Fletcher Int’l, Ltd. v. ION Geophysical Corp., C.A. No. 5109-VCP (Del. Ch. March 24, 2010), read letter decision here.

This 15-page letter decision from the Court of Chancery addresses the issue of whether a convertible promissory note violated the terms of a Certificate of Rights and Preferences prohibiting the issuance of any securities without Fletcher’s consent. Fletcher sought the return of any funds borrowed under the note and an injunction to prevent any future borrowing under the note The decision was time-sensitive as there was a request to avert a closing involving the challenged note, that was scheduled to take place in Beijing, China, the day after this ruling was issued. The note at issue was part of a larger transaction involving other credit facilities in connection with a joint venture that ION was entering into with a third-party.

To the extent that the motion was treated as a request for a preliminary injunction, the Court found that an application of the usual three factors resulted in the following conclusions:

(i) a probability of success on the merits, but
(ii) no likely irreparable harm as money damages could be determined; and
(iii) the balance of equities argued against the grant of injunctive relief at this time.

Moreover, the Court determined that even if the issuance of the convertible promissory note was a violation of Fletcher’s rights, it would not necessarily require an invalidation of the note or mandate a return of any funds already disbursed under the note.

Because the motion was styled as one for partial summary judgment, but in essence, sought mandatory injunctive relief, the Court reviewed it based on the standard applicable for a preliminary injunction. The familiar three (3) prerequisites for the issuance of a preliminary injunction, referenced above, were listed, as well other considerations the Court typically reviews (or may review) in exercising its discretion in connection with an application for injunctive relief, such as:

(i) observing that there is no “steadfast formula for the relative weight each of the three factors deserves (fn 17), thus, a strong showing on one of the factors may overcome a marginal demonstration on another (fn. 18).
(ii) if an injury can be compensated for after a full trial on the merits, either by means of money damages or equitable relief, then preliminary injunctive relief should not be granted.  (id.)

Likelihood of Success on the Merits.

Cases were cited to support the likelihood of success on the argument than a convertible note would be considered a security (fn. 19), and that the issuance of that security without Fletcher’s consent was a violation of Fletcher’s rights. Although contrary case law was cited by ION, the Court determined that Fletcher satisfied this prerequisite for injunctive relief. However, Fletcher failed to satisfy the remaining two prerequisites.

Irreparable Harm

Although Fletcher argued that denial of voting rights constitutes irreparable harm (fn 21), and if damages are “difficult or impossible to quantify”, injunctive relief may be appropriate (fn.22), the Court determined that money damages could be calculated and that Fletcher only made a “slight showing” on this factor. The Court acknowledged that calculating damages would be “onerous” in this case, but it would not be “impossible”.

Balance of Equities

The Court found that if ION were required to pay back the amount drawn down on the note, it would also be required to pay down indebtedness under a credit facility (in the approximate amount of $140 million), that—according to ION, might prevent it from fulfilling other debt obligations, cause other defaults and force it into bankruptcy. (Slip op. at 13 and 14.) Finally, the Court observed that Fletcher did not appear to seek relief with the “degree of alacrity that the Court would expect” in the context of trying to interfere with a transaction of the size and importance to ION of the one involved here. That also was weighed by the Court against the request for injunctive relief.