Private Credit Restructuring Trends: New Delaware Law Aids Secured Creditors In Getting Deals Done Out Of Court

• Published date: 02 January 2024
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy, Shareholders
• Law Firm: Proskauer Rose LLP
• Author: Mr David Hillman, Vincent Indelicato, Charles A. Dale, Steven M. Peck, Steven Weise and Maximilian Greenberg

In our prior alert over the summer, we highlighted the Delaware Supreme Court's decision in Stream TV Networks, Inc. v. SeeCubic, Inc., 279 A.3d 323, 329 (Del. 2022) ("Stream TV"), which held an insolvent corporation could not consensually "toss the keys" to its secured creditors in an out‑of‑court restructuring approved by the board of directors without the consent of the "out of the money" shareholders, because the transfer was a consensual sale of all or substantially all of the corporation's assets.¹ The decision was based on Section 271 of General Corporate Law of the State of Delaware ("DGCL"), requiring a shareholder vote for a sale of all or substantially all of a corporation's assets. Stream TV considered whether there was an "insolvency exception" from Section 271's shareholder approval requirement and held that "a common law insolvency exception, if one ever existed in Delaware, did not survive the enactment of Section 271," and that, accordingly, "there is no Delaware common law 'board only' insolvency exception under Section 271." The decision (which we disagreed with as a policy matter) had significant implications for secured creditors seeking to implement out‑of‑court restructurings by giving "out of the money" shareholders a veto right to use as leverage in negotiations. The Stream TV decision also impaired the ability of a secured creditor to use the voting proxy in its pledge agreement to implement a restructuring with a newly appointed independent board of directors. By frustrating the lenders' out‑of‑court playbook, Stream TV (we predicted) would needlessly increase the restructuring costs to be borne by secured lenders by forcing parties to use Chapter 11 as a means to effectuate a change of control transaction, where the very same transaction could be consummated more efficiently on an out of court basis.

The Delaware Legislature responded by enacting legislation to codify the "insolvency exception" that Stream TV found did not presently exist in the common law. Specifically, Section 272(b) of the DGCL was amended to add a new "safe harbor" provision for the sale, lease or exchange of collateral without shareholder consent. As explained below, the amendment provides material benefits for secured creditors, but (unfortunately) the statute also affords corporations a path to "opt out" of the safe harbor (thereby eliminating those newly‑added benefits).

Here are four key takeaways from the new Delaware statute.

1. New Section 272(b)(1)...