Fletcher International, Ltd. v. ION Geophysical Corp., C.A. No. 5109-CS (Del. Ch. May 23, 2012). Issue addressed: Whether several promissory notes issued in connection with the sale of a company should be considered “securities”? Short answer: The court found one of the notes to be a security.


For more detailed background details, we refer you to several prior Court of Chancery decisions involving these parties that we have highlighted on these pages here, here, here and here. In sum, the factual background begins with the issuance of several promissory notes, each with different terms and attributes, in connection with the purchase of a business by ION. A preferred shareholder of ION, Fletcher International, Ltd., claimed that the issuance of the notes was a violation of the terms of the Certificates of Rights and Preferences (the “Certificates”) that governed the terms of Fletcher’s preferred stock. The Certificates required ION to obtain Fletcher’s prior approval before ION could issue any securities. Fletcher claims that the promissory notes issued by an ION subsidiary were each a “security” as that term is defined in the Certificates. This matter was presented on cross-motions for summary judgment pursuant to Court of Chancery Rule 56(h).


The court referred to a prior Chancery decision in this matter as the “law of the case”, in which it was determined that the issue of whether a note was a security would be determined by the 4-part test in the U.S. Supreme Court decision of Reves v. Ernst & Young, 494 U.S. 56, 66-67 (1990).

Under the Reves test, which has been adopted by the Delaware Supreme Court, “all notes are presumptively securities”. See fn 74. That presumption can be rebutted in two ways applicable in this case. First, there are four categories of notes that are explicitly excluded from the definition of security, such as a loan from a commercial bank for current operations or a short-term note secured by a lien on a small business. An alternative test under Reves is the “family resemblance test”.  Under this test, the presumption can be rebutted if the note bears a strong resemblance to one of the enumerated types of notes. See fn. 76.

The essence of the Reves analysis is to determine whether the note in question is an investment or, instead, a commercial loan or consumer loan transaction. This distinction is key, because the fundamental nature of a “security” is its character as an “investment”. The 30-page decision in this matter (which is on the “short side” for a typical Chancery decision), describes the different shades of grey and the nuances of a careful application of the various factors applicable to a determination of the distinction between a loan and an investment.


The court concluded that only one of the notes, referred to as “the Final Note”, in its ultimate iteration was a security. Although the Final Note began as a short-term loan, it was revised and amended to become a long-term investment by the seller in the ongoing business of the buyer, ION. Thus, its issuance without Fletcher’s prior consent was a violation of the Certificate.