The Delaware Court of Chancery (the Court) recently issued an unprecedented order to divest shares in a Delaware corporation. In In re Stream TV Networks, Inc. Omnibus Agreement Litigations, Vice Chancellor Laster found that the divested parties acted in contempt to circumvent a prior decision of the Court and, as a remedy, invoked a rule allowing the Court to reassign ownership of any real or personal property within the jurisdiction of the Court. The decision is a reminder to Delaware litigants of the broad authority of the Court and its willingness to issue “extraordinary remedies” to ensure a fair and equitable result.
Stream TV Networks, Inc. (Stream), its secured creditors, including Hawk Investment Holdings Ltd. (Hawk), and certain stockholders, entered into an omnibus agreement related to Stream’s default on secured debt. The agreement provided that Stream would transfer all of its assets, which primarily consisted of shares in a Delaware subsidiary (the Shares) to SeeCubic, Inc. (SeeCubic), an entity controlled by the secured creditors. In return, the secured creditors would extinguish the secured debt. Minority stockholders received the right to exchange their shares in Stream for shares in SeeCubic. Stream’s controlling stockholders, however, were not entitled to any rights and, therefore, objected to the validity of the omnibus agreement.
The Court initially held that the omnibus agreement was valid and enforceable, following which all of Stream’s assets, including the Shares, were transferred to SeeCubic. However, the Delaware Supreme Court reversed on appeal, holding the agreement was invalid as it did not receive the requisite approval from Stream’s majority stockholders. The Court directed that the assets (and the Shares) be returned to Stream.
Hawk then intervened and sought permission to exercise rights as creditor prior to the transfer but was denied by the Court. As Vice Chancellor Laster explains, this prompted Hawk to engage in “a series of coordinated acts in which SeeCubic would transfer the Shares to Stream in a manner that would enable Hawk to seize them by acting before Stream could respond.” First, SeeCubic informed the Court that the Shares had been returned to Stream. Following this, Hawk sent a letter consisting of “dense legalese” demanding that title to the Shares immediately be registered in its name, at which point title to the Shares was transferred into Hawk’s name on the official stock ledger. One hour after the Shares were registered in Hawk’s name, Hawk wrote to the Court confirming that it now owned the Shares. The series of “choreographed” events took place during “an extended lunch hour, starting at 11:45 a.m. and ending at 1:18 p.m.,” with Vice Chancellor Laster commenting that it “was not possible for [the parties] to have taken the actions they did without advance notice, preparation, and an overarching plan.”
The Court’s Decision
The Court held SeeCubic and Hawk in contempt for acting in concert to frustrate the Court’s earlier orders. Vice Chancellor Laster applied an equitable standard to determine whether SeeCubic and Hawk failed to comply with orders “in a meaningful way.” The Court found that SeeCubic and Hawk deprived Stream of a fair opportunity to engage with its secured creditors, and orchestrated a sequence of events to “seize the Shares before Stream could react.”
In granting the divestiture sought by Stream, the Court invoked a rule that had never before been referenced in a Court opinion, reasoning that “extraordinary facts will sometimes call for extraordinary remedies” and “the fact that a particular form of relief is unprecedented does not mean it is unwarranted or unavailable.” The rule provided that where a “party [is] in contempt,” the Court “may enter a judgment divesting the title of any party” to “real or personal property … within the jurisdiction of the Court,” which property included the Shares because “stock in a Delaware corporation [is] personal property within the jurisdiction of the Court.” In addition, the Court granted a 10-day injunction barring Hawk and SeeCubic from interfering with Steam’s ownership of the Shares.
Though this case involved an extreme set of facts, litigants should take heed of the Court’s willingness to apply equitable and extraordinary tools that are at its disposal. This is particularly true when the Court views such actions as necessary to ensure that parties carry out the intended outcome of the Court’s orders.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.