Stream TV Networks, Inc. v. SeeCubic, Inc. ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
STREAM TV NETWORKS, INC. )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0310-JTL
)
SEECUBIC, INC., )
)
Defendant. )
)
SEECUBIC, INC., )
)
Counterclaimant and )
Third-Party Plaintiff,
)
v. )
)
STREAM TV NETWORKS, INC., )
)
Counterclaim Defendant, )
)
and
)
MATHU RAJAN, and RAJA RAJAN, )
)
Third-Party Defendants. )
OPINION
Date Submitted: November 30, 2020
Date Decided: December 8, 2020
Scott D. Cousins, COUSINS LAW, LLC, Wilmington, Delaware; Luis Salazar, Jose Ceide,
Daniel Halperin, SALAZAR LAW, Miami, Florida; Attorneys for Plaintiff and
Counterclaim Defendant Stream TV Networks, Inc.
Robert S. Saunders, Jenness E. Parker, Bonnie W. David, SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP, Wilmington, Delaware; Eben P. Colby, Marley Ann Brumme,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Boston, Massachusetts;
Attorneys for Defendants and Counterclaim Plaintiff Seecubic, Inc.
LASTER, V.C.
Plaintiff and counterclaim defendant Stream TV Networks, Inc. (“Stream” or the
“Company”) and defendant, counterclaim plaintiff, and third-party plaintiff Seecubic, Inc.
(“SeeCubic”) have filed competing motions for preliminary injunction. Both motions turn
on the validity of an agreement dated May 6, 2020, between Stream, its two secured
creditors, and fifty-two of its stockholders (the “Equity Investors”). The parties refer to this
agreement as the “Omnibus Agreement.”
By the time the Omnibus Agreement was executed, Stream had defaulted on more
than $50 million in debt to its secured creditors, owed another $16 million to trade
creditors, and could not pay its bills as they came due. Stream had missed payroll in January
2020, furloughed a number of workers, and avoided missing payroll in February 2020 only
because of an emergency loan from one of its secured creditors and another investor. By
any measure, Stream was insolvent and failing.
In the Omnibus Agreement, Stream agreed to transfer all of its assets to SeeCubic,
a newly formed entity controlled by its secured creditors. Stream also granted its secured
creditors a power of attorney to effectuate the transfers. Stream’s secured creditors already
held security interests in all of Stream’s assets and had the right to foreclose on those assets.
In the Omnibus Agreement, Stream’s secured creditors agreed to release their claims
against Stream upon completion of the transfer of Stream’s assets to SeeCubic.
If Stream’s secured creditors had foreclosed on Stream’s assets, then Stream and its
stockholders would have been left with nothing. Instead, the Omnibus Agreement provided
Stream’s minority investors with the right to swap their shares in Stream for shares in
SeeCubic. The Omnibus Agreement also provided for the issuance of one million shares
in SeeCubic to Stream.
Stream contends that the Omnibus Agreement is invalid and seeks a preliminary
injunction to prevent SeeCubic from taking any action to enforce it. Stream first contends
that the directors who approved the Omnibus Agreement were never validly appointed.
The evidence establishes that Mathu and Raja Rajan acted by unanimous written consent
as Stream’s only directors to expand Stream’s board of directors (the “Board”) and fill the
newly created directorships with four outside directors (the “Outside Directors”). At a
subsequent meeting, the Board validly created a committee, populated it with two of the
Outside Directors, and empowered it to negotiate and resolve the outstanding claims
against Stream (the “Resolution Committee”). On May 6, 2020, the Resolution Committee
approved the Omnibus Agreement. As of that date, the Omnibus Agreement became
effective and binding on Stream.
Assuming for the sake of argument that Mathu and Raja did not validly appoint the
Outside Directors, those individuals were de facto directors. Mathu and Raja intended to
appoint the Outside Directors to their positions. Mathu, Raja, and Stream treated the
Outside Directors as directors. And Mathu, Raja, and Stream represented to third parties
that the Outside Directors were directors. Mathu, Raja, and Stream cannot now contend
that the two Outside Directors who comprised the Resolution Committee lacked authority
to act. Once again, the Omnibus Agreement binds Stream.
Stream next contends that the Omnibus Agreement is invalid because it constituted
a sale of all of Stream’s assets, which required stockholder approval under Section 271 of
2
the Delaware General Corporation Law (the “DGCL”). Under the majority rule at common
law, the directors of a solvent corporation lack authority to transfer all of the corporation’s
assets. But authorities dating back a century recognize an exception to this rule for
insolvent corporations, whose directors can transfer corporate assets to creditors.
In a decision issued in 1915, this court embraced and applied the common law rules,
but held that a provision in the corporation’s certificate of incorporation authorized the
board of directors to sell all of the corporation’s assets with the approval of its stockholders.
In 1917, the General Assembly adopted the predecessor to Section 271 to make clear that
the directors of a solvent Delaware corporation have authority to sell all of the
corporation’s assets with the approval of its stockholders. The circumstances surrounding
the adoption of the statute and its subsequent evolution demonstrate that the General
Assembly did not intend Section 271 to constrain the ability of an insolvent or failing
corporation to transfer corporate assets to secured creditors.
Interpreting Section 271 to require a stockholder vote before an insolvent or failing
corporation can transfer its assets to secured creditors would conflict with Section 272 of
the DGCL, which authorizes a corporation to mortgage or pledge all of its assets without
complying with Section 271. Section 272 is silent as to whether a secured creditor can
foreclose on its security interest in the debtor corporation’s assets, but the statutory scheme
would not function if the debtor corporation had to comply with Section 271 before the
creditor could foreclose. When facing the prospect of foreclosure, the board and
stockholders of the debtor corporation would have no incentive to approve the transfer of
the corporation’s assets. As a practical matter, any creditor who wanted to ensure that it
3
had the ability to levy on the pledged collateral would have to obtain a stockholder vote
when entering into the credit agreement, contrary to the plain language of Section 272.
Stream therefore did not need to comply with Section 271 before transferring its
assets to its secured creditors. The voluntary foreclosure contemplated by the Omnibus
Agreement is not governed by Section 271.
Stream also argues that under its certificate of incorporation (the “Charter”), the
Omnibus Agreement required the separate approval of holders of a majority of the Class B
Common Stock (the “Class Vote Provision”). The Class Vote Provision applies to an
“Asset Sale,” which it defines using language that parallels the text of Section 271. The
Class Vote Provision therefore warrants the same interpretation as Section 271: The Class
Vote Provision does not restrict Stream’s ability to transfer its assets to its secured creditors
when the Company is insolvent and failing.
Finally, Stream argues that the members of the Resolution Committee breached
their fiduciary duties by approving the Omnibus Agreement. The business judgment rule
protects the Resolution Committee’s decision to enter into the Omnibus Agreement.
Stream therefore has not established a reasonable likelihood of success on the merits
of its challenges to the Omnibus Agreement. Accordingly, Stream’s motion for a
preliminary injunction is denied. SeeCubic, by contrast, contends that the Omnibus
Agreement is valid and seeks a preliminary injunction preventing Stream or any of the
third-party defendants from taking any action to interfere with it. SeeCubic’s motion is
granted.
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I. FACTUAL BACKGROUND
The facts are drawn from the parties’ submissions in connection with their
competing motions for preliminary injunction. In total, the parties provided seven
deposition transcripts, ten affidavits, and 206 documentary exhibits. What follows are not
formal factual findings, but rather the facts as they appear reasonably likely to be found
after trial, based on the current record.
A. Stream
Stream was founded in 2009 to develop and commercialize technology that enables
viewers to watch three-dimensional content without 3D glasses. In 2010 and 2011, Stream
formed subsidiaries in the Netherlands. Through these subsidiaries, Stream hired engineers
to develop Stream’s technology. By all accounts, the technology is promising, even
revolutionary, but Stream does not yet have a product. Eleven years after its founding,
Stream remains a pre-revenue, development-stage company.
The Rajan family controls Stream. Mathu Rajan holds 18,000 shares of Stream’s
Class A common stock, which carry one vote per share. A family investment vehicle owned
by Mathu, his brother Raja Rajan, and their parents holds 19,000,000 shares of Stream’s
Class B common stock, which carry ten votes per share. Through these holdings, the Rajan
brothers control a majority of the Class B common stock and a majority of Stream’s
outstanding voting power.
At the board level, the Rajan brothers historically have controlled Stream. From July
2019 until March 2020, Mathu and Raja were Stream’s only directors. Mathu has served
as a director since the Company’s founding. Raja served as a director from shortly after the
5
Company’s founding until July 2020, when he resigned from that role. From time to time,
other individuals have served as directors. From approximately 2015 until 2019, Leo
Hindery served as an outside director, but he resigned in July 2019 over disputes with the
Rajan brothers. From approximately 2018 until 2019, Mark Coleman served as a second
outside director. He too resigned in July 2019 over disputes with the Rajan brothers. From
2011 until 2014, Shad Stastney, the principal of Stream’s senior secured creditor, served
as an outside director. He rejoined the Board in 2019 and served as CFO before resigning
on January 30, 2020.
At the officer level, the Rajan brothers dominate Stream. Mathu has served as
Stream’s CEO since the Company’s founding. Raja has served as general counsel and COO
since soon after the Company’s founding.
During its existence, Stream’s corporate governance practices have been virtually
nonexistent. Stream has never held annual meeting of stockholders and has not kept regular
minutes of Board meetings. Stream has officers and employees, but their roles are not well
defined.
B. Stream’s Investors
Since 2009, Stream has raised approximately $160 million from third party
investors. The investments have taken the form of a combination of debt and equity.
Stream’s senior secured creditor is SLS Holdings VI, LLC (“SLS”). Between 2011
and 2012, SLS loaned $6 million to Stream through a series of secured notes (the “SLS
Notes”). Stream pledged all of its assets and the assets of its wholly owned subsidiaries as
security for the SLS Notes. Stream executed a security agreement in connection with the
6
SLS Notes, which authorized SLS to take control of Stream’s assets to satisfy the SLS
Notes if Stream defaulted.
Stream’s junior secured creditor is Hawk Investment Holdings Limited (“Hawk”).
Between 2010 and 2014, Hawk loaned more than £50 million to Stream, plus another
$1.336 million, through a series of junior secured notes (the “Hawk Notes”). Subject to the
senior security interest held by SLS, Stream pledged all of its assets as security for the
Hawk Notes. Stream executed a security agreement in connection with the Hawk Notes,
which authorized Hawk to take control of Stream’s assets to satisfy the Hawk Notes if
Stream defaulted.
In 2018, Stream entered into an agreement with Hawk, which provided that the
Hawk Notes would convert into equity if and when Stream raised additional equity capital
(the “Hawk Conversion Agreement”). Stream and SLS contemporaneously entered into a
parallel agreement governing the SLS Notes (the “SLS Conversion Agreement”). The SLS
Conversion Agreement provided that it would terminate if the Hawk Conversion
Agreement was amended. In April 2019, the Hawk Conversion Agreement was amended,
which caused the SLS Conversion Agreement to terminate. In any event, neither the Hawk
Notes nor the SLS Notes ever converted into equity, and the notes remain outstanding.
