This post was prepared by Brian E. O’Neill, Esq. of Eckert Seamans.
The Court of Chancery recently allocated merger consideration among common and preferred stockholders in an appraisal action involving no disputed facts. In In Re Appraisal of Goodcents Holdings, Inc., C.A. No. 11723-VCMR (Del. Ch. June 7, 2017), Vice Chancellor Montgomery-Reeves interpreted the certificate of incorporation of Goodcents Holdings, Inc. as granting preferred shareholders voting rights to veto a merger but not preferential liquidation rights.
Facts: The common stockholders of Goodcents consisted of two individuals with collective voting power of 18.21%. The preferred stockholders of Goodcents possessed the remaining 81.79% voting rights. With the affirmative vote of all of the preferred stockholders, Goodcents merged into another corporation in 2015 and received $57 million in cash consideration. The preferred stockholders possessed a $73 million liquidation preference. Goodcents interpreted its certificate of incorporation as triggering the preferred stockholders’ liquidation rights upon a merger and allocated all of the merger consideration to them. The common stockholders argued that the certificate of incorporation only granted voting rights to the preferred holders in the event of a merger.
The petitioners, common stockholders, filed an appraisal action challenging the company’s allocation of the merger consideration. The parties agreed to all of the material facts, and argued that the certificate of incorporation was unambiguous. The parties disagreed, however, about the interpretation of the certificate of incorporation.
The certificate of incorporation of Goodcents stated, in relevant part, that “upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation” the preferred stockholders shall be entitled to payment out of the corporate assets “before any payment shall be made” to the common stockholders. The certificate of incorporation further provided that if in such event the corporate assets were insufficient to satisfy the claims of the preferred holders, then they would receive payment “ratably.”
The certificate of incorporation also stated in a separate subsection that “[w]ithout the affirmative vote of the [preferred] holders” the company “shall not . . . effect any merger or consolidation . . . unless the agreement or plan of merger . . . shall provide” that the consideration shall be distributed to the stockholders of the corporation in accordance with the sections applicable to liquidation.
Result: The Court ruled based upon the plain language of the certificate of incorporation that the preferred stockholders held a voting right in the merger context, but did not hold a liquidation right. The Court interpreted the COI as granting the preferred holders a veto right over any merger unless the merger plan included a liquidation preference for the preferred holders. The veto right was deemed inapplicable once the preferred holders affirmatively voted in favor of the merger.
The Court relied on In re Appraisal of Ford Holdings, Inc. Preferred Stock, 698 A.2d 973 (Del. Ch. 1997), which interpreted nearly identical language as conferring a voting right, but not a liquidation right, upon the preferred stockholders in that action. The Court accordingly entered summary judgment in favor of the common stockholders and awarded them the proportionate share of the merger consideration “considering the Preferred Stock on an as-converted basis.”
Takeaway: This appraisal action boiled down to straightforward contract interpretation based on stipulated facts, unlike the usual battle of experts fighting over highly nuanced and complicated facts related to deal process and competing DCF methodologies in most appraisal actions.