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SV Investment Partners, LLC v. ThoughtWorks, Inc., No. 107, 2011; C.A. No. 2724 (Del. Nov. 15, 2011)

November 15, 2011

In this en banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s holding that the plaintiffs, SV Investment Partners, LLC and an affiliated group of investment funds (collectively, “SVIP”), did not meet their burden to prove that ThoughtWorks, Inc. (“ThoughtWorks”) had sufficient funds legally available to redeem their shares of preferred stock of ThoughtWorks. The Supreme Court found no reversible error in the Court of  Chancery’s determination that SVIP failed to meet this burden even accepting SVIP’s argument that the phrase “funds legally available” has the same meaning as statutory surplus. For this reason, the Supreme Court did not reach the question of whether SVIP’s argument that the phrase “funds legally available” is equivalent to surplus as a matter of law.

The certificate of incorporation of ThoughtWorks provides that, upon a specified date, if an initial public offering has not yet occurred, the holders of preferred stock have a right to have their shares redeemed for cash, subject to two limitations: (a) ThoughtWorks could only redeem the shares of preferred stock out of “funds legally available therefor,” and (b) certain funds which the Board of Directors of ThoughtWorks designated as working capital could not be included in the determination of funds legally available. The Board of Directors of ThoughtWorks concluded it did not have sufficient funds legally available to satisfy SVIP’s redemption demand in full, but it periodically reviewed ThoughtWorks’s finances and made several partial redemptions. SVIP brought an action in the Court of Chancery seeking a declaratory judgment that the phrase “funds legally available,” as used in the certificate of incorporation of ThoughtWorks, meant statutory surplus and that ThoughtWorks had sufficient statutory surplus to redeem all shares of preferred stock held by SVIP.

After a trial, the Court of Chancery rejected SVIP’s argument and held that the phrase “funds legally available” was not equivalent to statutory surplus. The Court of Chancery concluded that the phrase meant cash on hand that could be legally distributed for redemption without violating common law or statutory law. The Court of Chancery further concluded that, even if it accepted SVIP’s definition, SVIP did not carry the burden of proving that, more likely than not, ThoughtWorks had, or was able to obtain, sufficient funds legally available or statutory surplus to satisfy its redemption obligations under the certificate of incorporation.

The Supreme Court noted that the Court of Chancery had a logical rationale for rejecting the opinion of SVIP’s expert witness and that the evidence showed that ThoughtWorks was unable to meet its redemption obligations. Thus, the Supreme Court did not address whether “funds legally available” and statutory surplus have the same meaning because it found that the record supported the Court of Chancery’s decision that SVIP failed to demonstrate that ThoughtWorks had sufficient funds legally available for redemption, even assuming that the meaning of the phrase is equivalent to statutory surplus.

The full opinion is available here