Friday, July 3, 2009
Can Secured Creditor Foreclose on Substantially All the Assets of a Debtor without Stockholder Approval?
An interesting question appeared in my in-box a few days ago from the ABA’s Private Equity/Venture Capital Listserve. Here is a somewhat edited version (thanks to Peter Sugar for helping me refine the question):
Creditor makes a loan to Debtor. The loan is secured by the stock of a wholly owned subsidiary of Debtor. The stock constitutes substantially all of the assets of Debtor. So, under the terms of the loan, upon a default, Creditor can take 100% of the shares in the subsidiary.
The loan is in default and Creditor plans to exercise its rights to acquire 100% of the shares in the subsidiary. Under the relevant statute, the sale, lease, or exchange of all or substantially all of a company’s assets must be authorized by the affirmative vote of its stockholders.
Here's the question: Should any of this be put to a shareholders' vote?
I asked my partner Steven Weise what he thought (something I do quite often) and he pointed to Sections of the California and Delaware Corp. Codes:
California Corp Code § 1000:
"Any . . . pledge or other hypothecation of all or any part of the corporation's property, real or personal, for the purpose of securing the payment or performance of any contract or obligation may be approved by the board. Unless the articles otherwise provide, no approval of shareholders . . . shall be necessary for such action."
Delaware GCL § 272:
“The authorization or consent of stockholders to the mortgage or pledge of a corporation's property and assets shall not be necessary, except to the extent that the certificate of incorporation otherwise provides."
So if Debtor is a California or Delaware corporation, no stockholder vote is necessary to enter into the loan agreement or pledge the stock of the subsidiary.
He went on to say he thought that the foreclosure by the secured party should not require shareholder consent because such a requirement (i) would make these statutory provisions useless and (ii) a foreclosure is not a sale "by" the corporation.
But what if, instead of foreclosing, the Creditor works out a negotiated settlement with the Debtor pursuant to which the loan is satisfied by the stock of the subsidiary? Could you argue that (i) the right to enforce is inherent in the creation of the security interest and (ii) the reasonable anticipation of the parties when a security interest is created is that the secured loan will be paid and the security interest won't be enforced, so (iii) if there is a default, even in a settlement, it's still "involuntary" because of the threat of foreclosure?
Thoughts in the comments are welcome.