Stream TV Networks, Inc. v. SeeCubic, Inc.

• Decision Date: 08 December 2020
• Docket Number: C.A. No. 2020-0310-JTL
• Parties: STREAM TV NETWORKS, INC., Plaintiff, v. SEECUBIC, INC., Defendant. SeeCubic, Inc., Counterclaimant and Third-Party Plaintiff, v. Stream TV Networks, Inc., Counterclaim Defendant, and Mathu Rajan, and Raja Rajan, Third-Party Defendants.
• Court: Court of Chancery of Delaware

250 A.3d 1016

STREAM TV NETWORKS, INC., Plaintiff,

v.SEECUBIC, INC., Defendant.

SeeCubic, Inc., Counterclaimant and Third-Party Plaintiff,

v.Stream TV Networks, Inc., Counterclaim Defendant,andMathu Rajan, and Raja Rajan, Third-Party Defendants.

C.A. No. 2020-0310-JTL

Court of Chancery of Delaware.

Date Submitted: November 30, 2020

Date Decided: December 8, 2020

Scott D. Cousins, COUSINS LAW, LLC, Wilmington, Delaware; Luis Salazar, Jose Ceide, Daniel Halperin, SALAZAR LAW, Miami, Florida; Attorneys for Plaintiff and Counterclaim Defendant Stream TV Networks, Inc.

Robert S. Saunders, Jenness E. Parker, Bonnie W. David, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Eben P. Colby, Marley Ann Brumme, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Boston, Massachusetts; Attorneys for Defendants and Counterclaim Plaintiff Seecubic, Inc.

LASTER, V.C.

Plaintiff and counterclaim defendant Stream TV Networks, Inc. ("Stream" or the "Company") and defendant, counterclaim plaintiff, and third-party plaintiff Seecubic, Inc. ("SeeCubic") have filed competing motions for preliminary injunction. Both motions turn on the validity of an agreement dated May 6, 2020, between Stream, its two secured creditors, and fifty-two of its stockholders (the "Equity Investors"). The parties refer to this agreement as the "Omnibus Agreement."

By the time the Omnibus Agreement was executed, Stream had defaulted on more than $50 million in debt to its secured creditors, owed another $16 million to trade creditors, and could not pay its bills as they came due. Stream had missed payroll in January 2020, furloughed a number of workers, and avoided missing payroll in February 2020 only because of an emergency loan from one of its secured creditors and another investor. By any measure, Stream was insolvent and failing.

In the Omnibus Agreement, Stream agreed to transfer all of its assets to SeeCubic, a newly formed entity controlled by its secured creditors. Stream also granted its secured creditors a power of attorney to effectuate the transfers. Stream's secured creditors already held security interests in all of Stream's assets and had the right to foreclose on those assets. In the Omnibus Agreement, Stream's secured creditors agreed to release their claims against Stream upon completion of the transfer of Stream's assets to SeeCubic.

If Stream's secured creditors had foreclosed on Stream's assets, then Stream and its stockholders would have been left with nothing. Instead, the Omnibus Agreement provided Stream's minority investors with the right to swap their shares in Stream for shares in SeeCubic. The Omnibus Agreement also provided for the issuance of one million shares in SeeCubic to Stream.

Stream contends that the Omnibus Agreement is invalid and seeks a preliminary injunction to prevent SeeCubic from taking any action to enforce it. Stream first contends that the directors who approved the Omnibus Agreement were never validly appointed. The evidence establishes that Mathu and Raja Rajan acted by unanimous written consent as Stream's only directors to expand Stream's board of directors (the "Board") and fill the newly created directorships with four outside directors (the "Outside Directors"). At a subsequent meeting, the Board validly created a committee, populated it with two of the Outside Directors, and empowered it to negotiate and resolve the outstanding claims against Stream (the "Resolution Committee"). On May 6, 2020, the Resolution Committee approved the Omnibus Agreement. As of that date, the Omnibus Agreement became effective and binding on Stream.

Assuming for the sake of argument that Mathu and Raja did not validly appoint the Outside Directors, those individuals were de facto directors. Mathu and Raja intended to appoint the Outside Directors to their positions. Mathu, Raja, and Stream treated the Outside Directors as directors. And Mathu, Raja, and Stream represented to third parties that the Outside Directors were directors. Mathu, Raja, and Stream cannot now contend that the two Outside Directors who comprised the Resolution Committee lacked authority to act. Once again, the Omnibus Agreement binds Stream.

