Shiftan v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012), read opinion here.

Issues Addressed:

(i)         Whether the Court may consider in an appraisal action a contractually required redemption event in the certificate of incorporation, scheduled to occur six months after the merger, in determining the fair value of the stock;

(ii)        Whether the automatic redemption provision was subject to an “excess cash” requirement in the certificate of incorporation.

Short Answers:

(i)         The Court concluded that it was appropriate to consider the automatic redemption for purposes of the appraisal analysis even though the merger occurred several months before the right was triggered.  The Court distinguished this redemption right from cases in which the Court has refused to consider speculative possibilities in rendering an appraisal opinion, or where preferred stockholders were contractually told how their shares would be treated in the event of a merger;

(ii)        The Court also found that the automatic redemption was not subject to an “excess cash requirement” under the certificate.  The certificate of incorporation was plain that there were two types of redemptions for preferred stock.  In addition, although the Court found that the certificate was unambiguous, parol evidence also supported the conclusion in favor of the petitioners.  The Court especially noted that Morgan Joseph chose not to file a Rule 56(f) affidavit or to submit any conflicting parol evidence.

Background

The defendant in this case, Morgan Joseph Holdings, Inc., is an investment bank in which the petitioner held Series A Preferred Stock.  The petitioners bought their preferred stock when Morgan Joseph was founded in 2001 to help provide the initial funding for the company.  In December 2010, Morgan Joseph merged with another investment bank called Tri-Artisan Capital Partners, LLC.  The new Series A Preferred Stock which was governed by a new certificate of incorporation, was offered in exchange for Morgan Joseph’s old Series A Preferred Stock.  Instead of exchanging their Series A Shares, the petitioners in this action demanded appraisal under 8 Del. C. § 262. 

The certificate of incorporation included a provision for an automatic redemption of the Series A Preferred Stock at $100 per share which would have been triggered six months after the merger.  The petitioners claimed that because their stock was to be mandatorily redeemed six months after the merger, the Court should take into account the $100 per share redemption value provided for in the certificate in determining the fair value of the Series A Preferred Stock.

Short Summary of Court’s Reasoning

The Court emphasized that “the core mandate of Section 262 requires this Court to award the petitioners the ‘fair value of their shares.’” (emphasis in original) (citing 8 Del. C. § 262(h)).  The Court also emphasized that in the case of an appraisal of preferred stock, the Court must look at the contract rights granted to the shares being appraised under the relevant certificate of incorporation or designation in determining fair value.  In this case, the Court reasoned that the unique contractual feature of the automatic redemption given to the Series A Preferred Stock under the certificate had to be considered in rendering the final appraisal decision.

This decision was made in the context of a motion for partial summary judgment.  The material facts were not disputed, but rather, there was a different interpretation about how the certificate of incorporation provisions should be interpreted in connection with the automatic redemption clause and its impact on the analysis of the fair value in this appraisal proceeding.

The Court conducted an extensive analysis of the language in the certificate of incorporation and applied contract interpretation principles, including the principle of contract interpretation which says that ambiguous terms should be construed against the drafter.  The Latin phrase for that contract interpretation principle is contra proferentem.  See footnotes 17 through 26.

This 23-page opinion also provides helpful analysis regarding the construction of the rights granted to preferred stockholders in a certificate of incorporation or a certificate of designation.