In Cedarview Opportunities Master Fund, L.P. v. Spanish Broadcasting System, Inc., CA No. 2017-0785-AGB (Del. Ch. Aug. 27, 2018), the Court of Chancery granted in part and denied in part the motion of Spanish Broadcasting System (“SBS” or the “Company”) to dismiss Plaintiffs’ claims, which were based on alleged breaches by the Company of its certificate of incorporation and certificate of designations for its preferred stock, under Court of Chancery Rule 12(b)(6) for failure to state a claim and Rule 12(b)(1) for lack of ripeness. In ruling on one aspect of the Company’s motion to dismiss, the Court notably held that the parties should be permitted to admit extrinsic evidence to resolve an ambiguity with respect to the terms governing preferred stock, and in doing so, expressly declined to apply two arguably conflicting principles historically used by Delaware courts in resolving such an ambiguity, the application of which would not necessitate or permit the admission of extrinsic evidence.
In Charles Almond, et al. v. Glenhill Advisors LLC, et al., C.A. No. 10477-CB, Chancellor Bouchard ruled in favor of the defendants, directors of furniture company Design Within Reach Inc. (the “Company”) and Glenhill Capital Management LP (“Glenhill”), on all of the plaintiff-investors’ claims relating to the 2014 acquisition of DWR by Herman Miller, Inc. (“Herman Miller”). In doing so, Chancellor Bouchard judicially validated certain measures taken by Herman Miller to rectify an error that had diluted its ownership stake in the Company. Chancellor Bouchard also dismissed claims challenging transactions through which the Company’s board members received additional equity in the Company before the merger, holding that because these claims were derivative in nature, the plaintiffs’ standing to bring such claims were extinguished because of the merger.
In In re Appraisal of GoodCents Holdings, Inc., C.A. No. 11723-VCMR, Vice-Chancellor Montgomery-Reeves held that, following a merger, a provision in the target company’s certificate of incorporation only provided preferred stockholders a voting right, not an entitlement to a liquidation preference.
In I.A.T.S.E. Local No. One Pension Fund v. General Electric Company, et al., No. 11893-VCG (Del. Ch. Ct. December 6, 2016), the Delaware Court of Chancery, denied defendants’ motion to dismiss and held that a breach of fiduciary duty claim is personal and does not adhere to the stock of the company where the transaction at issue severs the relationship between the stockholder and the entity.
In Bonanno v. VTB Holdings, Inc. (C.A. No. 10681-VCN) (Del. Ch. February 8, 2016), Vice Chancellor Noble granted a defendant corporation’s motion to dismiss a plaintiff shareholder’s breach of contract claim, ruling that plaintiff’s redemption claim fell within the scope of a forum selection provision contained in a transaction document signed by plaintiff that required the parties to litigate such disputes in the state courts of New York or the federal courts therein.
The action arose when plaintiff John Bonanno, a shareholder of Voyetra Turtle Beach, Inc. (“VTB”), a predecessor corporation to VTB Holdings, Inc. (“VTBH”), brought a breach of contract claim in the Delaware Court of Chancery against defendant VTBH for failure to redeem his shares after a 2014 strategic merger involving VTBH, which Bonanno claimed qualified as a triggering event for a redemption. VTBH sought dismissal for improper venue based on the forum selection clauses located in various transaction documents previously entered into among the parties, all of which required them to litigate their disputes in either New York state court or the United States District Court for the Southern District of New York. Ultimately, the Delaware Court of Chancery granted VTBH’s motion to dismiss for improper venue, holding that the redemption is a “transaction” that was contemplated in a 2011 Right of First Refusal Agreement (the “2011 ROFR”) between the parties and the 2011 ROFR contained an exclusive New York forum selection clause, which governed Bonanno’s claims as a matter of New York law.
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.
TCV v. TradingScreen, Inc. concerns the interplay between a charter provision providing for the mandatory redemption of preferred stock, Section 160 of the Delaware General Corporation Law (the “DGCL”), and Delaware common law. The Chancery Court held that despite an adequate surplus under Section 160, common law restrictions prohibited a corporation from redeeming preferred stock as required by its charter.
In TCV, TradingScreen’s charter required that if after a specified date holders of a majority of TradingScreen’s Series D preferred stock asked for assistance in selling their preferred stock, TradingScreen would give that assistance. If no third-party buyer were found, TradingScreen would repurchase its preferred stock at its fair value as agreed upon or determined by an expert. In June 2012, the holders of a majority of the preferred stock requested assistance in selling their shares. When no suitable third-party buyer was found, an expert selected by Trading Screen and the majority owners of the preferred stock made a valuation and determined the sale price. After receiving the valuation, TradingScreen refused to repurchase more than a small portion of the preferred stock, stating that its board had determined, based on a study it had had prepared by an outside expert, that doing so would impair TradingScreen’s ability to continue as a going concern. The preferred stockholders brought suit, alleging, among other claims, that TradingScreen breached the Charter by failing to honor the charter’s redemption provision and, as a result, triggered interest payments at 13% on the unpaid amounts.
The preferred stockholders argued that because TradingScreen had a surplus that far exceeded the amount it would need to redeem the preferred stock without violating Section 160, its charter required it to repurchase the preferred stock. TradingScreen argued that under Delaware common law, funds would not be “legally available” for repurchase of preferred stock if doing so threatened the corporation’s ability to continue operating as a going concern. The Chancery Court agreed with TradingScreen. It held that even though redemption of the preferred stock would not violate Section 160, “outside the DGCL, a wide range of statutes and legal doctrines restrict a corporation’s ability to use funds.” It held that the common law restricted TradingScreen’s ability to redeem its shares when doing so would damage its ability to continue as a going concern, and that to challenge the Board’s judgment regarding the effect of redemption on TradingScreen’s ability to continue as a going concern, the preferred stockholders would have to show that the Board’s decision was made in bad faith or was so far off the mark as to constitute actual or constructive fraud. The Court rejected the argument that the charter provisions regarding the preferred stock were a contract between the corporation and the holders of the preferred stock, saying the preferred stockholders “fail to appreciate the hybrid nature of preferred stock” and that the preferred stockholders “are holders of equity, not debt.” It is likely many holders of preferred stock will be surprised to learn that their rights with regard to their preferred stock are subject to the issuers’ needs as going concerns.
In this action for breach of contract, Plaintiff institutional investors held cumulative preferred stock of Spanish Broadcasting System (“SBS”), a Delaware corporation, with dividends payable quarterly if so declared by the board of directors. If the dividends were unpaid for four consecutive quarters, a voting rights trigger in the shares’ Certificate of Designation (“Certificate”) allowed the holders of the preferred stock to call a special meeting and elect two additional directors to SBS’s board. In addition, the Certificate prohibited SBS from incurring additional debt after such a triggering event.