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Alta Berkely VI C.V., et al. v. Omneon, Inc., C.A. No. N10C-11-102 JRS CCLD (Super. Ct July 21, 2011)

July 21, 2011

In this Memorandum Opinion, the Superior Court granted defendant’s Motion for Summary Judgment and denied plaintiffs’ Cross Motion for Partial Summary Judgment, finding that plaintiffs’ liquidation preference for their Series C-1 Preferred Stock of Omneon was not triggered by Omneon, Inc’s (“Omneon”) agreement to merge with Harmonic, Inc. (“Harmonic”).

Plaintiffs owned shares of preferred stock of defendant Omneon. Omneon’s certificate of incorporation provided, among other things, for (i) a liquidation preference payable to the holders of preferred stock upon the occurrence of certain “Liquidation Events” and (ii) an automatic conversion of preferred stock to common stock at the election of the holders of a majority of the outstanding shares of preferred stock (the “Automatic Conversion Provision”). The Automatic Conversion Provision contained a carve-out with respect to the Series A-2.2 Preferred Stock, which required the separate vote of the Series A-2.2 holder to effect the automatic conversion of such stock. In May 2010, Omneon entered into an agreement and plan of reorganization (the “Reorganization Agreement”), pursuant to which Harmonic would acquire Omneon for $190 million in cash and $120 million in Harmonic stock. The Reorganization Agreement provided that all of the outstanding shares of preferred stock of Omneon (other that the Series A-2.2 Preferred Stock) would be automatically converted into Omneon common stock per the Automatic Conversion Provision, and immediately thereafter, a subsidiary of Harmonic would be merged with and into Omneon, with all of the holders of common stock receiving a mix of cash and Harmonic stock collectively valued at $11.10. The merger between the Harmonic subsidiary and Omneon constituted a Liquidation Event under the terms of the Omneon certificate of incorporation and the Series A-2.2 holder did not approve an automatic conversion with respect to such stock; accordingly, the holder of the Series A-2.2 Preferred Stock received its liquidation preference of approximately $1.5 million per share.

The question before the Superior Court was when the Liquidation Event occurred. If prior to the conversion, as plaintiffs contended, plaintiffs would be entitled to their liquidation preference of $28.78 per share. If after, as defendant contended, plaintiffs were entitled only to the merger consideration of $11.10 per share. On this point, the Court concluded that the certificate of incorporation clearly and unambiguously established that a Liquidation Event occurred upon the consummation of an acquisition of Omneon by a third party. The Automatic Conversion Provision, on the other hand, clearly provided that the conversion would be effective upon the vote of a majority of the preferred stockholders (subject to the carve-out with respect to the Series A-2.2 Preferred Stock), which vote preceded the consummation of the merger. Plaintiffs also argued that each step of the proposed merger, including the vote approving the conversion of preferred stock, was part of a series of related transactions that collectively constituted the Liquidation Event. The Superior Court disagreed, finding that the Reorganization Agreement clearly stated that the automatic conversion of preferred stock was a condition to the merger, and not part of a series of related transactions that comprised the merger itself. Thus, the only shares of preferred stock that remained in existence at the time of the merger, and therefore entitled to the liquidation preference, were the Series A-2.2 Preferred Stock. The Court concluded that to accept plaintiffs’ interpretation of the certificate of incorporation would require the Court to insert terms beyond those bargained for by the Omneon preferred stockholders, contrary to the well established rules of contract construction. In the Court’s view, the Automatic Conversion Provision clearly contemplated the exact circumstances giving rise to the automatic conversion, merger and the ability of the Series A-2.2 preferred stockholders to opt out of the automatic conversion in the event of a merger, and any other interpretation would have rendered the carve-out to the Automatic Conversion Provision superfluous.

The full opinion is available here