The Court of Chancery in a recent decision addressed the issue of whether a “put right” that a company did not have sufficient funds to honor when exercised, was enforceable against the surviving company after a merger when the surviving company had the funds needed. The Court of Chancery answered this question in the affirmative in a matter styled: QC Holdings, Inc. v. Allconnect, Inc., C.A. No. 2017-0715-JTL (Del. Ch. Aug. 28, 2018).
This opinion addresses issues that are of importance to anyone who needs to be familiar with Delaware law regarding: (i) the restrictions on the ability of a corporation to redeem its own shares pursuant to DGCL Section 160;
(ii) the obligations of a successor corporation for the liabilities of the constituent corporation in a merger pursuant to DGCL Section 259; and
(iii) the minutiae of transferring stock pursuant to DGCL Section 201 and the Delaware Uniform Commercial Code, Article 8.
Several key principles articulated in this decision should be of interest to corporate and commercial litigation practitioners, include the following:
- Law and equity disfavor forfeitures. See footnotes 19 and 20. The court also explained that it would be unreasonable to construe a “put right” as valid for “one day only” on the date of exercise, as opposed to allowing time for the corporation to accrue available funds required under DGCL Section 160.
- The court described the limitations on the ability of a corporation to redeem its shares under DGCL Section 160 as “widely known.” See footnote 21.
- Because the funds for redemption in this case were held in escrow in connection with the merger, the court found that specific performance was appropriate because a money judgment alone would not be sufficient to transfer the funds or to make the claimant whole. See footnote 44 and accompanying text.
- This holding is noteworthy on the remedy issue because in some circumstances there may not be equitable jurisdiction if the only remedy sought is money. The procedural nuances of this case provide somewhat of an exception in this context.
- The court found that “merger funds” were not “legally available” for redemption purposes under DGCL Section 160. See footnote 21 and Slip op. at 17-20.
- The court explained that when a put right is exercised, and stock is transferred to the company pursuant to DGCL Section 201 and Article 8 of the Delaware UCC, DGCL Section 259 made the successor corporation, after the merger, duty bound to redeem the shares as a contract obligation.