In a previous alert, we covered the Delaware Chancery Court ruling in Streaming TV networks Last year. After the independent directors of Stream TV negotiated a consensual transfer of collateral to its lenders in full and final settlement of their secured debt in March 2020, the interested directors, at the request of two brothers who are co-founders and shareholders of the company , filed a lawsuit to stop the transaction on the grounds that it violated both Stream TV’s corporate charter and the Delaware General Corporations Law (DGCL) because the parties failed to obtain the consent of the shareholders before the transfer of the guarantee.
The Chancery Court ruled that Delaware law did not require shareholder consent for collateral transfer through consensual seizure and appeared to pave the way for future restructurings without out-of-the-money shareholder interference. The interested directors and shareholders then appealed the decision to the Delaware Supreme Court.
In a sharp reversal of the Chancery Court’s decision, the Delaware Supreme Court unanimously ruled last month that Stream TV’s corporate charter and DGCL’s 271 didin fact, require shareholder consent before the parties can execute a consensual seizure of assets.
Additionally, at a subsequent hearing, Chancery Court Vice-Chancellor Laster rejected a plea by the secured lenders for an injunction against Stream TV and the shareholder brothers, instead allowing the assets to be returned to Stream TV and the control of the board of directors in place. , provided the company agrees to a notice provision that requires Stream TV to notify the court of chancery before entering into any material transaction outside of the ordinary course.
It remains to be seen how these claims play out and what comes next (the litigation has been going on for two years now), but the decision has particular significance because Delaware is a preferred jurisdiction for corporate organization and otherwise compelling case law. In practice, the ruling may encourage out-of-the-box shareholders of Delaware corporations to try to exert undue leverage for personal gain (as was the case in Stream TV) with other stakeholders. But such actions by out-of-play shareholders are not without risk, as the Vice-Chancellor warned that secured lenders likely have a disguised claim against directors and interested shareholders for breach of duty and unjust enrichment.
A strict foreclosure is a quick and effective tool for effecting a consensual restructuring that a board of directors, in accordance with its fiduciary duties, has determined to be in the best interests of the company and its shareholders. Shareholders have no fiduciary duties to creditors and, in fact, can act in their own interests (perhaps, as the Vice-Chancellor noted, with some risk of liability). Some shareholders may view this as additional leverage.
In our experience, in most cases we have sought and obtained shareholder consent in consensual out-of-court restructurings or have been able to structure ourselves around recalcitrant shareholders. Additionally, there are structures that can be implemented at the documentation stage to mitigate or avoid this outcome. The best course, however, would be for Delaware to amend DGCL 271 to eliminate the need for shareholder consent in such circumstances.
© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 208