In Hildreth v. Castle Dental Centers, Inc., (Del. Supr., Nov. 15, 2007), read opinion here, the Delaware Supreme Court affirmed the Chancery Court ruling in an action contesting the appraisal of preferred shares in a merger. This case did not involve the typical valuation issues in an appraisal case. The plaintiff agreed on the total merger price. The dispute was based on the fact that preferred shares, that were convertible into common shares, were treated as if they were already converted, even though the corporation failed to authorize a sufficient number of common shares necessary to cover the full number of preferred shares that could be converted into common. The plaintiff wanted the merger price to be divided only among the total of authorized shares–as opposed to the number of convertible preferred shares that exceeded the total number of authorized shares.
Delaware’s high court based its reasoning on two key points. First, despite the failure to have adequate common shares, like other contracts, the failure of one part of a contract does not invalidate the whole contract. In addition, it was not alleged that the issuance did not comply with DGCL Section 151. Thus, the court rejected the argument that the preferred shares were void. Second, the court determined that there are many ways to value preferred shares and the method used by the merger agreement was permissible.