In Brevan Howard Credit Catalyst Master Fund Limited, et al. v. Spanish Broadcasting System, Inc., the Delaware Court of Chancery considered the latest judicial iteration of rights of holders of preferred stock in Spanish Broadcasting System, Inc. (“SBS”) in which the plaintiffs sought damages as a result of SBS incurring indebtedness following the non-payment of dividends to the preferred stockholders without their consent. The Chancery Court granted defendant SBS’s motion to dismiss on the grounds that collateral estoppel and res judicata barred the plaintiffs from re-litigating issues previously decided in Lehman Brothers Holdings, Inc. v. Spanish Broadcasting System, Inc. against those in privity with the plaintiffs finding that the plaintiffs acquiesced to the non-payment of dividends. The Court dismissed the majority of the plaintiffs’ claims.
By way of background, in Lehman Brothers Holdings, Inc. v. Spanish Broadcasting System, Inc., a prior case involving similar claims brought by other preferred stockholders of SBS, such plaintiffs claimed that the non-payment of dividends to the preferred stockholders led to the occurrence of a voting right trigger event after which SBS incurred indebtedness in violation of the preferred stockholders’ contractual rights, the Court of Chancery granted a motion for summary judgment brought by SBS, holding that the defense of acquiescence as to the non-payment of dividends defeated those preferred stockholders’ claims. The Certificate of Designation of SBS (“Certificate”) setting forth the rights, privileges and preferences of the SBS preferred stock provided that dividends on the preferred stock were payable quarterly, and that if such dividends were not paid for four consecutive quarters, a voting rights trigger permitted the holders of 10% of the outstanding preferred stock to call a special meeting and elect additional directors. The Certificate also prohibited SBS from incurring additional debt after such a triggering event. According to the plaintiffs, a triggering event had occurred in April 2010, while additional debt was incurred in 2011 and 2012. None of the preferred stockholders called a special meeting to elect additional directors. Plaintiffs in this suit brought suit (1) seeking a declaration that a voting rights triggering event had occurred, (2) for breach of contract for incurring the debt, (3) seeking to exercise repurchase rights under the Certificate, and (4) breach of the covenant of good faith and fair dealing.
Because the majority of the factors in the collateral estoppel and res judicata doctrines were uncontested, the Court explained that “[w]hether proceeding under the doctrine of res judicata or collateral estoppel, the only issue in applying the findings [regarding acquiescence in Lehman Brothers] to the [plaintiffs in this case] is whether they are in privity with the Lehman Brothers plaintiffs.” The Court referred to the privity test laid out in Aveta, Inc. v. Cavallieri, which provides that “[p]arties are in privity for res judicata when their interests are identical or closely aligned such that they were adequately represented in the first suit.” The Court further explained that under Kohls v. Kenetech, the pleading burden is on a fellow stockholder to enunciate why it is situated differently than other stockholders.
Plaintiffs contended that they were not in privity with the Lehman Brothers plaintiffs because they were not 10% stockholders and so were not entitled to call a special meeting. The Court explained that since all of the stockholders knew of the special meeting rights, and none objected, they all acquiesced to the transactions. Next, Plaintiffs argued that they acquired some shares after the debt was incurred, so they should be able to take discovery regarding the state of mind of their predecessors. The Court explained that acquiescence is focused on the understanding of the defendant, not the plaintiffs. Since the Lehman Brothers decision found that the defendant had the necessary mental state required when relying on the acquiescence of the stockholders existing at the time the debt was incurred, the state of mind of Plaintiffs or their predecessors was not pertinent in this case. Thus, the Court found that the Plaintiffs were in privity with the Lehman Brothers plaintiffs, and granted SBS’ motion to dismiss as to all of the claims except Count III, involving repurchase rights under the Certificate which remains subject to litigation.