Stream TV Networks, Inc. v. Seecubic, Inc., C.A. No. 2020-0310-JTL (Del. Ch. Dec. 8, 2020) (Laster, V.C.)
In this opinion, the Delaware Court of Chancery denied plaintiff’s motion for a preliminary injunction seeking to prevent defendant from enforcing an agreement the two parties had entered into while plaintiff was insolvent. The Court found that none of plaintiff’s theories challenging the agreement had a reasonable likelihood of success on the merits and therefore denied plaintiff’s motion. The Court granted defendant’s motion for a preliminary injunction preventing plaintiff from taking any action to interfere with the agreement.
Plaintiff, Stream TV Networks, Inc. (“Stream” or the “Company”), is a pre-revenue, development-stage company focused on developing three-dimensional television technology. In February 2020, the Company was insolvent, having defaulted on over $50 million in debt owned by its secured creditors. At the time, Stream had a two-person board consisting of founder and CEO Mathu Rajan and his brother, COO and general counsel Raju Rajan (the “Rajan Brothers”). In response to the Company’s financial distress, Stream’s secured creditors initiated discussions with the Rajan Brothers concerning a potential restructuring. At the request of the creditors, the Rajan Brothers signed a unanimous written consent adding four independent outside directors to the board in March.
On May 4, 2020, the six-member board passed a resolution creating a Resolution Committee, which consisted of two outside directors. The Resolution Committee approved an agreement whereby Stream would transfer all of its assets to defendant, SeeCubic, Inc. (“SeeCubic”), a newly formed entity controlled by the Company’s secured creditors (the “Omnibus Agreement”). The Omnibus Agreement functioned as an alternative to foreclosure on Stream’s assets and gave Stream stockholders the right to exchange their Stream common stock for SeeCubic common stock.
The Rajan Brothers opposed the formation of the Resolution Committee and worked to undo the committee’s approval of the Omnibus Agreement by drafting a written stockholder consent that would remove the outside directors. Despite Stream’s assertions to the contrary, the Court found that the Rajan Brothers executed the stockholder consent at least two days after the signing of the Omnibus Agreement. The Rajan Brothers refused to comply with that agreement, and later adopted a resolution purporting to nullify it. On September 8, 2020, Stream commenced this litigation and sought to bar SeeCubic from enforcing the Omnibus Agreement.
Plaintiff first argued that the outside directors appointed to the Resolution Committee were not validly appointed directors. The Court disagreed, finding that the Rajan Brothers had validly increased the size of the board by written consent. Even assuming they were not validly appointed, the Court held that the outside directors were de facto directors, as demonstrated by the actions of the Rajan Brothers and the Company and given the fact that the outside directors attended eight board meetings during which they voted and received privileged legal advice and confidential information.
Plaintiff also challenged the Omnibus Agreement by asserting that it required stockholder approval under DGCL Section 271 as a sale or exchange of all or substantially all of the Company’s assets. The Court found that the transfer of Stream’s assets under the circumstances did not constitute a sale or exchange for purposes of Section 271. In making this determination, the Court surveyed the history of Section 271, the origins of which began as an exception to the common law rule requiring stockholder approval for the transfer of all of a company’s assets in the event of insolvency. In finding that Section 271 did not apply to the transfer of Stream’s assets, the Court also conducted an analysis of the terms “sale” and “exchange,” finding that the plain meaning of these terms did not apply to the transfer of assets under the Omnibus Agreement. The Court reasoned that the agreement functioned as a transfer of assets to Stream’s secured creditors in lieu of a formal foreclosure proceeding and that unlike a typical sale or exchange, the agreement treated SeeCubic as a vehicle through which the secured creditors levied on their security interest, rather than as an exchange of assets.
The Court also examined the legislative history of Section 271, finding that it also did not support plaintiff’s argument for multiple reasons. First, the forgiveness of debt has never been understood to be a form of consideration triggering Section 271. Also, included in the 1967 revision to the DGCL was the addition of Section 272, which established that stockholder approval is not necessary to mortgage or pledge corporate assets. Finally, the Court expressed concern of undercutting the value of security interests if Section 271 was held to apply to the agreement. Such a result would cause creditors to insist on a corporation complying with Section 271 prior to obtaining credit, a result contrary to the plain language of Section 272, which states that such authorization is not necessary.
Accordingly, the Court denied plaintiff’s motion for a preliminary injunction and granted defendant’s motion for a preliminary injunction, finding that the Omnibus Agreement was valid and preventing plaintiff from taking any action to interfere with it.