C. Stream’s Financial Difficulties
Alistair Crawford is a significant stockholder of Stream. He also represents the
Equity Investors. During 2019, Crawford engaged in discussions with SLS, Hawk, and the
Rajan brothers about a restructuring of Stream. Crawford proposed forming a “NewCo”
that would acquire Stream’s assets and have a more transparent and investor-friendly
7
governance structure. In December 2019, Crawford provided SLS, Hawk, and the Rajan
brothers with a draft of the Omnibus Agreement and other documents to implement the
restructuring.
The Rajan brothers refused to agree to the restructuring, and the discussions broke
down. In January 2020, the Equity Investors filed a lawsuit in this court against the Rajan
brothers.
At the end of February 2020, Stream defaulted on the SLS Notes and Hawk Notes.
On March 9, 2020, SLS notified Stream that it was in default.
In addition to the debts that Stream owed to its secured creditors, Stream carried
more than $16 million in trade debt and had fallen months behind on payments to customers
and suppliers. Stream even failed to make the payments necessary to maintain the patents
on its technology, which are the key to Stream’s potential success. In January 2020, Stream
missed payroll at least once. In February, Stream managed to make payroll, but only due
to an emergency infusion of capital from Hawk and a short-term loan from another
investor. Stream still furloughed numerous employees.
During this period, SLS, Hawk, and Crawford attempted to resume discussions with
Stream about a restructuring. They also discussed the capital structure of a new entity and
its governance arrangements.
D. The Outside Directors
With the company failing, SLS, Hawk, and Crawford urged the Rajan brothers to
appoint outside directors. In February and March 2020, the Rajan brothers extended
invitations to the four Outside Directors: Krzystof Kabacinski, Asaf Gola, Kevin Gollop,
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and Frank Hodgson. All were independent outsiders, though Kabacinski was a potential
candidate to serve as CEO of the new entity if a restructuring could be achieved. None of
the Outside Directors had prior ties to the Rajan brothers, SLS, or Hawk.
By March 12, 2020, all four of the Outside Directors had agreed to join the Board.
On that date, the Rajan brothers acted by unanimous written consent as Stream’s only two
directors to add the Outside Directors to the Board. Dkt. 102 Ex. 105 (the “March Director
Consent”). That same day, Stream announced to its investors and employees that the
Outside Directors would join the Board.
From March through May 2020, the Outside Directors participated in Board
meetings, approved minutes, voted on resolutions, and approved other corporate actions.
The Rajan brothers and other Stream employees referred to them as “directors” and as
members of the “Board” and held them out as such to third parties.
E. The Resolution Committee
After joining the Board and learning about Stream’s financial difficulties, the
Outside Directors concluded that the only path forward was to negotiate a resolution with
the Company’s secured creditors and the Equity Investors. In April 2020, the Outside
Directors resumed discussions about a restructuring. Raja initially participated in the
discussions, but his presence generated obvious tensions. It became clear that the Outside
Directors would have to attempt to broker a resolution.
On May 4, 2020, during a meeting of the Board, Gola proposed three resolutions
for consideration. Hodgson left early for personal reasons, before Gola proposed the
resolutions, so Hodgson did not vote on them.
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Gola’s first resolution provided that all directors would serve for no less than one
year without being removed. Raja seconded the motion, and Gola, Gollop, Kabacinski,
Raja, and Mathu voted in favor. The unanimous vote resulted in the resolution being
adopted.1
Gola’s second resolution proposed that the Board create the Resolution Committee,
with Gola and Gollop as its members. The Resolution Committee would have “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 litigation, or threats thereof, on behalf of
[Stream], without further action being required from the Board of Directors or any
executive of the [C]ompany.” Dkt. 101 Ex. 56 at 1057. Gola, Gollop, and Kabacinski voted
in favor; the Rajan brothers abstained. The three directors who voted in favor constituted a
majority of a quorum, and the motion carried.
Gola’s third resolution proposed removing Mathu as CEO and replacing him with
Kabacinski. Gola, Gollop, and Kabacinski voted in favor; the Rajan brothers abstained.
The three directors who voted in favor of the resolution constituted a majority of a quorum,
and the motion carried. But after further discussion, Raja proposed an alternative: instead
of replacing Mathu as CEO, Stream would stop all fundraising efforts until the Board
authorized them to resume. The Outside Directors agreed to replace Gola’s third resolution
with Raja’s alternative, all five directors voted in favor, and the motion carried.
1
The parties have not addressed the validity of the resolution. But see 8 Del. C.
§ 141(k).
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F. The Omnibus Agreement
On May 6, 2020, the Resolution Committee approved the Omnibus Agreement. See
Dkt. 100 Ex. 10 [hereinafter “OA”]. By doing so, the Resolution Committee bound Stream
to comply with its terms. The counterparties to the Omnibus Agreement were SLS, Hawk,
and the Equity Investors.
The signatories to the Omnibus Agreement executed it at different times. SLS and
Hawk signed on May 6, 2020. So did Gola. Gollop signed on May 7. The Equity Investors
signed at various points.
The Omnibus Agreement provided that SLS and Hawk would not foreclose on
Stream’s assets and that they would accept delivery of Stream’s assets in satisfaction of
their debts. The assets would be transferred to a newly formed entity controlled by SLS
and Hawk, which they later identified as SeeCubic. Upon transfer of the assets, SLS and
Hawk would extinguish the SLS Notes and Hawk Notes in their entirety. See OA § 1.1(a).
The Omnibus Agreement gave holders of Stream’s Class A common stock, other
than the Rajan brothers and their affiliates, the right to exchange their shares of Stream’s
Class A common stock for an identical number of shares of SeeCubic’s common stock at
no cost. See OA §1.1(d). As a result, Stream’s minority investors can share in the future
success of Stream’s assets. SLS and Hawk initially proposed that Stream’s minority
investors pay a fee to exchange their shares, but the Resolution Committee negotiated for
the exchange to occur at no cost to the participating stockholders.
The Omnibus Agreement provided that Stream would receive one million shares of
SeeCubic Class A common stock. See OA §1.1(f). Because the Rajan brothers hold an
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ownership interest in Stream, they will benefit from Stream’s ownership interest in
SeeCubic.
Without the Omnibus Agreement, Stream’s creditors would have foreclosed on
Stream’s assets, leaving its equity investors with nothing. Or Stream would have filed for
bankruptcy, and its equity investors likely would have been wiped out.
G. The Rajan Brothers Respond.
Soon after the Board created the Resolution Committee, the Rajan brothers began
planning to neutralize it. As early as May 6, 2020, the same day on which the Resolution
Committee approved the Omnibus Agreement, the Rajan brothers began drafting a written
consent of stockholders that would remove the Outside Directors (the “May Stockholder
Consent”). A Stream employee circulated an initial version of the May Stockholder
Consent on May 7, then a second version on May 8. On the evening of May 8, the Rajan
brothers were still discussing whether and how to remove the Outside Directors and when
the removal would become effective. See Dkt. 102 Ex. 71. It was not until May 9 that the
Rajan brothers informed Gola and Kabacinski that they had been removed as directors. It
was not until May 11 that Stream notified Gollop of his removal.
In this litigation, Stream has claimed that the Rajan brothers executed a version of
the May Stockholder Consent on May 6, 2020, which resulted in the removal of Gola,
Gollop, and Kabacinski. Stream contends that the Rajan brothers accomplished the removal
before the Resolution Committee approved the Omnibus Agreement. The evidence weighs
against that assertion. The evidence instead demonstrates that the Rajan brothers executed
12
the May Stockholder Consent later, possibly during the evening of May 8 or on May 9, and
then backdated it to May 6 in an effort to preempt the Omnibus Agreement.
The Rajan brothers developed other theories designed to undermine the Resolution
Committee. On May 6, 2020, the same day that the Rajan brothers purportedly executed
the May Stockholder Consent, Raja asked his assistant, Nicole Maneen, to search for
documentation reflecting whether the Outside Directors had accepted their directorships.
Maneen responded that they had accepted via email and attached the relevant
communications. But while handling Raja’s request, Maneen and Mathu’s assistant,
Amanda von Ahnen, brainstormed ways to claim that the Outside Directors had never
become directors. At 6:56 p.m. on May 6, von Ahnen suggested to Maneen that the anyone
who had not formally accepted their offer to join the Board by signing a “Director Services
Agreement” should not be considered a director.
No one had informed the Outside Directors that their positions as directors depended
on signing any particular documents. Nor would the Rajan brothers have needed this theory
if they had removed the Outside Directors by delivering the May Stockholder Consent.
On May 7, 2020, the day after the Resolution Committee approved the Omnibus
Agreement, the Rajan brothers invented another basis to challenge the status of the Outside
Directors. They claimed that the Outside Directors were “advisors waiting to formally be
appointed to the board of directors,” but never actual directors. Dkt. 101 Ex. 62; see Dkt.
101 Ex. 61. Until that point, no Stream employee, including the Rajan brothers, had
suggested that the Outside Directors were merely advisors. Gola challenged that argument
as “patently ridiculous,” and the Rajan brothers dropped it. Dkt. 102 Ex. 64 at 1598. If the
13
Rajan brothers had already removed the Outside Directors by delivering the May
Stockholder Consent, then they would not have needed to claim that the Outside Directors
were only advisors.
H. Further Negotiations
Once it became clear that the Rajan brothers intended to challenge the Omnibus
Agreement, SLS, Hawk, the Equity Investors, and the Resolution Committee attempted to
negotiate with the Rajan family to convince them to support a deal. SLS, Hawk, and the
Equity Investors offered to amend the Omnibus Agreement to give the Rajan brothers
greater consideration. The Rajan brothers pushed for personal benefits for themselves,
including employment, compensation, and indemnification for litigation expenses.
After those negotiations broke down, the Rajan brothers refused to comply with the
Omnibus Agreement. On May 11, 2020, the Rajan brothers and Hodgson, the only
remaining Outside Director, convened a meeting of the Board. During the meeting, they
adopted a resolution purporting to nullify and void the Omnibus Agreement. The Rajan
brothers refused to take any action to comply with the Omnibus Agreement. Instead, they
tried to change who managed certain Stream subsidiaries, and they attempted to remove
prototype technology from a storage facility in the Netherlands. Mathu also incorporated a
new entity named Glasses-Free Technologies, Inc., and purported to grant it a license to
use Stream’s technology. See Dkt. 102 Ex. 74.
I. This Litigation
On September 8, 2020, Stream filed this litigation and moved for a temporary
restraining order to bar SeeCubic from seeking to enforce the Omnibus Agreement.
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SeeCubic filed counterclaims and third-party claims and moved for a temporary restraining
order of its own. This court entered a status quo order and scheduled a hearing on the
parties’ competing motions for preliminary injunction.
Discovery did not go smoothly. In its discovery responses, Stream took aggressive
positions that included objecting to producing documents to support its defenses. SeeCubic
filed a motion to compel, which Stream rendered moot by belatedly supplementing its
responses. Stream then missed the deadline to start producing documents on a rolling basis.
Before the deadline for substantial completion of the production of documents, Stream had
produced a paltry 201 documents. On the deadline, Stream produced more than 11,000
documents, necessitating an extension in the deadline for completing fact discovery.
