Section 271 of the DGCL generally requires stockholder approval for a company’s sale of substantially all of its assets. Most of the litigation involving Section 271 has centered on whether a particular deal involved “substantially all” of the seller’s assets, but the Delaware Chancery Court’s recent decision in Stream TV Networks v. SeeCubic, (Del. Ch.; 12/20), focused on whether the statute applied at all in the case of an asset sale by an insolvent seller to its secured creditors.
Vice Chancellor Laster concluded that Section 271 does not apply to a sale of substantially all of an insolvent company’s assets to its secured creditors because to hold otherwise would conflict with Section 272 of the DGCL:
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 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.
The interplay between Section 271 and Section 272 was just one of several rather arcane corporate law issues addressed in Vice Chancellor Laster’s 52-page opinion. Others include the impermissibility of attempting to impose qualifications on directors that are not set forth in the certificate of incorporation and the circumstances under which defectively elected directors will be regarded as de facto directors with authority to bind the corporation. The Vice Chancellor also tosses in some tips on how to properly draft resolutions expanding the board and electing directors to fill newly created vacancies.
-John Jenkins, DealLawyers.com December 16, 2020