Shiftan, et al. v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012) (Strine, C.)
In Shiftan, et al v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012) (Strine, C.), the Delaware Court of Chancery considered whether former Series A preferred stockholders who commenced a statutory appraisal proceeding following a merger were entitled to a fair value determination that accounted for a future “automatic redemption” at $100 per share of Series A preferred stock. The certificate of incorporation contained the automatic redemption provision, and the redemption was scheduled to occur about seven months after the merger was consummated. The Court granted plaintiffs’ motion for partial summary judgment, finding that (i) the automatic redemption right in the certificate was not subject to the same excess cash requirement that would have been applicable in the case of an optional redemption; and (ii) the automatic redemption was a nonspeculative event that the Court could consider at trial in determining the fair value of the preferred stock.
Because an appraisal of preferred stock requires the Court to evaluate the contractual rights of the holders of preferred shares under the Company’s certificate of incorporation, the Court analyzed the certificate’s redemption provisions. The automatic redemption provision stated that Series A preferred stock “shall be automatically and mandatorily redeemed” on July 1, 2011 or upon the earlier occurrence of certain “harvest” events such as a sale of all assets of the Company or an IPO of the common stock. The provision did not expressly condition an automatic redemption on the availability of excess cash. The certificate of incorporation also contained an optional redemption provision, and optional redemptions were expressly conditioned upon the Company having available a specified percentage of excess cash. A third provision described what would happen if the Company did not have excess cash on any Redemption Date (which was defined to include the date of both an automatic redemption and an Option Redemption). Defendants argued that this third provision imposed an excess cash requirement on any automatic redemption, despite the fact that the automatic redemption provision itself did not contain such a condition.
The Court determined that it need not grapple with the appropriate principles applicable to resolving an ambiguity in the terms of preferred stock because it found that the language of the certificate of incorporation was not ambiguous. First, the Court noted that the Company could have included express language conditioning automatic redemptions on the availability of excess cash (as it did for optional redemptions), but it failed to do so. Second, the Court found that the third redemption provision merely explained how an optional redemption would work if there was insufficient excess cash. Third, the Court explained that the types of triggering events for automatic redemptions (sale of substantially all assets, an IPO, a merger in which the Company did not survive, or ten years after initial investment) were events that result in a preferred security holder receiving a return based on its place in the capital structure. Accordingly, the Court held that but for the merger, petitioners’ would have had an automatic redemption right on July 1, 2011, subject only to the Company having legally available funds.
The Court next held that, at the trial stage, it could appropriately consider the rights of preferred stockholders under the automatic redemption provision for purposes of appraising the value of the preferred stock. Unlike common stock, “the value of preferred stock is determined solely from the contract rights conferred upon it in the certificate.” Because the July 1 redemption was a legal requirement set forth in the certificate, the Court distinguished this case from cases where the Court has declined to consider speculative possibilities in determining appraisal.
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