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Delaware Supreme Court Enforces Class Vote Requirement, Reasons There Is No Insolvency Exception to Section 271 Of The Delaware General Corporation Law

Stream TV Networks, Inc. v. SeeCubic, Inc., No. 360, 2021 (Del. June 15, 2022)
Section 271 of the Delaware General Corporation Law provides, among other things, that a majority vote of stockholders is required to sell all or substantially all of a corporation’s assets. As an issue of first impression, the Delaware Supreme Court reasoned that there is no insolvency exception to Section 271’s requirement of a stockholder majority vote.

Two large secured creditors of a financially struggling corporation along with a number of equity investors purported to enter into an omnibus agreement with the corporation, whereby the corporation transferred all of its assets into a newly formed company. While the transaction received board approval, the company’s largest stockholders objected. They argued that the transaction failed to comply (i) with a provision in the certificate of incorporation requiring approval of class B common stockholders; and (ii) Section 271 of the DGCL. Surveying the available precedent, the Court of Chancery reasoned that there is a common law insolvency exception, under which the board of directors may sell the assets of an insolvent corporation without stockholder approval. Interpreting the charter provision and Section 271 against this background, the Court of Chancery ruled in the corporation’s favor, holding that a stockholder vote was not required. 

On appeal, in an en banc decision, the Delaware Supreme Court reversed. First, the Supreme Court looked to the legislative intent behind Section 271, which was enacted to mitigate the common law’s requirement for unanimous stockholder consent for the transfer of all or substantially all of a corporation’s assets. Assuming that Delaware historically recognized an exception to the common law for insolvent corporations, Section 271 not only superseded the unanimity rule, but also any common law exceptions for insolvency. Second, because no previous Delaware court ever expressly recognized an exception to Section 271 for insolvent corporations, the Supreme Court found that the public policy of maintaining predictability in the law weighed against recognizing one now.

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