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Brevan Howard v. Spanish Broad. Sys., Inc., C.A. No. 9209-VCG (Del. Ch. June 27, 2014) (Glasscock, V.C.)


In this memorandum opinion, the Delaware Court of Chancery denied defendant’s motion to dismiss, finding that plaintiffs had standing and sufficiently pled their breach of contract claim.

Defendant, Spanish Broadcasting System (“Spanish Broadcasting”), is a Delaware corporation.  Plaintiffs are shareholders of defendant’s Series B Preferred Stock (“Series B”).  This dispute arose from the parties’ differing interpretations of defendant’s obligations under Section 7 of the Certificate of Designations Setting Forth the Voting Power, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions of the 10 3/4% Series B Cumulative Exchangeable, Redeemable Preferred Stock of Spanish Broadcasting System, Inc. (“Section 7”).

Under Section 7, Series B holders could require Spanish Broadcasting to repurchase their shares on October 15, 2013.  Spanish Broadcasting’s failure to repurchase these shares causes a Voting Rights Triggering Event (“VRTE”) that gives Series B shareholders the right to fill seats on Spanish Broadcasting’s board of directors and to block its incurrence of certain types of debt.  Section 7 also provides that Spanish Broadcasting (1) can only repurchase Series B shares using legally available funds and (2) shall take all actions required or permitted under the DGCL to repurchase such shares.

On October 15, 2013, holders of virtually all of the Series B shares sought to exercise their repurchase rights under Section 7.  After repurchasing a small number of these shares, defendant claimed it lacked sufficient legally available funds, thereby triggering a VRTE.  Plaintiffs argued that defendant breached its Section 7 obligations by failing to take all actions required or permitted under the DGCL—such as selling assets, issuing additional equity, or taking on new debt—to acquire additional legally available funds.

Spanish Broadcasting sought a dismissal of the complaint on the grounds of lack of standing and failure to state a claim upon which relief may be granted. In determining that plaintiffs had standing, the Court relied upon 6 Del. C. § 8-302(a), which provides that the purchaser of a security acquires all rights in such security.  The Court found that plaintiffs, as purchasers of Series B shares, acquired all right in these shares and could therefore require defendant to repurchase them under Section 7.

The Court also determined that plaintiffs sufficiently pled a breach of contract claim.  The Court first rejected plaintiffs’ claim to the extent that it relied upon the assertion that Section 7 required Spanish Broadcasting to take all actions required or permitted under the DGCL to generate legally available funds.  Instead, the Court found that Section 7 only required defendant to comply with the DGCL when repurchasing Series B shares.  The Court, however, determined that plaintiffs sufficiently pled a breach of contract claim by alleging that defendant failed to correctly calculate legally available funds for such repurchasing.

The full opinion is available here