In Fletcher International, Ltd., v. Ion Geophysical Corp., C.A. No. 5109-VCS (Del. Ch. Mar. 29, 2011), read opinion here, the Court of Chancery dismissed two counts in a complaint brought by preferred stockholder Fletcher International based on the express terms that the preferred stockholder bargained for in the certificate of incorporation. Several prior decisions in this case were highlighted on this blog here.
Kevin F. Brady of Connolly Bove Lodge & Hutz LLP prepared this summary.
Fletcher is the record owner of all the Series D preferred stock in the defendant parent company, ION Geophysical Corporation. Fletcher filed a claim against ION and others claiming that the sale of stock from a subsidiary to a strategic partner was improper because ION failed to get Fletcher’s consent. In the Certificate of Rights and Preferences (the “Certificate”), Section 5(B) (ii) specifically provided: (B) the consent of the Holders of at least a Majority of the [Series D preferred stock] . . . shall be necessary to: . . . (ii) permit any Subsidiary of [ION] to issue or sell, or obligate itself to issue or sell, except to [ION] or any wholly owned Subsidiary, any security of such Subsidiaries. (emphasis in original). . .
In October, 2009, ION and China National Petroleum Corporation announced that they had entered into an agreement to form a wholly owned subsidiary to later become the joint venture entity and that upon the closing of the transaction, the joint venture would be owned 51% by China National and 49% by ION. In 2010, ION formed INOVA Geophysical Equipment Limited, a wholly owned subsidiary of ION, for the purpose of becoming the joint venture entity. ION, China National, and INOVA then entered into a Share Purchase Agreement, pursuant to which ION (not INOVA) delivered INOVA stock directly to China National.
Fletcher filed suit alleging: (i) in Count VI, that ION breached § 5(B)(ii) of the Certificate by permitting its then-wholly owned subsidiary, INOVA, to sell or issue securities to China National without first obtaining Fletcher’s consent; and (ii) in Count VII, that INOVA tortiously interfered with Fletcher’s § 5(B)(ii) contractual right. ION and INOVA moved to dismiss Counts VI and VII under Rule 12(b)(6) for failure to state a claim upon which relief can be granted, arguing that under the clear terms of § 5(B)(ii), Fletcher has no right to consent to the sale of INOVA securities.
The Court agreed with ION and INOVA noting specifically that the consent rights in Section 5(B)(ii) were inapplicable to the sales of INOVA’s stock owned by ION. The Court noted that INOVA was initially capitalized with 49% of its stock owned by ION and 51% owned by China National, thus INOVA was never a “subsidiary” of ION. As a result, Fletcher had no consent rights because § 5(B)(ii) expressly limited Fletcher’s consent rights to transactions involving ION’s “subsidiaries.” The Court stated that “a preferred stockholder’s rights “are contractual in nature” and where the language governing the preferred stockholder’s rights is “clear and unambiguous, it must be given its plain meaning.” Furthermore, such rights “are to be strictly construed and must be expressly contained in the relevant certificates.” Section 5(B)(ii) provides Fletcher with a narrow and unambiguous right to consent to sales and issuances by an ION subsidiary of an ION subsidiary’s own stock to third parties.
But, § 5(B)(ii) expressly permits an ION subsidiary, such as INOVA, to sell or issue its shares directly to ION without first obtaining Fletcher’s consent. And nothing in § 5(B)(ii) or otherwise gives Fletcher a right to consent to sales of an ION subsidiary’s stock owned by ION to a third party. The Court went on to note that “in light of the clear and unambiguous language in § 5(B)(ii) and the law in Delaware, it is immaterial whether ION, in structuring the Share Purchase Agreement, purposefully chose a transaction structure that did not trigger Fletcher’s consent rights. Fletcher, a sophisticated contracting party, could have bargained for the right it now in effect claims, namely a veto right over ION’s dealing in an ION subsidiary’s stock. It did not, and this court is not empowered to rewrite an unambiguous contract in order to have it meet Fletcher’s current business interests.”