V.C. Laster Says Stockholder Approval Is Not Required, What Would California Say?

John Jenkins at DealLawyers.com took note yesterday of an interesting ruling by Vice Chancellor J. Travis Laster in  Stream TV Networks v. SeeCubic, C.A. No. 2020-0310-JTL (Dec. 8, 2020).   On issue in the case was whether Section 271 of the Delaware General Corporation Law requires shareholder approval when an insolvent corporation transfers all or substantially all of its assets to its secured creditors.   Vice Chancellor Laster ruled:

"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."

As anyone familiar with Court of Chancery rulings would expect, the Vice Chancellor has a lot more to say on the subject.

The concern of this blog, however, is California corporate law.  Like Delaware, California generally requires shareholder approval for a corporation to "sell, lease, convey, exchange, transfer, or otherwise dispose of all or substantially all of its assets . . .".  Cal. Corp. Code § 1001(a).  California, also like Delaware, permits a corporation to mortgage, pledge or otherwise hypothecate all or any part of its property with board approval alone.  Cal. Corp. Code § 1000.  Also like Delaware Section 272, California's statute does not speak to whether shareholder approval is required for a secured creditor to foreclose.

Vice Chancellor Laster reasoned that requiring shareholder approval made little sense:

"[T]he 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."

The same logic would appear to apply to California.