Stream next contends that the Omnibus Agreement is invalid because it constituted a sale of all of Stream's assets, which required stockholder approval under Section 271 of the Delaware General Corporation Law (the "DGCL"). Under the majority rule at common law, the directors of a solvent corporation lack authority to transfer all of the corporation's assets. But authorities dating back a century recognize an exception to this rule for insolvent corporations, whose directors can transfer corporate assets to creditors.

In a decision issued in 1915, this court embraced and applied the common law rules, but held that a provision in the corporation's certificate of incorporation authorized the board of directors to sell all of the corporation's assets with the approval of its stockholders. In 1917, the General Assembly adopted the predecessor to Section 271 to make clear that the directors of a solvent Delaware corporation have authority to sell all of the corporation's assets with the approval of its stockholders. The circumstances surrounding the adoption of the statute and its subsequent evolution demonstrate that the General Assembly did not intend Section 271 to constrain the ability of an insolvent or failing corporation to transfer corporate assets to secured creditors.

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.

Stream therefore did not need to comply with Section 271 before transferring its assets to its secured creditors. The voluntary foreclosure contemplated by the Omnibus Agreement is not governed by Section 271.

Stream also argues that under its certificate of incorporation (the "Charter"), the Omnibus Agreement required the separate approval of holders of a majority of the Class B Common Stock (the "Class Vote Provision"). The Class Vote Provision applies to an "Asset Sale," which it defines using language that parallels the text of Section 271. The Class Vote Provision therefore warrants the same interpretation as Section 271: The Class Vote Provision does not restrict Stream's ability to transfer its assets to its secured creditors when the Company is insolvent and failing.

Finally, Stream argues that the members of the Resolution Committee breached their fiduciary duties by approving the Omnibus Agreement. The business judgment rule protects the Resolution Committee's decision to enter into the Omnibus Agreement.

Stream therefore has not established a reasonable likelihood of success on the merits of its challenges to the Omnibus Agreement. Accordingly, Stream's motion for a preliminary injunction is denied. SeeCubic, by contrast, contends that the Omnibus Agreement is valid and seeks a preliminary injunction preventing Stream or any of the third-party defendants from taking any action to interfere with it. SeeCubic's motion is granted.

I. FACTUAL BACKGROUND

The facts are drawn from the parties’ submissions in connection with their competing motions for preliminary injunction. In total, the parties provided seven deposition transcripts, ten affidavits, and 206 documentary exhibits. What follows are not formal factual findings, but rather the facts as they appear reasonably likely to be found after trial, based on the current record.

A. Stream

Stream was founded in 2009 to develop and commercialize technology that enables viewers to watch three-dimensional content without 3D glasses. In 2010 and 2011, Stream formed subsidiaries in the Netherlands. Through these subsidiaries, Stream hired engineers to develop Stream's technology. By all accounts, the technology is promising, even revolutionary, but Stream does not yet have a product. Eleven years after its founding, Stream remains a pre-revenue, development-stage company.

The Rajan family controls Stream. Mathu Rajan holds 18,000 shares of Stream's Class A common stock, which carry one vote per share. A family investment vehicle owned by Mathu, his brother Raja Rajan, and their parents holds 19,000,000 shares of Stream's Class B common stock, which carry ten votes per share. Through these holdings, the Rajan brothers control a majority of the Class B common stock and a majority of Stream's outstanding voting power.

At the board level, the Rajan brothers historically have controlled Stream. From July 2019 until March 2020, Mathu and Raja were Stream's only directors. Mathu has served as a director since the Company's founding. Raja served as a director from shortly after the Company's founding until July 2020, when he resigned from that role. From time to time, other individuals have served as directors. From approximately 2015 until 2019, Leo Hindery served as an outside director, but he resigned in July 2019 over disputes with the Rajan brothers. From approximately 2018 until 2019, Mark Coleman served as a second outside director. He too resigned in July 2019 over disputes with the Rajan brothers. From 2011 until 2014, Shad Stastney, the principal...