In Stream TV Networks, Inc. v. SeeCubic, Inc., C.A. No. 2020-0310-JTL (Del. Ch. Dec. 8, 2020), the Court of Chancery of the State of Delaware (the “Court”) ruled that all of the assets of an insolvent 3D television technology company, Stream TV Networks Inc. (“Stream”), could be transferred to its secured creditors even though Stream did not seek  stockholder approval of the sale under Section 271 of the General Corporation Law of the State of Delaware (the “DGCL”) or its certificate of incorporation. Accordingly, the Court enforced an agreement between Stream and its secured creditors pursuant to which Stream agreed to transfer all of its assets to an affiliate of its two secured creditors.

In September 2020, Stream filed a claim against Seecubic, Inc., an entity controlled by Stream’s secured creditors (“SeeCubic”) asking the Court to enjoin SeeCubic from seeking to enforce and agreement among Stream and its two secured creditors SLS Holdings VI, LLC (“SLS”) and Hawk Investment Holdings Limited (“Hawk” and together with SLS, the “Creditors”) and its investors (the “Agreement”) pursuant to which Stream agreed to transfer all of its assets to an affilate of the Creditors.

In early 2020, Stream defaulted on its notes issued by the Creditors and was notified by SLS that it was in default. Additionally, Stream had trade debt, had fallen behind on payments to customers and suppliers, and failed to make necessary payments to maintain the patents on its technology. In May 2020, amid its financial problems, a board committee approved the Agreement. Under the Agreement, Stream agreed to transfer all of its assets to SeeCubic and granted its secured creditors a power of attorney to effectuate the transfers. In exchange, the Creditors agreed to release their claims against Stream and to extinguish the notes held by the Creditors upon completion of the transfer of Stream’s assets to SeeCubic. 

Stream claimed that the Agreement was invalid and that it still owned its assets.  Stream’s position was that the company was suffering irreparable harm because SeeCubic was depriving it of control over its assets and therefore the balance of hardship favored a preliminary injunction to prevent SeeCubic from interfering with their rights. 

First, Stream argued that the board committee that approved the Agreement didn’t have authority to cause Stream to enter into the Agreement and that the directors who approved the Agreement were never validly appointed or had been validly removed. The Court disagreed with Stream’s position because the directors in question were validly appointed or invalidly removed, and alternatively were de facto directors since Stream represented that they were directors to third parties. 

Second, Stream argued that the Agreement was invalid because it constituted a sale of all of Stream’s assets, which required stockholder approval under Section 271 of the DGCL (the “Section 271”). The Court disagreed with Stream’s position because the company was insolvent and therefore did not need to comply with Section 271 of the DGCL before transferring its assets to the Creditors. 

Third, Stream argued that under its certificate of incorporation, the Agreement required the separate approval of holders of a majority of Stream’s Class B Common Stock. Because the class voting requirement of the Class B Common Stock tracked Section 271, the Court determined that Stream did not need to comply with Section 271 because it was insolvent and failing. 

Fourth, Stream argued that the committee that approved the resolution to enter into the Agreement breached their fiduciary duties. The Court pointed to the business judgment rule in protecting the committee’s decision to enter into the Agreement. 

The Court concluded that Stream failed in its challenges to the Agreement and denied Stream’s motion for a preliminary injunction. The Court granted SeeCubic’s motion for a preliminary injunction to enforce the Agreement.