During this period, Stream’s initial counsel withdrew, and successor counsel appeared.
The parties subsequently agreed on deposition dates for six witnesses, but Stream
unilaterally put the deposition schedule on hold. After SeeCubic filed a second motion to
compel, Stream negotiated a new deposition schedule. Then, at the start of the deposition
of Kabacinski, Raja Rajan claimed that he would be taking the deposition, even though he
was a party to and fact witness in the case and represented by counsel who attended the
deposition. SeeCubic’s counsel objected but allowed the deposition to proceed.
After a dispute over whether Raja would conduct further depositions, Stream’s
successor counsel withdrew. Stream next failed to produce a privilege log or redaction log
in compliance with the scheduling order. SeeCubic filed a third motion to compel, which
this court granted. Stream is currently on its third set of lawyers. The Rajan brothers are
currently representing themselves.
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II. LEGAL ANALYSIS
To obtain a preliminary injunction, the movant must demonstrate (i) a reasonable
probability of success on the merits, (ii) a threat of irreparable harm if an injunction is not
granted, and (iii) that the balance of the equities favors the issuance of an injunction.
Revlon, Inc. v. MacAndrews & Forbes Hldgs., Co., 506 A.2d 173, 179 (Del. 1986).
In this case, each side’s arguments are the flipside of its opponent’s:
 Stream claims that the Omnibus Agreement is invalid and that it therefore still owns
the assets. SeeCubic claims the opposite.
 Stream claims that it is suffering irreparable harm because SeeCubic is depriving
Stream of control over the assets. SeeCubic claims the opposite.
 Stream claims that because it owns the assets, the balance of hardships favors an
injunction to prevent SeeCubic from interfering with its rights. SeeCubic claims the
opposite.
Because of the parties’ mirror-image claims, there is no dispute about the existence of
irreparable harm or the balancing of the hardships. The outcome of the dueling motions
turns on who has established a reasonable probability of success on the merits, which in
turn depends on the validity of the Omnibus Agreement.
A. The Resolution Committee Had Authority To Bind Stream To The Omnibus
Agreement.
Stream argues that the Omnibus Agreement is invalid because the Resolution
Committee did not have authority to cause Stream to enter into it. Stream contends that the
Resolution Committee could not have acted validly because its members either were not
validly appointed as directors or were removed before the Omnibus Agreement was
16
approved. The weight of the evidence establishes that the Resolution Committee validly
adopted the Omnibus Agreement.
1. The Outside Directors Were Appointed Validly.
The evidence establishes that the Outside Directors were appointed validly. As
authorized by Section 141(b) of the DGCL,2 the Charter provides that “[t]he number of
directors which shall constitute the whole Board shall be fixed by the Board in the manner
provided in the Bylaws . . . .” Dkt. 101 Ex. 41 § VI.A. Stream’s bylaws provide that “[t]he
Board of Directors shall consist of one or more members, the number thereof to be
determined from time to time by the Board.” Dkt. 100 Ex. 40 (the “Bylaws”) § 2.1.
Consistent with Section 141(f) of the DGCL,3 the Bylaws recognize that “[a]ny action
required or permitted to be taken by the Board of Directors, or any committee thereof, may
2
See 8 Del. C. § 141(b) (“The number of directors shall be fixed by, or in the manner
provided in, the bylaws, unless the certificate of incorporation fixes the number of
directors, in which case a change in the number of directors shall be made only by
amendment of the certificate.”); Stroud v. Milliken Enters., Inc., 585 A.2d 1306, 1308 (Del.
Ch. 1988) (“Proposed Article 11(a) provides that the Board of Directors shall consist of 9
to 13 members, to be fixed by a majority vote of directors. Unquestionably, Delaware law
allows the Board to fix the number of directors within the restrictions imposed by the
Certificate of Incorporation.”), appeal dismissed as not ripe, 552 A.2d 476 (Del. 1989).
3
See 8 Del. C. § 141(f) (“Unless otherwise restricted by the certificate of
incorporation or bylaws[,] any action required or permitted to be taken at any meeting of
the board of directors or of any committee thereof may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in writing, or by
electronic transmission . . . .”).
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be taken without a meeting if all of the members of the Board or of such a committee, as
the case may be, consent in writing to such action . . . .” Id. § 2.8.
Before adding the Outside Directors to the Board, Mathu and Raja Rajan were
Stream’s sole directors. On March 12, 2020, the Rajan brothers executed the March
Director Consent. As Stream’s sole directors, they validly increased the size of the Board
to six and filled the newly created directorships with the Outside Directors.4
4
The parties agree that Mathu and Raja were Stream’s sole directors when they
executed the March Director Consent. Matters would become more complicated if Mathu
and Raja had been the two remaining directors on a board with five seats, three of which
remained vacant after the resignations in June 2019 and January 2020. In that scenario,
Mathu and Raja would have constituted two members of a five-member board, meaning
that they could not have satisfied the requirements for a quorum, taken action at a meeting,
or acted unanimously by written consent. See Applied Energetics, Inc. v. Farley, 239 A.3d
409, 425–29 (Del. Ch. 2020). However, they still would have been able to fill vacancies or
newly created directorships because under the Bylaws and consistent with Section 223(a)
of the DGCL, “vacancies and newly-created directorships resulting from any increase in
the authorized number of directors may be filled by a majority of the directors then in
office, although less than a quorum, or by the sole remaining director.” Dkt. 100 Ex. 40 §
2.2; accord 8 Del. C. § 223(a)(1) (“Unless otherwise provided in the certificate of
incorporation or bylaws . . . [v]acancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the stockholders having the
right to vote as a single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director.”). If the Board had three
vacancies, then Mathu and Raja could have filled them.
Mathu and Raja could not have added all four Outside Directors because the Board
had only five seats. An advocate might argue that the references to “newly-created
directorships” in the Bylaws and in Section 223(a)(1) meant that Mathu and Raja could
have expanded the Board, established a sixth directorship, and filled it, even though they
would not have constituted a quorum. That is not a viable interpretation of the Bylaws or
Section 223(a)(1). The reference to newly created directorships in Section 223(a)(1)
addresses uncertainty about whether a board can fill newly created directorships or whether
that power rests exclusively with the stockholders. See 1 David A. Drexler et al., Delaware
Corporation Law and Practice § 13.02, at 13-29 (2018 & Supp. 2020) (“[A] series of cases
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held that the power of directors to fill vacancies did not extend to newly created
directorships. It was not until 1949 that the statue was amended to grant such power to
directors expressly.” (footnote omitted)). It also ensures that a board can act if directors
comprising a majority of a quorum expand the size of the board such that they no longer
can supply a quorum (e.g., a board of three expands its size to a board of nine). Under those
circumstances, the directors in office, though now less than a quorum, could fill the newly
created directorships. But Section 223(a)(1) does not empower the remaining directors
constituting less than a quorum to reduce or enlarge the size of the Board.
From a technical standpoint, Mathu and Raja could have accomplished their goal of
adding all four Outside Directors to the Board by filling a sufficient number of vacancies
to satisfy a quorum, and then acting along with those new directors to enlarge the board to
six seats and fill the newly created directorship. At the time, Mathu and Raja wanted to add
all four Outside Directors, so they doubtless would have taken those steps if they
understood it was necessary.
SeeCubic suggests that Mathu and Raja also could have acted as stockholders. They
could have filled the existing vacancies as stockholders, but they could not have enlarged
the Board because the Charter states that “[t]he number of directors which shall constitute
the whole Board shall be fixed by the Board in the manner provided in the Bylaws . . . .”
Dkt. 101 Ex. 41 § VI.A. Such a provision gives the board the sole authority to set the
number of directors. See Henley Gp., Inc. v. Santa Fe S. Pac. Corp., 1988 WL 23945, at
*16, *19 (Del. Ch. Mar. 11, 1988) (explaining that under a comparable provision, “the size
of the Santa Fe Board is presently determined exclusively by the Board”; finding provision
valid). As Stream’s controlling stockholders, Mathu and Raja had the voting power
necessary to amend the certificate of incorporation, but the Board first had to adopt the
amendment and declare its advisability. See 8 Del. C. § 242(b)(1). Mathu and Raja could
not supply the majority of a quorum necessary for the Board to act. Notably, Mathu and
Raja’s inability to supply a quorum in this scenario also would infect any other action that
they took as the two remaining members of a five-member board.
For purposes of the issues in this case, this potential defect does not affect the
outcome. If trial established that Mathu and Raja were the two remaining members of a
five-member board when they executed the March Director Consent, then that would
undermine the status of the Outside Directors only as de jure directors. It would not alter
their status as de facto directors, and Gola and Gollop, as the sole members of the
Resolution Committee, would have had authority as de facto directors to approve the
Omnibus Agreement.
19
Consistent with Stream’s practice of disregarding corporate formalities, the
language of the March Director Consent does not deploy the specific concepts that the
Bylaws and the DGCL contemplate. A Delaware practitioner would want the March
Director Consent to (i) refer to the directors’ power to act by unanimous written consent,
supported by citations to Section 2.8 of the Bylaws and Section 141(f) of the DGCL, (ii)
expand the number of seats on the Board from two to six, supported by citations to Section
2.1 of the Bylaws and Section 141(b) of the DGCL, and (iii) state that the directors were
filling the newly created directorships with the Outside Directors, supported by citations to
Section 2.2 of the Bylaws and Section 223(a)(1) of the DGCL. The operative resolution
instead stated,
NOW, THEREFORE, BE IT HEREBY RESOLVED, that Frank
Hodgson, Asaf Gola, Krzysztof Kabacinski and Kevin Gollop are elected to
the Board of Directors of Company [sic], each as an Interim Director, with
an official start date for those posts to be within twenty four (24) hours of the
time and date of the signatures of Messrs. Mathu and Raja Rajan below and
continue until determined otherwise by the mutual agreement of the
Company and the individual Interim Director.
Dkt. 102 Ex. 105 at 1.
Although lacking in technical precision, the language of the March Director
Resolution made clear that the Rajan brothers intended to expand the Board and add the
Outside Directors. Stream cannot now take advantage of Mathu and Raja’s informality to
achieve a result that would benefit themselves. Equity regards as done what ought to have
been done. See Eddington v. Turner, 26 A.2d 80, 82 (Del. Ch. 1942) (Wolcott, C.).
In an effort to escape the implications of the Rajan brothers’ actions, Stream claims
that the March Director Consent appointed the Outside Directors as “Interim Directors,”
20
and conditioned their actual directorships on them satisfying certain requirements,
including investing in Stream and executing a Director Services Agreement. That argument
fails for three reasons.
First, Delaware law does not recognize the role of “Interim Director,” and Stream’s
constitutive documents did not contemplate such a position. Perhaps a certificate of
incorporation provide for an interim director using the authority granted under Section
141(d) of the DGCL, but the Charter did not attempt to do that. As a matter of Delaware
law, and under Stream’s constitutive documents, the Outside Directors became directors
entitled to serve until their successors’ election and qualification.
