On August 1, 2023, the Delaware General Corporation Law (DGCL) was amended to create an “insolvency exception” to Delaware’s long-standing requirement that a sale of all or substantially all of a Delaware corporation’s assets and property be approved by a majority of the company’s stockholders (in addition to being authorized by its board of directors). The amendment, which was proposed in response to the Delaware Supreme Court’s decision in Stream TV,1 not only creates a path forward for so-called friendly foreclosures, but may also provide a new mechanism for “zombie companies”2 to obtain new ownership, de-lever their balance sheets, and return to (or achieve) profitability.
Stream TV and the Zombie Company Problem
By 2019, Stream TV was, by most definitions of the term, a “zombie company.” Though brimming with potential, Stream remained a pre-revenue, development-stage company ten years after its founding, despite having raised approximately $160 million through financing and equity investments. Apparently dissatisfied with the way things were going, a group of equity holders proposed an out-of-court debt-for-equity exchange with the company’s secured lenders. The company’s board voted to accept the proposal, but a group of controlling shareholders disagreed, arguing that the transaction constituted a sale of substantially all of the company’s assets that required a stockholder vote under Section 271 of the DGCL.3 Following extensive litigation, the Delaware Supreme Court agreed with the shareholders, refusing to read a common-law insolvency exception into Section 271.
The Stream TV decision dealt a major blow to the ability of Delaware corporations to rebalance their balance sheets and align governance and ownership with the “true owners” of the business, absent stockholder approval. And the timing could not have been worse for zombie companies, which are particularly sensitive to rising interest rates and operational costs. But perhaps few felt the impact of the decision as acutely as private equity firms which may find themselves with ongoing board and fiduciary responsibilities, a minority (and worthless) ownership stake, and no easy way out.
The DGCL Amendment
Though stopping short of abrogating Stream TV, the Delaware legislature amended Section 272 of the DGCL to provide for a “safe harbor” for the sale, lease, or exchange of property or assets that secure a mortgage or pledge to a secured party without stockholder consent. Under newly-amended Section 272, a company’s board of directors may authorize an alternative sale so long as: (i) the value of the property to be sold is less than or equal to the amount of liabilities being eliminated, and (ii) the sale is not otherwise prohibited by applicable law. However, a company may opt out of this new provision by expressly requiring stockholder approval in its certificate of incorporation.
Possible solution to the zombie company problem?
Though it is too soon to know the full implications of this amendment, the amended DGCL does provide another tool for at least some Delaware zombie companies to quickly and cost-effectively de-lever their balance sheets through an out-of-court restructuring approved by the company’s board—even over the objection of a majority shareholder or shareholder group. In many cases, a sale of the company’s assets is the most efficient—and in some cases only—way for a company to restructure. By allowing a company’s board of directors to guide the enterprise in accordance with their fiduciary duties, a Delaware board now has a potential pathway towards breaking the logjam and executing on an out of court sale or consensual foreclosure that breathes new life into the zombie.
