July 20, 2017
Preferred Stock: Charter Provision Gives Vote, Not Preference
It’s been a tough year in Delaware for preferred stockholders – & according to this K&L Gates blog, they just took another hit in Chancery Court:
In In re Appraisal of GoodCents Holdings, Inc., C.A. No. 11723-VCMR, Vice-Chancellor Montgomery-Reeves held that, following a merger, a provision in the target company’s certificate of incorporation only provided preferred stockholders a voting right, not an entitlement to a liquidation preference.
The Preferred Stockholders argued that Section B.6.c of Article V of the certificate of incorporation conferred a liquidation preference, entitling them to the entire merger consideration, because Section B.6.c states that “consideration payable to the stockholders of the corporation . . . shall be distributed to the holders of capital stock of the corporation in accordance with Sections B.6.a and B.6.b above [which set forth the Preferred Stockholders’ preference in the event of a liquidation, dissolution or winding up of GoodCents].”
The common stockholders argued otherwise – contending that the language was intended to confer voting rights on the preferred in a merger, but only if the merger agreement didn’t provide for them to receive their liquidation preference.
The court sided with the common holders, noting that the charter document contained language specifying the preferred’s right to a dividend in connection with a liquidation, dissolution or winding up – but was silent when it came to a merger.
– John Jenkins