Second, Delaware law does not permit the March Director Consent to impose
conditions on the ability of the Outside Directors to become directors. By doing so, the
March Director Consent attempted to impose director qualifications. Under Section 141(b)
of the DGCL, any director qualifications must appear in the certificate of incorporation or
bylaws. The pertinent language of Section 141(b) states,
Directors need not be stockholders unless so required by the certificate of
incorporation or the bylaws. The certificate of incorporation or bylaws may
prescribe other qualifications for directors.
8 Del. C. § 141(b). The Charter and Bylaws did not require that directors invest in Stream
or sign a Director Services Agreement, and the Rajan brothers could not impose those
qualifications through the March Director Consent.
Third, director qualifications must be reasonable. The offer letter and Director
Services Agreement resemble documents used with employees. They contain terms that,
21
when applied to directors, are inconsistent with Stream’s constitutive documents and
Delaware law.
For example, the offer letter sent to the Outside Directors stated, “You will begin
on Friday, February 14, 2020. This is a 3 year term, but at the end of every year, both
parties can renew.” E.g., Dkt. 100 Ex. 8. The Board was not divided into classes, so all
directors served for one-year terms, not three-year terms. Moreover, a Delaware
corporation and its directors do not “renew” the directors’ service. Under Delaware law,
“[e]ach director shall hold office until such director’s successor is elected and qualified or
until such director’s earlier resignation or removal.” 8 Del. C. § 141(b). And except for the
filling of vacancies or new directorships, directors are elected by stockholders to oversee
the business and affairs of the corporation. See id. §§ 141(a), 141(d), 211(b). The
corporation cannot elect or appoint its own directors. To the contrary, a corporation may
not vote its own shares. See 8 Del. C. § 160(c).
The Director Services Agreement went even further astray. Contrary to the status of
directors under Delaware law, the Director Services Agreement purported to provide that
the “Director’s relationship with the Company will be that of an independent contractor . .
. .” Dkt. 102 Ex. 76 at ’040. The Services Agreement also purported to impose a contractual
confidentiality obligation on the director that (i) would be superfluous in light of the
director’s fiduciary duties, see Holdgreiwe v. Nostalgia Network, Inc., 1993 WL 144604,
at *6 (Del. Ch. Apr. 29, 1993) (Allen, C.), and (ii) could not prevent the director from
making disclosures if the director’s fiduciary duties required it, see Quickturn Design Sys.,
Inc. v. Shapiro, 721 A.2d 1281, 1291–92 (Del. 1998). The Director Services Agreement
22
also purported to impose various mandatory obligations on the director to support the
corporation. As with the confidentiality obligation, the director’s fiduciary duties rendered
those mandatory obligations both redundant (to the extent that they contemplated actions
consistent with what the director believed to be in the best interests of the corporation) and
ineffective (to the extent that they required action contrary to what the director believed
would be in the best interests of the corporation). Overall, the Director Services Agreement
was unreasonable, and the Rajan brothers could not condition the Outside Directors’ status
as directors on their signing the Director Services Agreement.
As a matter of Delaware law, the Outside Directors were validly appointed as
directors through the March Director Consent. Gola and Gollop therefore had authority to
bind Stream to the Omnibus Agreement as members of the Resolution Committee.
2. The Outside Directors’ Status As De Facto Directors
Assuming for the sake of argument that the Outside Directors were not validly
appointed, it is reasonably probable that this court would conclude after trial that the
Outside Directors were de facto directors. See Hockessin Cmty. Ctr., Inc. v. Swift, 59 A.3d
437, 459–60 (Del. Ch. 2012). As de facto directors, their acts are valid and bind the
corporation for purposes of its interactions with third parties.5 The Omnibus Agreement
therefore would be valid and binding on Stream.
5
See President & Fellows of Harvard Coll. v. Glancy, 2003 WL 21026784, at *17
(Del. Ch. Mar. 21, 2003) (“[D]e facto directors have the authority to take valid corporate
action when third parties are affected.”); see also Gassis v. Corkery, 2014 WL 2200319, at
*13 (Del. Ch. May 28, 2014) (“[E]ven if [the court] were to find that [the directors in
23
Stream and the Rajan brothers treated the Outside Directors as directors, and all
other relevant parties reasonably believed that the Outside Directors were directors. The
Rajan brothers, on behalf of Stream, sent letters of invitation to join the Board to the
Outside Directors. Each of the Outside Directors agreed to join the Board, and Stream
announced to its investors and employees that the Outside Directors had become members
of the Board. The Outside Directors attended eight Board meetings, during which they
received privileged legal advice and confidential information and were asked to vote on
corporate actions. The minutes of those meetings list the Outside Directors as “Board
Members” and were submitted to the Outside Directors for approval. In discussions with
the Outside Directors, the Rajan brothers asserted that the Outside Directors owed fiduciary
duties to Stream, which they could only owe if they were really directors. Throughout this
period, the Rajan brothers and other Stream employees repeatedly referred to the Outside
Directors as “directors” and the “Board” and held out the Outside Directors as directors to
third parties, including when soliciting investments. By the time of the hearing on the
preliminary injunction, Stream no longer disputed that it treated the Outside Directors as
de facto directors.
question] ultimately had no valid claim to their director seats, that finding would not
invalidate prior actions of the board.”), aff’d, 113 A.3d 1080 (Del. 2015). See generally
2 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations
§ 383, at 225 (perm.ed., rev. vol. 2014) (explaining that the acts of de facto directors “are
just as valid and biding upon the corporation” as the acts of de jure directors).
24
Stream now argues that the Outside Directors could not be de facto directors because
the de facto director doctrine only protects third parties, and the Board’s vote to establish
the Resolution Committee did not involve third parties. But the motions for preliminary
injunction turn on the validity of the Omnibus Agreement, which is an agreement between
Stream and third parties. Under the de facto director doctrine, Gola and Gollop had
authority to approve the Omnibus Agreement.
As a fallback, Stream argues that SLS and Hawk are not third parties because they
were intimately familiar with Stream’s internal affairs, and Stastney, the principal of SLS,
previously had served as a director and officer of Stream. For purposes of the Omnibus
Agreement, SLS and Hawk were third parties. Neither was an insider or represented by an
insider, and neither had any first-hand knowledge about the roles of the Outside Directors.
They only knew what the Rajan brothers and other Stream representatives told them.
Assuming for the sake of argument that the Outside Directors were not validly
appointed as de jure directors, they nevertheless had authority to act as de facto directors.
As members of the Resolution Committee, Gola and Gollop had authority to bind Stream
to the Omnibus Agreement.
3. The May Stockholder Consent Did Not Remove Gola And Gollop
Before They Approved The Omnibus Agreement.
Stream next argues that the Resolution Committee could not have approved the
Omnibus Agreement because the Rajan brothers removed Gola, Gollop, and Kabacinski
on May 6, 2020, before Gola and Gollop could act. The weight of the evidence establishes
that the Rajan brothers backdated the May Stockholder Consent, which they did not
25
actually execute until the evening of May 8 or on May 9, after the Resolution Committee
already had approved the Omnibus Agreement.
As a matter of Delaware law, the Resolution Committee was formed validly and had
authority to bind Stream to the Omnibus Agreement. During the meeting of the Board on
May 4, 2020, the directors validly created the Resolution Committee. Section 2.6 of the
Bylaws provides that “a majority of the authorized number of directors shall constitute a
quorum,” and “[t]he vote of a majority of the directors present at a meeting at which a
quorum is present shall be shall be [sic] the act of the Board . . . .” The Bylaws authorize
the Board to “designate one or more committees, each consisting of one or more directors,”
which “shall have and may exercise all the powers and authority of the Board . . . .” Gola,
Gollop, Kabacinski, and the Rajan brothers constituted a quorum. Gola, Gollop, and
Kabacinski voted in favor of the proposal to form Resolution Committee, and the Rajan
brothers abstained. As a result, the Board acted by a majority of a quorum to create the
Resolution Committee and empower it with authority to resolve pending disputes between
Stream and its investors.
On May 6, 2020, the Resolution Committee, approved the Omnibus Agreement. By
taking that action, the Resolution Committee bound Stream to the Omnibus Agreement.
Gola signed the Omnibus Agreement on May 6, memorializing that decision. Gollop did
not sign the agreement until May 7, but the delay in securing the second signature does not
alter the fact that the Omnibus Agreement was approved on May 6 and bound Stream from
that point on.
26
The evidence indicates that the Rajan brothers did not execute the May Stockholder
Consent until the evening of May 8 at the earliest. The Rajan brothers backdated the May
Stockholder Consent to May 6. Although the evidence suggests that the Rajan brothers
started working on the May Stockholder Consent on May 6, the evidence also makes clear
that they did not execute the document on that date. By the time the Rajan brothers executed
the May Stockholder Consent, the Resolution Committee had already approved the
Omnibus Agreement. The May Stockholder Consent thus does not impair the validity of
the Omnibus Agreement.
B. The Omnibus Agreement Did Not Require Stockholder Approval.
Having failed to undermine the Omnibus Agreement at the director level, Stream
moves to the stockholder level, claiming that the Omnibus Agreement is ineffective
because it required stockholder approval. Stream identifies two sources of a stockholder-
approval requirement: Section 271 and the Class Vote Provision. Neither applies to the
transfer of assets contemplated by the Omnibus Agreement.
1. Section 271
Section 271 of the DGCL requires a stockholder vote for a sale of all or substantially
all of a corporation’s assets. Everyone agrees that the Omnibus Agreement encompasses
all of Stream’s assets. The question is whether the transfer of Stream’s assets to its secured
creditors under the circumstances presented here constitutes a sale or exchange within the
scope of Section 271. It does not.
The current dominance of the merger as the transactional vehicle for selling a
corporation has caused the earlier predominance of the sale of assets to fade from memory.
27
Before the General Assembly liberalized Delaware’s merger statutes,6 the preferred
transaction structure involved the target corporation selling all of its assets to the acquirer,
6
“In the Nineteenth Century, a merger almost always meant the melding of two
different businesses into one, akin to the formation of a partnership among individual
proprietorships. All of the stockholders in all of the constituent corporations had to approve
the combination, and each automatically became a stockholder of the surviving
corporation.” 2 Drexler, supra, § 35.03, at 35-4. The concept of a “merger” thus meant a
direct, stock-for-stock merger between two entities, and it required unanimous stockholder
approval to effectuate.
During the first half of the twentieth century, the merger remained a “cumbersome,
seldom-used mechanism,” even after the General Assembly lowered the voting
requirement to two-thirds of the outstanding shares and then to a bare majority. Id. The
DGCL continued to “require[] that the outstanding shares of each constituent corporation
be converted into equity shares of the surviving corporation,” making cash deals
impossible. Id.
In 1941, the General Assembly amended the long-form merger statute so that the
shares of a constituent corporation could be converted into “shares or other securities.”
43 Del. Laws ch. 132, § 12 (1941). Hypothetically, this amendment permitted a merger to
provide target stockholders with the functional equivalent of cash consideration by
converting their shares into short-term notes. See 2 Drexler, supra, § 35.03, at 35-4. In
1957, the General Assembly authorized the conversion of shares into cash in short-form
mergers. 51 Del. Laws ch. 121, § 6 (1957); see 8 Del. C. § 253. Stockholder plaintiffs
challenged the statute as unconstitutional, claiming that it destroyed a vested right to stock
consideration, but the Delaware Supreme Court rejected this argument based on “the
reserved power of the State to amend corporation charters . . . .” Coyne v. Park & Tilford
Distillers Corp., 154 A.2d 893, 897 (Del. 1959).
