June 23, 2022

Asset Sales: Stockholder Approval Required for Transfer by Insolvent Corporation

Last week, in StreamTV Networks v. SeeCubic, (Del.; 6/22), the Delaware Supreme Court overruled a prior Chancery Court decision and held that an insolvent company’s transfer of pledged assets to secured creditors required stockholder approval under applicable provisions of the company’s charter. The case involved an insolvent company that entered into an “Omnibus Agreement” under the terms of which it agreed to transfer its assets to the company’s secured creditors without stockholder approval.  The company’s Class B stockholders argued that their approval was required under both Section 271 of the DGCL and the terms of the company’s certificate of incorporation.

The Chancery Court held that stockholder approval was not required.  In doing so, Vice Chancellor Laster held that there was a common law exception to Section 271’s stockholder approval requirement that applied in situations involving transfers by an insolvent company. He also concluded that to hold otherwise would result in a conflict with Section 272 of the DGCL, which allows Delaware corporations to mortgage or pledge a company’s assets without stockholder approval.

The Vice Chancellor also rejected claims that the terms of the certificate of incorporation required the Class B stockholders to approve the Omnibus Agreement. He said that the charter language tracked Section 271, and that a charter provision that tracks a statutory provision should be given the same meaning as the statutory provision. Since the statute didn’t require stockholder approval, neither did the terms of the certificate of incorporation.

The Delaware Supreme Court disagreed.  First, it accepted the appellant’s argument that the Chancery analyzed the issue “upside down” by applying its interpretation of Section 271 to a clear and unambiguous charter provision. In doing so, it pointed out that the Delaware statute was “broadly enabling,” and that companies had the ability to depart from statutory default provisions in their charter documents so long as those provisions don’t “transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself”.  The Court continued:

Thus, we proceed with analyzing whether the Class Vote Provision requires a vote of the Class B stockholders. Considering the plain and ordinary meaning of the term “disposition,” we conclude that it does. More specifically, the Omnibus Agreement effects an “Asset Transfer” that unambiguously triggers a majority vote of the Class B stockholders. Therefore, extrinsic evidence is not used to interpret the Class Vote Provision.

Next, because we disagree with the Court of Chancery that the language of the Class Vote provision of the Charter “tracks the text of Section 271,” we do not look to Section 271 as an interpretative guide in construing the provision. And because we conclude that a vote is required because the Omnibus Agreement falls within the materially broader definition of Asset Transfer, we need not resolve whether such a vote is also required under the plain language of Section 271, i.e., whether the Omnibus Agreement effects a “sale, lease or exchange” within the meaning of Section 271.

In sum, we agree with the Vice Chancellor that the Omnibus Agreement effects an Asset Transfer under the Charter. However, because Section 271’s language is materially different, our agreement ends there, as does our analysis, as the parties have raised no argument that the Charter violates “a public policy settled by the common law or implicit in the [DGCL] itself.

Although the Court concluded that it didn’t need to address Section 271 for purposes of its opinion, it went on to clarify that any previously existing common law exception to Section 271’s stockholder approval requirement didn’t survive its enactment.  The Court also rejected the view that requiring stockholder approval here would create a conflict with Section 272 observing, among other things, that “Section 272 is a default rule that corporations can alter in their charters, which Stream has done here.”

John Jenkins