, in lieu of foreclosure by the secured creditors, Stream would transfer all of its assets to SeeCubic, Inc. ("SeeCubic"), a newly formed entity controlled by its secured creditors. The secured creditors agreed to release their claims against Stream upon completion of the transfer of its assets to SeeCubic.

If Stream's secured creditors had foreclosed on Stream's assets, Stream and its stockholders would have received no recovery. However, the Omnibus Agreement provided Stream's minority shareholders with the right to exchange their stock in Stream for shares in SeeCubic. The Omnibus Agreement also provided for the issuance of one million shares in SeeCubic to Stream.

Stream and the Rajans later sought an injunction preventing the effectiveness of the Omnibus Agreement. They contended that the agreement was invalid because: (i) the outside directors who approved it were never validly appointed; and (ii) the agreement was ineffective because it required stockholder approval under section 271 of the DGCL and the "class vote provision" in Stream's certificate of incorporation.

The Delaware Chancery Court ruled that the outside directors were validly appointed and...