In 1967, as part of a substantial rewrite of the DGCL, the General Assembly
amended the long-form merger statute to authorize the conversion of a constituent
corporation’s shares into cash, debt securities, securities of other corporations, or other
property. 56 Del. Laws ch. 50 (1967); see 1 R. Franklin Balotti & Jesse A. Finkelstein, The
Delaware Law of Corporations & Business Organizations § 9.11 (3d ed. 1998 & 2011
Supp.); see also 8 Del. C. § 251. After these amendments, it became possible to “structure
mergers to accomplish a broad spectrum of transactions, including the cashout of minority
interests and the acquisition of other corporations for cash . . . .” 2 Drexler, supra, § 35.03,
at 35-6. The amendments also authorized triangular mergers, allowing acquirers to use a
28
then dissolving and distributing the consideration to its stockholders.7 Before the 1980s,
the great Delaware takeover cases largely involved sales of assets.8 “[T]he decisions in
subsidiary as a constituent corporation and convert the shares of the target corporation into
shares of the parent. See 1 Balotti & Finkelstein, supra, § 9.7. With these changes, the
merger began its steady rise to predominance.
7
See generally 2 Drexler, supra, § 37.04 at 37-8 to -9; Henry Winthrop Ballantine,
Ballantine on Corporations §§ 279–80 (1946); George S. Hills, Consolidation of
Corporations by Sale of Assets and Distribution of Shares, 19 Cal. L. Rev. 349 (1931).
8
E.g., Gimbel v. Signal Cos., Inc., 316 A.2d 599, 609–18 (Del. Ch. 1974) (granting
preliminary injunction against third-party sale of assets based on apparent breaches of the
duty of care, citing the haste with which the board acted and disparate testimony regarding
value), aff’d, 316 A.2d 619 (Del. 1974); Alcott v. Hymann, 184 A.2d 90, 96–97 (Del. Ch.
1962) (rejecting claim that sale of assets was a de facto merger and holding that price was
fair even if controlling stockholder stood on both sides of transaction), aff’d, 208 A.2d 501(Del. 1965); Baron v. Pressed Metals of Am., 117 A.2d 357, 364 (Del. Ch. 1955) (holding
that directors and majority stockholders did not breach their fiduciary duties when
effectuating sale of corporation’s assets), aff’d, 123 A.2d 848 (Del. 1956); Robinson v.
Pittsburgh Oil Refin. Co., 126 A. 46, 50–51 (Del. Ch. 1924) (Wolcott, C.) (denying motion
for preliminary injunction to enjoin sale of assets; holding that directors legitimately chose
nominally lower-valued bid with more certain consideration over nominally higher-valued
bid); Allied Chem. & Dye Corp. v. Steel & Tube Co. of Am., 120 A. 486, 491, 496–97 (Del.
Ch. 1923) (Wolcott, C.) (holding that controlling stockholder owed fiduciary duty to
minority and granting preliminary injunction against sale of assets by controlling
stockholder that appeared motivated by desire for short-term profit). See generally 2
Drexler, supra, § 37.04 at 37-8 (“A review of annotations suggests that perhaps more
judicial scrutiny was given prior to 1967 to Section 271 than any other Section of law.”);
Ernest L. Folk, III, The Delaware General Corporation Law: A Commentary and Analysis
399–424 (1972) (collecting cases and describing range of issues raised by sales of assets
under Section 271). Demonstrating the reversal of transactional fortunes, in 1931, this court
issued a decision that described the settled principles governing a claim for breach of
fiduciary duty in connection with a sale of assets and then applied them by analogy to a
merger, explaining that “from the viewpoint of the constituent companies, a sale of assets
is in substance involved.” Cole v. Nat’l Cash Credit Ass’n, 156 A. 183, 188 (Del. Ch. 1931)
(Wolcott, C.). The court further explained that the transaction could be regarded as “one
where the stockholders of the defendant are in substance selling its assets to another in
exchange for securities issued by the latter . . . .” Id.29
Section 271 transactions provided the vehicle for much of the development and refinement
in Delaware of the law with respect to the business judgment presumption and the fiduciary
duty owed by directors and majority stockholders to a minority.” 2 Drexler, supra, § 37.04
at 37-8 to -9.
At common law, the general rule was “that the directors have no power or authority
to sell out the entire property of a corporation and terminate its business. They have only
the power of management in conducting ordinary business affairs.” Ballantine, supra,
§ 281, at 666. The common law even prevented directors from selling the assets of the
business with approval from a majority or supermajority of the stockholders. Unanimous
stockholder approval was required, and “[t]he general rule in the absence of statute” was
“that such a disposition of assets or a dissolution may be restrained on the objection of a
single shareholder.” Id.
A widely recognized exception to the rule applied to insolvent or failing firms. A
late nineteenth century treatise noted that for “a failing company the rule is different, and
sale of the whole property may be made by the directors.” 1 Charles Fisk Beach, Jr.,
Company Law: Commentaries on the Law of Private Corporations § 357, at 582 (1891);
see id. § 358, at 582 (“A corporation through a majority of its directors may make a transfer
of all its property in payment of one creditor if it be done bona fide.”). An early twentieth
century treatise expressed the rule similarly: “The directors may, however, without
authorization of the stockholders, sell the corporate assets if necessary to pay the corporate
debt, and they may, in the absence of statutory or other prohibitions, make an assignment
for the benefit of creditors.” Thomas Conyngton & R. J. Bennett, Corporation Procedure
30
232 (rev. ed. 1927) (footnote omitted). And a mid-twentieth century treatise stated the rule
plainly:
If a corporation is insolvent or in failing condition[,] the board of directors
have authority to sell the entire assets in order to pay the debts and avoid the
sacrifice of an execution sale[,] even without the vote or consent of the
shareholders. They may also make an assignment for the benefit of creditors
or file a voluntary petition in bankruptcy.
Ballantine, supra, § 281, at 667 (footnote omitted). When making these statements, the
treatise authors relied on cases from numerous jurisdictions.9 Even today, a leading
9
See, e.g., City Nat. Bank v. Fuller, 52 F.2d 870, 872–873 (8th Cir. 1931) (holding
that directors of insolvent national bank had authority to convey assets to creditors without
stockholder approval); Autauga Coop. Leasing Ass’n v. Ward, 33 So.2d 904, 906 (Ala.
1948) (holding that when a commercial corporation is insolvent or in failing condition, “the
directors . . . could sell all its property without any special procedure”); Candor v. Mercer
Cty. State Bank, 257 Ill. App. 192, 197–98 (Ill. App. Ct. May 3, 1930) (“The general rule
is that where a business is in a failing condition and has become financially involved and
insolvent, and the creditors are pressing their claims, the directors may dispose of the assets
without the sanction of the stockholders, when it is deemed of imperative necessity.”);
Sherrard State Bank v. Vernon, 243 Ill. App. 122, 128 (Ill. App. Ct. Oct. 8, 1926) (“Where,
however, the corporation is insolvent or in failing circumstances and the business can no
longer be carried on profitably and advantageously, such a sale may be made and minor
stockholders cannot object thereto in the absence of fraud.”); Oskaloosa Sav. Bank v.
Mahaska Cty. State Bank, 219 N.W. 530, 533 (Iowa 1928) (“[I]t is an exception to the
general rule [requiring stockholder approval for a sale of assets] that where a business is in
a failing condition and has become financially involved and insolvent, and the creditors are
pressing their claims, the power of the directors to alienate the property is conceded where
it is regarded as of imperative necessity.”); Howard v. Republic Bank & Tr. Co., 76 S.W.2d
187, 191 (Tex. Civ. App. 1934) (“While the general rule is well settled that the directors
of a solvent corporation cannot dispose of all of the corporation's assets without first
obtaining the consent of the stockholders, there is also a well-recognized rule that, where
a corporation is in failing circumstances and its business can no longer be carried on
profitably, or where an emergency exists wherein delay would prove disastrous to its
creditors, the directors may validly do so without the consent of the other stockholders.”).
See R. P. Davis, Annotation, Applicability of Statutes Regulating Sale of Assets or Property
of Corporation as Affected by Purpose or Character of Corporation, 9 A.L.R.2d 1306 § 4
31
Delaware treatise acknowledges the “failing business” exception to the common law rule.
1 Balotti & Finkelstein, supra, § 10.7, at 10-34.
The Delaware Court of Chancery first confronted litigation involving a sale of assets
in 1915, before the enactment of any statute addressing sales of assets. Chancellor Curtis10
summarized the law as follows:
The general rule as to commercial corporations seems to be settled that
neither the directors nor the stockholders of a prosperous, going concern have
power to sell all, or substantially all, the property of the company if the holder
of a single share dissent. But if the business be unprofitable, and the
enterprise be hopeless, the holders of a majority of the stock may, even
against the dissent of the minority, sell all the property of the company with
a view to winding up the corporate affairs.
Butler v. New Keystone Copper Co., 93 A. 380, 382 (Del. Ch. 1915). Chancellor Curtis
thus acknowledged the general prohibition on selling all of a corporation’s assets, as well
as the exception for an insolvent or failing firm. See id. The defendant corporation in Butler
had a provision in its charter that authorized the directors to sell all of its assets after
(1950 & Supp.) (addressing “[r]eorganization of companies in financial difficulties”). See
generally G. M. H., Annotation, Power of Directors to Sell Property of Corporation
Without Consent of Stockholders, 60 A.L.R. 1210 (1929 & Supp.); R.S., Annotation, Power
of Directors to Sell Property of Corporation Without Consent of Stockholders, 5 A.L.R.
930 (1920 & Supp.).
10
Chancellor Charles M. Curtis served from 1909 until 1921. He was succeeded by
Chancellor Josiah O. Wolcott, who served from 1921 until 1938. Both presided during the
period after New Jersey adopted the Seven Sisters Acts, which opened the door for envious
upstarts (as Delaware then was) to compete for the chartering business. Both Chancellors
played major—and today underappreciated—roles in establishing this court’s reputation
as a preeminent venue for deciding corporate cases.
32
receiving approval from three-fourths of its stockholders, and the principal issue for
decision was whether that provision supplied the necessary authority and overrode the
common law rule. Chancellor Curtis held that the charter provision was effective and
denied the stockholders’ application for a preliminary injunction. Id. at 381–82.
The General Assembly enacted the statutory predecessor to Section 271 against this
common law backdrop. In 1917, the General Assembly authorized the board of a
corporation to sell all of the corporation’s assets with the approval of a majority of its
stockholders.11 The statute read as follows:
Section 64a. Sale of Assets and Franchises.––Every corporation organized
under the provisions of this chapter, may at any meeting of its board of
directors, sell, lease or exchange all of its property and assets, including its
good will and its corporate franchises, upon such terms and conditions as its
board of directors deem expedient and for the best interests of the
corporation, when and as authorized by the affirmative vote of the holders of
a majority of the stock issued and outstanding having voting power given at
a stockholders’ meeting duly called for that purpose, or when authorized by
11
See Folk, supra, at 399 n.1 (“Apparently, the sale of assets statute was first
enacted in 1916, probably as a legislative reaction to the restrictive dicta in Butler . . . .”
