Alta Berkeley VI C.V. v. Omneon, Inc., C.A. No. N10C-11-102 (Del. Mar. 5, 2012) (Jacobs, J.)
In this decision, the Delaware Supreme Court affirmed the Court of Chancery’s decision that certain preferred stockholders were not entitled to a liquidation preference payment with respect to their preferred stock in connection with a merger because their shares had been involuntarily converted into common stock immediately prior to and as a condition of the merger, because the conversion was not part of a “Liquidation Event,” as defined by the company’s charter.
Plaintiff-appellants previously held Series C-1 preferred shares (the “Series C-1 Preferred Stockholders”) in Omneon, Inc. (“Omneon”), a privately-held Delaware corporation. As a condition of and immediately prior to a merger of Omneon with Orinda Acquisition Corp. (“Orinda”), an entity controlled by the ultimate acquirer, Harmonic, Inc. (“Harmonic”), also a Delaware corporation, the Series C-1 Preferred Stockholders’ shares were automatically and involuntarily converted into Omneon common stock by a majority vote of Omneon’s preferred stockholders (the “Conversion”), in accordance with the terms of the certificate of incorporation. The Series C-1 Preferred Stockholders sued Omneon in the Superior Court for breach of contract, claiming the Conversion was part of a Liquidation Event under Omneon’s certificate of incorporation that entitled them to a liquidation preference payment for their shares at a price greater than the merger consideration. The Superior Court granted summary judgment in favor of Omneon, holding that the Conversion was not part of a Liquidation Event, as defined in Omneon’s charter, and that the Series C-1 preferred shares were validly converted into common stock before the Omneon-Orinda merger and therefore not entitled to a liquidation preference payment.
On appeal, the Series C-1 Preferred Stockholders argued, among other things, that the Conversion was part of the Liquidation Event, because it was one of a “series of related transactions” that constituted the “event.” The Delaware Supreme Court disagreed. The Court supported its decision by examining the plain language of Omneon’s charter. Under Omneon’s charter, a Liquidation Event was “deemed” to occur upon: (1) an “acquisition” in which the acquirer obtains majority voting power by means of any transaction or series of transactions, or (2) the closing of the transfer of a majority of voting stock to an acquirer in one transaction or a series of related transactions. The Court explained that the contractual phrase “series of transactions” was intended to prevent accomplishing piecemeal what is specifically precluded if attempted as a single transaction. The Court concluded that the Liquidation Event clause employed the “series” language for an anti-circumvention purpose. Because the Series C-1 Preferred Stockholders failed to propose a reasonable alternative reading or claim that Omneon or Harmonic inequitably employed the Conversion to evade the occurrence of (and the legal consequences flowing from) a Liquidation Event, the clause did not encompass the antecedent Conversion of the Series C-1 preferred shares.
The Court also relied on the “provided, however” provision in Omneon’s charter to confirm the validity of its analysis. The “provided, however” provision expressly provided Omneon’s Series A-2.2 preferred stockholders an exclusive right to “opt out” of a conversion that either (i) was conditioned upon, or (ii) followed the consummation of a Liquidation Event. The Court held that the Series A-2.2 preferred stockholders’ right to opt out of the Conversion was triggered because the merger was a condition of the Conversion. The Court determined that the drafters plainly considered the possibility that Conversion might be integral to, and precede, a Liquidation Event, but nevertheless would constitute a legally separate event from the Liquidation Event. The Court refused to provide the Series C-1 Preferred Stockholders with an after-the-fact “opt out” right that they failed to bargain for or obtain contractually. The Court ultimately held that Conversion validly converted the Series C-1 preferred shares into common stock before the Liquidation Event (i.e., the merger); therefore, the Series C-1 Preferred Stockholders were no longer entitled to any liquidation preference at the time the merger occurred.