January 19, 2018
Change-in-Control: What Does “Voting Power” Mean?
Nearly every change-in-control clause makes reference to the acquisition or transfer of a specified percentage of a company’s “voting power” as a potential trigger. However, a lot of those clauses don’t get very specific when it comes to what “voting power” means. This recent blog from Weil’s Glenn West highlights a recent New York case demonstrating that failing to define the term voting power can have some pretty significant consequences.
In Special Situations Fund III QP, L.P. v Overland Storage, Inc. (N.Y. Sup. Ct. 10/17), a New York trial court was called upon to interpret whether a merger triggered a contractual change-in-control clause. Certain shareholders of Overland Storage had paid $3 million to Overland for a 20% stake in the proceeds of a pending patent infringement claim. Their purchase agreement include a clause provided that “an acquisition by any Person and its Affiliates of more than 50% of the then outstanding voting power” of Overland would trigger the shareholders’ right to a $6 million payment.
The shareholders claimed that the clause was triggered by a transaction in which Tandberg Data Holdings’ sole shareholder – FBC – acquired 54% of Overland’s common stock in exchange for 100% of its shares of Tandberg. However, the terms of the transaction provided that for a specified period, FBC was only entitled to nominate 2 of Overland’s 7 board members.
As this excerpt points out, in the absence of a definition, that raised the question of what the term “voting power” meant:
Because the board of directors ultimately manages the affairs of a corporation, it was the board that would ultimately decide whether to continue prosecuting or settle the patent litigation. So based on the purpose of the provision and an examination of various corporate statutes defining “voting power,” the court concluded that, in this context, the term “voting power” referred to the “ability to elect directors;” and that it was largely irrelevant what other voting rights the holders of shares had if they didn’t have the ability to elect more than 50% of the directors.
Since that was the case, the court concluded that in the context of this case, “‘voting power’ must be read to refer to a shareholder’s actual power and discretion to control the election of directors.” The transfer of shares to FBC, subject to the voting agreement was, therefore, not a transfer of more than 50% of the voting power of Overland.
The blog notes that one of the interesting aspects of this case is that the agreement originally spoke in terms of transfers of 50% or more of Overland’s outstanding “voting securities” – which presumably would’ve caught this transaction. However, the shareholders opted to negotiate for different language due concerns that the term voting securities would’ve left them vulnerable to a transaction involving the issuance of a small amount of high-vote shares.
I think the most common formulation of the term voting power in agreements that I’ve seen is consistent with the way the court approached it here – “voting power in the election of directors.” But I also think that this language doesn’t get as much attention as other aspects of the typical change-in-control clause – and this case makes it clear that it should.
While the Overland Storage case was decided by a New York court, it was governed by California law – and this blog from Keith Bishop highlights the important role that the definition of the term “voting power” in California’s Corporations Code played in the decision.
– John Jenkins