(italics added)). Sources conflict on whether the statute was adopted in 1916 or 1917.
Professor Folk says 1916, as does another treatise. See 2 Drexler, supra, § 37.01 at 37-1
(explaining that Butler “led to the adoption in 1916 of the predecessor to present Section
271”). A source closer in time says 1917. Russell Carpenter Larcom, The Delaware
Corporation 34–35 (1937) (“The statute contained no provisions for such sales until 1917
when regulations were included, doubtless as a result of the controversy over a similar
charter clause which was settled by the courts in 1915.” (footnote omitted) (citing Butler));
accord 1 Balotti & Finkelstein, supra, § 10.1, at 10-4 (“Section 271 was first enacted in
1917 . . . .”) The statute appears to have been enacted in 1917, so this decision uses that
date. See 29 Del. Laws ch. 113, § 17 (1917); Lewis S. Black, Jr., & Craig B. Smith,
Antitakeover Charter Provisions: Defending Self-Help for Takeover Targets, 36 Wash. &
Lee L. Rev. 699, 700 n.8 (1979) (citing the enactment of 29 Del. Laws ch. 113, § 17 in
1917).
33
the written consent of a majority of the holders of the voting stock issued and
outstanding, provided, however, that the certificate of incorporation may
require the vote or written consent of a larger proportion of the stockholders.
29 Del. Laws ch. 113, quoted in Allied Chem., 120 A. at 490.
The General Assembly enacted the statute to confer authority on corporations that
did not exist at common law.12 There is no indication that the General Assembly intended
to restrict or eliminate authority that already existed at common law, such as the power of
the directors of an insolvent and failing corporation to sell its assets.
The 1917 statute was silent as to the permissible forms of consideration. A 1929
amendment confirmed that the consideration could consist “in whole or in part [of] shares
of stock in, and/or other securities of, any other corporation or corporations.”13 In 1967,
after a systematic review of the DGCL, the General Assembly revised the statute to appear
substantially in its current form. The revised statute expanded the expressly permitted
forms of consideration: “[T]o the original authority to sell assets for stock and securities of
12
Balotti & Finkelstein, supra, § 10.1, at 10-4 (“Section 271 was first enacted in
1917 to supersede and mitigate the common law requirement, in most situations, of
unanimous stockholder consent to the alienation of all or substantially all of the
corporation’s property. The statutory change was intended to eliminate the veto power of
minority stockholders and not to limit the powers of the directors to manage the business
of the corporation.” (footnotes omitted)); Folk, supra, at 400 (explaining that the statute
was intended to alter the common law rule that “neither the directors nor stockholders of a
prosperous going concern could sell all or substantially all of the property of the
corporation if a single stockholder objected”).
13
36 Del. Laws ch. 135, § 19 (1929); see Nelson Ferebee Taylor, Evolution of
Corporate Combination Law: Policy Issues and Constitutional Questions, N.C. L. Rev.
687, 883 n.812 (1998).
34
‘any other corporation or corporations,’ the 1967 revision added ‘money or other
property.’” Folk, supra, at 400. The revised provision also encompassed sales of “all or
substantially all” of the corporation’s assets, but the addition of “substantially all” was not
viewed as a substantive change, because “the general consensus was that the old statute
applied in that situation as well.”14
The 1967 revision made two related changes to the DGCL. First, the General
Assembly added a new provision—Section 272—which states, “The authorization or
consent of stockholders to the mortgage or pledge of a corporation’s property and assets
shall not be necessary, except to the extent that the certificate of incorporation otherwise
provides.” 8 Del. C. § 272. The General Assembly included this section “to clarify that
[S]ection 271 . . . does not apply to a mortgage or pledge of assets.”15 In Professor Folk’s
original commentary on the DGCL, written shortly after the 1967 revisions, he explained
that the new section did not “reflect a departure from the understanding of prior law which,
14
Folk, supra, at 400; accord Balotti & Finkelstein, supra, § 10.1, at 10-4 (“The
addition of this language was intended merely to codify the interpretation generally
accorded to the language of the pre-1967 statute that the word ‘all’ meant ‘substantially
all,’ so that the statute could not be evaded by retaining a small amount of property not
vital to the operation of the business.” (footnotes omitted)); Drexler, supra, § 37.01 at 37-
2 (“This modification merely codified what had been the generally held understanding of
what was implicit in the prior Section.”)
15
2 Edward P. Welch et al., Folk on the Delaware General Corporation Law
§ 272.01, at 10-59 (2020-2 Supp.) (footnotes omitted); accord 1 Balotti & Finkelstein,
supra, § 10.1, at 10-4 to -5 (“The 1967 revision . . . added Section 272 to expressly permit
the mortgage or pledge of corporate assets without stockholder consent absent an express
provision in the certificate of incorporation to the contrary . . . .”).
35
it was generally assumed, did not require stockholder approval to mortgage or pledge
corporate assets.”16 Professor Folk cited with apparent disapproval a federal decision that
had “assumed without deciding that a mortgage of the assets was covered by the
predecessor of § 271.” Folk, supra, at 425 (citing Greene v. Reconstr. Fin. Corp., 100 F.2d
34, 35–36 (1st Cir. 1938)).
Second, before the 1967 revisions, the DGCL contained a provision that authorized
“[s]ales of the property and franchises” of a corporation “under a decree of Court . . . .”17
The provision stated that the sale was “made in the foreclosure of one or more mortgages,
the Court may order such sale to be made for the whole amount of the outstanding bonds
and interest secured by such mortgage or mortgages . . . .” Marvel, supra, § 67, at 314. The
statute did not require either board approval or a stockholder vote to accomplish a sale of
assets to a secured creditor by decree. See id. As part of the 1967 revision, the General
Assembly eliminated this provision, presumably regarding it as unnecessary given the
rights generally available to secured creditors.18
16
Folk, supra, at 424–25. A contemporary treatise suggests that authorities
conflicted on this point. See 2 Drexler, supra, § 37.01, at 37-2 (“Section 272 was added to
make clear a proposition which had theretofore been the subject of conflicting views—viz,
that a pledge or mortgage of all or substantially all of a corporation’s assets was not a
transaction requiring stockholder approval under Section 271.”).
17
Josiah Marvel, Delaware Corporations and Receiverships § 67, at 314 (6th ed.
1939); accord Robert Pennington, A Treatise on Delaware Corporation Law § 64-A, at
152 (1925).
18
The revisions attempted to eliminate redundant and unnecessary provisions. For
example, “[i]n the pre-1967 statute[,] § 272 authorized the purchasers of corporate assets
36
Today, Section 271(a) states,
Every corporation may at any meeting of its board of directors or governing
body sell, lease or exchange all or substantially all of its property and assets,
including its goodwill and its corporate franchises, upon such terms and
conditions and for such consideration, which may consist in whole or in part
of money or other property, including shares of stock in, and/or other
securities of, any other corporation or corporations, as its board of directors
or governing body deems expedient and for the best interests of the
corporation, when and as authorized by a resolution adopted by the holders
of a majority of the outstanding stock of the corporation entitled to vote
thereon or, if the corporation is a nonstock corporation, by a majority of the
members having the right to vote for the election of the members of the
governing body and any other members entitled to vote thereon under the
certificate of incorporation or the bylaws of such corporation, at a meeting
duly called upon at least 20 days’ notice. The notice of the meeting shall state
that such a resolution will be considered.
8 Del. C. § 271(a). The statute thus mandates a two-step process: the board must approve
the sale, and the stockholders must approve it.19
Extensive Delaware case law addresses the factors that Delaware courts consider
when determining whether the assets involved in a transaction rise to the level of “all or
to organize a successor corporation to hold and use the assets. This provision was deleted
in its entirety as unnecessary in view of the broad general power to organize a corporation
for any lawful purpose.” Folk, supra, at 424 n.1; accord 1 Balotti & Finkelstein, supra,
§ 10.9, at 10-36 n.156. The revisions also eliminated a provision that authorized
stockholders to approve a sale of assets through action by written consent because “the
provision was redundant in light of the adoption of Section 228 . . . .” Id. § 10.1, at 10-5.
19
See 1 Balotti & Finkelstein, supra, § 10.3, at 10-14.1 (“As set forth in Section
271, the approval of the proposed transaction by the board of directors generally is required
prior to the submission of the proposed sale of assets to stockholders.”). Cases have reached
different outcomes regarding the extent to which the stockholders must approve a specific
transaction as opposed to providing “blank check” authority. See id. at 10-15; 2 Drexler,
supra, § 37.02, at 37-3 to -4.
37
substantially all.” Virtually no Delaware authority addresses what constitutes a “sale” or
“exchange.” Section 271 does not define either term. Nor does it speak to the ability of a
failing or insolvent firm to transfer assets to creditors, much less speak to the ability of a
struggling firm to transfer assets in which a creditor holds a security interest to the creditor.
Except for one transcript ruling, the parties have not identified any relevant
decisions. The one transcript ruling involved a claim by a stockholder that Section 271
required a stockholder vote before a secured creditor could acquire all of a corporation’s
assets by engaging in a strict foreclosure under the Uniform Commercial Code. Former
Chief Justice Strine, then a Vice Chancellor, dismissed the claim as a matter of law,
reasoning as follows:
[T]he Delaware General Corporation Law clearly makes a distinction
between financing transactions, mortgage transactions, collateral
transactions, and sales of assets. And I don’t think you can have a situation
where there’s the original financing transaction that pledges the collateral is
outside 271’s reach and then say when the creditor exercises rights under that
that are within the four corners or arguably a lesser -- lesser-included option,
that that somehow then triggers a stockholder vote. I think that would be bad
for -- frankly, for equity investors in general, because I think it would raise
the cost of capital, because it would -- it would create sort of a [hijack]
situation that you sometimes see in new bankruptcies where it appears that
everybody has to get something simply because they’re present.
Gunnerman v. Talisman Cap. Talon Fund, Ltd., C.A. No. 1894-VCS, tr. at 33–34 (Del.
Ch. July 12, 2006).
Whether Section 271 applies to a transaction like the Omnibus Agreement presents
an issue of statutory interpretation.
The rules of statutory construction are well settled. The goal, in all cases, is
to ascertain and give effect to the intent of the legislature. If the statute is
unambiguous, there is no room for interpretation, and the plain meaning of
38
the words controls. If the statute is ambiguous, several principles guide the
Court’s interpretation. First, the statute must be read as a whole in a manner
that will promote its purposes. Second, courts should consider the statute’s
history and examine the text of the statute and draw inferences concerning
the meaning from its composition and structure.
Rubick v. Sec. Instrument Corp., 766 A.2d 15, 18 (Del. 2000) (alterations, footnotes, and
internal quotation marks omitted). When construing a statute, “literal or perceived
interpretations which yield mischievous or absurd results are to be avoided.” One-Pie Invs.,
LLC v. Jackson, 43 A.3d 911, 914 (Del. 2012). “When a statute has been applied by courts
and state agencies in a consistent way for a period of years, that is strong evidence in favor
of that interpretation.” State v. Barnes, 116 A.3d 883, 890 (Del. 2015).
When interpreting an undefined statutory term, a Delaware court starts with “its
commonly accepted meaning.” Freeman v. X-Ray Assocs., P.A., 3 A.3d 224, 227 (Del.
2010). “Because dictionaries are routine reference sources that reasonable persons use to
determine the ordinary meaning of words,” Delaware courts “often rely on them for
assistance in determining the plain meaning of undefined terms.” Id. at 227–28.
Black’s Law Dictionary contains an extensive section on the term “sale.” The
hallmarks of the various definitions include (i) the status of the parties as “buyer” and
“seller,” (ii) the exchange of money or other property in return for goods and services, and
(iii) a transfer of title. See Sale, Black’s Law Dictionary (11th ed. 2019). Black’s Law
Dictionary distinguishes a “sale” from a “foreclosure sale,” defining “foreclosure sale” to
mean “[t]he sale of mortgaged property, authorized by a court decree or a power-of-sale
clause, to satisfy the debt.” In a separate entry, Black’s Law Dictionary defines the term
“foreclosure” as “[a] legal proceeding to terminate a mortgagor’s interest in property,
39
instituted by the lender (the mortgagee) either to gain title or to force a sale in order to
satisfy the unpaid debt secured by the property.”
Black’s Law Dictionary defines “exchange” to mean “[t]he act of transferring
interests, each in consideration for the other,” and defines the related term “bargained-for
exchange” to mean “[a] benefit or detriment that the parties to a contract agree to as the
price of performance.” As with the definition of a “sale,” the hallmarks of these definitions
include a voluntary transfer of interests between similarly situated parties.
Stream does not cite any dictionary definitions, but argues without support that the
plain meaning of the terms “sale” and “exchange” must encompass the transfer of all of
Stream’s assets to SeeCubic. In light of the definitions set forth above, that conclusion is
plausible but not mandated. Those definitions envision a buyer and seller, acting in those
capacities, and transferring or exchanging property or services. One could conceive of
SeeCubic as a buyer and Stream as a seller, but it is more accurate to regard SeeCubic as a
vehicle for Stream’s creditors and Stream itself as a debtor. One also could view the
Omnibus Agreement as involving a transfer or exchange of property (the assets) in
exchange for other property (the intangible rights reflected by the antecedent debts), but it
is more accurate to view SLS and Hawk as levying on their security. In substance, the
transaction contemplated by the Omnibus Agreement functions as a private foreclosure. It
is a contractual substitute for the legal proceeding through which SLS and Hawk otherwise
would have obtained Stream’s assets.
Rather than artificially parsing debatable dictionary definitions, the better course is
to accept that the language of Section 271 is ambiguous as to whether it applies to
40
transactions like the Omnibus Agreement. At that point, principles of statutory
interpretation call for examining the legislative history of the statute and its position in the
broader context of the DGCL. These sources demonstrate that Section 271 does not apply
to a transaction like the one contemplated by the Omnibus Agreement, in which an
insolvent and failing firm transfers its assets to its secured creditors in lieu of a formal
foreclosure proceeding.
First, the origins of Section 271 demonstrate that the General Assembly did not
intend for the statute to govern a transfer of assets by a failing firm. The General Assembly
enacted the statutory predecessor to Section 271 to make clear that the board of directors
of a corporation, with the approval of a majority of its stockholders, could sell all of the
firm’s assets, even if the corporation was profitable and solvent. See Allied Chem., 120 A.
at 490. The common law rule regarded such a transaction as ultra vires, at least absent a
provision in the certificate of incorporation that specifically granted such authority. By
contrast, the common law did not prohibit the board of directors of an insolvent or failing
firm from transferring its assets to creditors. A board of directors had authority to take that
course of action, so the General Assembly did not need to establish that point by statute.
In light of the common law backdrop, Section 271 does not apply to that transactional
setting.20
20
Courts in other jurisdictions have held that statutes similar to Section 271 did not
modify the failing business exception. See In re E.T. Russell Co., 291 F. 809, 816 (D. Mass.
1923) (explaining that a common-law assignment for the benefit of creditors was not a
“sale of assets” for purposes of the section of Massachusetts corporate law comparable to
41
Second, the language of Section 271 has evolved over time to confirm that particular
types of consideration are permissible in a “sale, lease or exchange.” The original statute
did not identify any specific forms of consideration. The General Assembly later amended
the statute to confirm that the consideration could include shares of stock or other
securities, and the General Assembly subsequently added money or other property. The
statute has never referred to forgiveness of debt as a form of consideration.21
Section 271, reasoning that “[t]he stockholder is only interested in what remains after debts
are paid”); Mills v. Tiffany’s, Inc., 198 A. 185, 640–41 (Conn. 1938) (explaining that
Connecticut analog to Section 271 is “inapplicable to a sale of all [assets] by a corporation
which is insolvent or in failing circumstances made for the purpose of closing up its
affairs”); Basset v. City Bank & Trust Co., 165 A. 557, 561 (Conn. 1933) (explaining that
the purpose of Connecticut analog to Section 271 “was to change [the common law rule
that barred a sale of all assets] so as to permit such a sale upon vote of two-thirds of the
outstanding stock” and that the statute did not apply because “[t]he common-law rule does
not apply to a sale, as here, of all its assets by a corporation which is insolvent or in failing
circumstances, made for the purpose of closing up its affairs”); In re Avard, 144 N.Y.S.2d
204, 209 (N.Y. Sup. Ct. 1955) (holding that statute requiring approval of two-thirds of
stockholders for sale of all assets did not apply; explaining that “[i]f corporate management
determines that a business is unprofitable, it may dispose of the property or business to
eliminate further loss without the consent of its stockholders”). A prior decision of this
court declined to address whether Section 271 applied “to a sale of assets by a failing
company facing an emergency situation,” concluding that the facts of the case did not
involve an emergency. See Russell v. Morris, 1990 WL 15618, at *5 (Del. Ch. Feb. 14,
1990), appeal refused, 577 A.2d 754 (Del. 1990) (ORDER); see also 1 Balotti &
Finkelstein, supra, § 10.7, at 10-35 (noting uncertainty about “whether the failing business
exception of the common law remains viable in Delaware” and citing Russell).
21
This observation should not be taken too far. A situation in which a solvent and
profitable corporation sold all of its assets for a package of consideration that included
some forgiveness of secured debt might be a sale of all or substantially all assets for
proposes of Section 271. This decision only addresses the Omnibus Agreement, which
involves an insolvent and failing firm transferring all of its assets to creditors who already
hold a security interest in those assets.
42
Third, the stewards of the 1967 revision did not regard Section 271 as applying to
mortgages or pledges of all of a corporation’s assets. To confirm that interpretation, they
added Section 272.22 The question then becomes whether a corporation must obtain
stockholder approval under Section 271 before a creditor can foreclose on its security
interest, even though the corporation did not need to obtain stockholder approval to grant
the security interest. The pre-1967 code suggests not, because it contemplated a judicial
foreclosure on a mortgage or pledge of all of the corporation’s assets without complying
with Section 271’s predecessor. As part of the 1967 revision, the General Assembly
appears to have regarded the special foreclosure provision as superfluous in light of the
rights generally available to a secured creditor.
As Gunnerman indicates, public policy considerations point in the same direction,
because interpreting Section 271 as applying to a creditor’s efforts to levy on its security
would undercut the value of the security interest. If stockholders were asked to approve the
transfer of an insolvent or failing corporation’s assets to a secured creditor, they might well
22
See 1 Balotti & Finkelstein, supra, § 10.9, at 10-38 (noting that Section 272 “was
added during the 1967 general revision in order to confirm the generally accepted
understanding that stockholder approval is not required to mortgage or pledge corporate
assets”); Folk, supra, at 424–25 (stating that prior law “did not require stockholder
approval” for these types of arrangements with creditors”); see also 2 Drexler, supra, §
37.01, at 37-2. (“Section 272 was added to make clear a proposition which had theretofore
been the subject of conflicting views—viz, that a pledge or mortgage of all or substantially
all of a corporation’s assets was not a transaction requiring stockholder approval under
Section 271.”).
43
vote to reject the transfer, if only to create bargaining leverage against the creditor. 23 To
avoid this problem, a creditor would have to insist that the corporation comply with Section
271 up front, as part of the process of obtaining credit. The result would be a regime that,
as a practical matter, required the corporation to comply with Section 271 before
mortgaging or pledging its assets. That result would be contrary to the plain language of
Section 272, which states that such authorization “shall not be necessary.”
As Gunnerman suggests, a regime of this sort would have detrimental effects for
everyone. Creditors would suffer the first-order effects when they tried to foreclose on
collateral. Corporations and stockholders would suffer the second-order effects as creditors
adjusted to the new reality, insisted on additional protections, and raised the cost of capital.
Section 271 should not be interpreted to produce such a mischievous and harmful result.
Finally, there is the dog that has not barked. Except for the transcript ruling in
Gunnerman, no one has cited any Delaware case involving a claim that Section 271 applied
23
A creditor that needed to comply with Section 271 before foreclosing on its
security interest would face other hurdles as well. Because there is no statutory method for
a creditor to cause a corporation to comply with Section 271, the credit agreement would
have to create a contractual structure that addressed both the board-level decision and the
stockholder vote. A creditor could bargain for the contractual right to force the corporation
to call a meeting of stockholders, but the creditor could not contractually bind the directors
to recommend that stockholders vote in favor of foreclosure. Such an obligation would be
invalid to the extent it required the board to violate its statutory obligation to provide a
meaningful, current recommendation to stockholders or breach its fiduciary duty of
disclosure. See generally In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 490–92 (Del.
Ch. 2013) (collecting authorities addressing comparable obligation under Section 251(b)).
A creditor thus would struggle to create a meaningful contractual mechanism that would
enable it to enforce compliance with Section 271 before foreclosing.
44
to a transfer of assets to a secured creditor. Given the prevalence of security interests and
the fact that Section 271 and its predecessor have been around since 1917, this issue surely
would have arisen if Section 271 applied in such a setting. The absence of cases implicating
the issue indicates that virtually no one thinks that Section 271 would apply in that context.
Perhaps anticipating that Section 271 logically cannot apply to an agreement that
allows a secured creditor to levy on the collateral that is subject to its security interest,
Stream argues that the Omnibus Agreement is more than a foreclosure equivalent. Stream
notes that the Omnibus Agreement contemplates SeeCubic issuing one million shares to
Stream, and it grants Stream’s minority stockholders the right to exchange their shares in
Stream for shares in SeeCubic. That is true, but those additional features involve give-
backs from the creditors, who otherwise could foreclose on all of Stream’s assets and leave
Stream and its stockholders with nothing. This is not a case in which the creditors hold
security interests in only some of Stream’s assets, and Stream is throwing in more assets
on top. Because Stream is insolvent and failing, its stockholders no longer have a
meaningful interest in the firm, and the secured creditors are entitled to its assets. Nothing
prevents the creditors from agreeing to provide some of their resulting bundle of property
rights to Stream and its stockholders in an effort to avoid disputes. Because Section 271
does not cover the worst case transaction for Stream—a foreclosure involving all of its
assets—it logically does not apply to a lesser included alternative that provides greater
benefits to Stream and its stockholders.
Section 271 therefore does not apply to the Omnibus Agreement. Under the DGCL,
the Omnibus Agreement did not require a stockholder vote.
45
2. The Class Vote Provision
In addition to Section 271, Stream relies on the Class Vote Provision, which requires
approval by the Class B Voting Stock in order for Stream to consummate an “Asset
Transfer.” Dkt. 101 Ex. 41 § IV.D.2(d). The language of the Class Vote Provision tracks
Section 271 of the DGCL, resulting in the same outcome: Stream need not obtain
stockholder approval under the Class Vote Provision to transfer mortgaged or pledged
assets to the secured creditors who hold security interests in those assets.
When interpreting a charter provision that closely resembles the language of a
section of the DGCL, Delaware courts will give the language the same meaning as the
statute. See Warner Commc’ns Inc. v. Chris-Craft Indus., Inc., 583 A.2d 962, 969 (Del.
Ch. 1989). In the Warner decision, Chancellor Allen considered whether a provision in the
certificate of incorporation that gave holders of preferred stock the right to vote on any
amendment necessary “to alter or change any rights, preferences or limitations of the
Preferred Stock so as to affect the holders of all such stock adversely” resulted in the
preferred stockholders being entitled to vote on a merger. Id. Chancellor Allen cited the
“close similarity between the operative language of [the class vote provision] and Section
242(b)(2) of the General Corporation Law,” which grants stockholders a class vote on any
amendment that “would . . . alter or change the powers, preferences or special rights of the
shares of such class so as to affect them adversely.” Id. (omission in original) (emphasis
omitted). Noting that “the parallel is plain,” Chancellor Allen accorded significant weight
to the fact that Delaware law had not held that Section 242(b)(2) created a class vote on a
merger. Id. He found it “extraordinarily unlikely that the drafters of [the class vote
46
provision], who obviously were familiar with and probably expert in our corporation law,
would have chosen language so closely similar to that of Section 242(b)(2) had they
intended a merger to trigger the class vote mechanism of that section.” Id. at 970.
The same reasoning applies here. The Class Vote Provision requires separate
approval by the Class B stock for any “Asset Transfer.”24 The Charter defines that term as
24
The Class Vote Provision also calls for a class vote on any “Acquisition,” defined
as
(A) any consolidation, stock exchange or merger of [Stream] with or into any
other corporation or other entity or person, or any other corporate
reorganization,
other than any such consolidation, merger or reorganization in which
the stockholders of [Stream] immediately prior to such consolidation,
merger or reorganization, continue to hold a majority of the voting
power of the surviving entity in substantially the same proportions (or,
if the surviving entity is a wholly-owned subsidiary, its parent)
immediately after such consolidation, merger or reorganization; or
(B) any transaction or series of related transactions to which [Stream] is a
party and in which in excess of fifty percent (50%) of [Stream’s] voting
power is transferred;
provided that an Acquisition shall not include
(x) any consolidation or merger effected exclusively to change the
domicile of [Stream], or
(y) any transaction or series of transactions principally for bona fide
equity financing purposes in which cash is received by [Stream] or
any successor or indebtedness of [Stream] is cancelled or converted
or a combination thereof.
Dkt. 101 Ex. 41 § IV.D.4(b)(i) (formatting added). Stream claims in conclusory fashion
that the Omnibus Agreement qualifies as an Acquisition, but does not explain what noun
might apply. The Omnibus Agreement does not contemplate a consolidation or merger,
47
a sale, lease or other disposition of all or substantially all of the assets or
intellectual property of [Stream] or the granting of one or more exclusive
licenses which individually or in the aggregate cover all or substantially all
of the intellectual property of [Stream].
Dkt. 101 Ex. 41 § IV.D.4(b)(ii). Section 271 uses parallel phrasing, allowing a corporation
to “sell, lease or exchange all or substantially all of its property and assets, including its
goodwill and its corporate franchises.”
There are only two differences between Section 271 and the Class Vote Provision.
The first is the express reference in the Class Vote Provision to “intellectual property” in
the phrase “all or substantially all of the assets or intellectual property of [Stream].”
Mentioning “intellectual property” in this phrase does not enlarge the voting obligation
beyond the scope of Section 271, because intellectual property is already a type of asset.
The other difference is the reference to “the granting of one or more exclusive
licenses which individually or in the aggregate cover all or substantially all of the
intellectual property of [Stream].” The Omnibus Agreement does not contemplate an
exclusive license.
which are specific types of transactions having independent legal significance, so those
aspects of part (A) of the definition are not implicated. The Omnibus Agreement does not
result in the transfer of any of Stream’s voting power, so part (B) of the definition does not
apply. By process of elimination, perhaps Stream thinks the Omnibus Agreement
contemplates a “reorganization.” That at least is a relatively general term, but Stream would
have to provide authorities delineating the content of the term and why it could encompass
the Omnibus Agreement. Stream also would have to explain why that concept would
trigger a stockholder vote when the definition of “Asset Transfer” did not. The Omnibus
Agreement involves a transfer of assets, so if any aspect of the Class Vote Provision
covered the transaction, it would be the definition of “Asset Transfer.”
48
It is true that through its reference to exclusive licenses, the Class Vote Provision
encompasses a type of transaction that does not plainly fall within Section 271. But that
fact cuts against Stream for purposes of this proceeding, because it shows that the drafters
of the Class Vote Provision knew how to define the concept of an “Asset Sale” to include
transactions that Section 271 would not otherwise reach. If the drafters of the Class Vote
Provision wanted to require a class vote before a secured creditor could foreclose on
pledged or mortgaged assets, then the definition of “Asset Sale” should have referred to
that type of transaction.
In the current case, for purposes of determining whether the Class Vote Provision
has a broader scope than Section 271, the critical language in the Class Vote Provision is
the reference to “a sale, lease or other disposition of all or substantially all of the assets …
of [Stream.” That language tracks the text of Section 271 and warrants the same
interpretation. The transaction contemplated by the Omnibus Agreement, in which Stream
agreed to transfer its assets to its secured creditors, does not implicate the Class Vote
Provision.
C. The Members Of The Resolution Committee Did Not Breach Their Fiduciary
Duties.
Stream finally argues that the Omnibus Agreement is void because the members of
the Resolution Committee breached their fiduciary duties by approving it. Setting aside the
fact that this argument conflicts with Stream’s position that the Outside Directors were
never directors, the theory lacks merit.
49
“Delaware has three tiers of review for evaluating director decision-making: the
business judgment rule, enhanced scrutiny, and entire fairness.” Reis v. Hazelett Strip-
Casting Corp., 28 A.3d 442, 457 (Del. Ch.2011). Which standard of review applies will
depend initially on whether the board members
(i) were disinterested and independent (the business judgment rule), (ii) faced
potential conflicts of interest because of the decisional dynamics present in
particular recurring and recognizable situations (enhanced scrutiny), or (iii)
confronted actual conflicts of interest such that the directors making the
decision did not comprise a disinterested and independent board majority
(entire fairness). The standard of review may change further depending on
whether the directors took steps to address the potential or actual conflict,
such as by creating an independent committee, conditioning the transaction
on approval by disinterested stockholders, or both.
In re Trados Inc. S’holder Litig., 73 A.3d 17, 36 (Del. Ch. 2013).
This case does not involve any of the recurring and recognizable situations in which
enhanced scrutiny applies. Nor does this case involve a transaction in which a controlling
stockholder stands on both sides of the sides of the deal, will receive a non-ratable benefit,
or will avoid a unique detriment, meaning that entire fairness does not apply ab initio.
Instead, the default standard of review is the business judgment rule, which presumes that
“in making a business decision the directors of a corporation acted on an informed basis,
in good faith and in the honest belief that the action taken was in the best interests of the
company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds
by Brehm v. Eisner, 746 A.3d 244, 253–54 (Del. 2000). Unless one of the rule’s elements
is rebutted, “the court merely looks to see whether the business decision made was rational
in the sense of being one logical approach to advancing the corporation’s objectives.” In
re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010).
50
Stream has not pointed to any evidence that would rebut the protections of the
business judgment rule. No evidence suggests that either member of the Resolution
Committee was interested in the Omnibus Agreement or lacked independence from
someone who was. No evidence suggests that the members of the Resolution Committee
acted in bad faith or for an improper purpose. The evidence indicates that Gola and Gollop
believed the Omnibus Agreement to be in the best interests of Stream and its stockholders
(including the Rajan family) because it prevented Stream’s creditors from foreclosing on
all of its assets and leaving Stream and its stockholders with nothing.
Relatedly, Stream argues that the Omnibus Agreement has never been “ratified”
under Section 7.4 of the Bylaws. That section tracks Section 144 of the DGCL by providing
three avenues for approval of an interested transaction. See 8 Del. C. § 144(a). Stream does
not explain how the Omnibus Agreement could be an interested transaction, precisely
because it is not. Assuming for the sake of argument that it was, then the approval of the
Resolution Committee validates it under the plain language of Section 7.4 of the Bylaws
and Section 144 of the DGCL.
D. Whether SeeCubic Seeks A Mandatory Injunction
In its reply brief, Stream asserts that SeeCubic seeks a mandatory injunction that is
equivalent to a decree of specific performance. “Relief by mandatory injunction should
only be awarded in a clear case, free from doubt, and when necessary to prevent irreparable
injury.” Richard Paul, Inc. v. Union Improvement Co., 86 A.2d 744, 748 (Del. Ch. 1952).
Generally speaking, “[m]andatory injunctions should only issue with the confidence of
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findings made after a trial or on undisputed facts.” C & J Energy Servs., Inc. v. City of
Miami Gen. Empls.’ & Sanitation Empls.’ Ret. Tr., 107 A.3d 1049, 1053–54 (Del. 2014).
This court does not need to enter a mandatory injunction. This court will enter a
prohibitive injunction that prevents Stream from taking action to interfere with the rights
of SLS, Hawk, the Equity Investors, and SeeCubic under the Omnibus Agreement. Those
rights include a power of attorney that empowers Stastney “to take all action necessary or
advisable to effect the delivery, conveyance, transfer and assignment to [SeeCubic] of the
Transferred Assets.” OA § 1.4. Using the power of attorney, Stastney can accomplish the
transfers contemplated by the Omnibus Agreement.
Were it necessary to grant a mandatory injunction to enforce the Omnibus
Agreement, then the record would be sufficiently clear to support it. The evidence that the
Outside Directors either were validly appointed or acted as de facto directors would support
a grant of summary judgment in SeeCubic’s favor. The evidence that the Rajan brothers
did not execute the May Stockholder Consent until May 8, 2020, or later likewise suffices
to support a grant of summary judgment in SeeCubic’s favor. No evidence suggests that
the members of the Resolution Committee breached their fiduciary duties. The other issues
in the case present questions of law.
III. CONCLUSION
Stream’s motion for a preliminary injunction is denied. SeeCubic’s motion is
granted. This court will enter an order implementing the relief to which SeeCubic is
entitled.
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