Wednesday, May 2, 2012

LC Capital Master Fund, Ltd. v. James, 990 A.2d 435.

LC Capital Master Fund, Ltd. v. James
Court of Chancery of Delaware, 2010.
990 A.2d 435.

(Preferred stockholders want more compensation in Merger)

P, preferred stockholder of Quadra, seeks to enjoin acquisition by D, Francisco Partners, of Quadra, (Merger) because consideration to be received by preferred stockholders of Quadra does not exceed the “as if converted” value the preferred were contractually entitled to demand in the event of a merger.
-”As if converted” value was based on a formula in the certificate governing preferred stock, and gave preferred bottom light right to convert into common at specified ratio and then receive same consideration as common in the merger. 

Merger Agreement
Francisco will acquire Quadra at price of $8.50/share of common stock.  Pref shareholders will receive $13.7097 in cash in exchange for each share of pref.
-Price for Pref. was pegged to conversion right that certificate granted to preferred stockholders in event of merger.
-conversion right allowed pref. stockholders to convert their pref. shares into common shares and then to receive the same consideration as the common stock received in merger.
-Preferred: enjoins merger on grounds that Ds breached fiduciary duties of care and loyalty.  Unfairly allocated b/t common and preferred stock.  P: “as-if converted” basis understates value of shares.

-Preliminary injunction is only means pref. has to block transaction -- certificate states that preferred stock does not have right to vote on merger.
-Certificate expressly provides that merger does not trigger the preferred stock’s liquidation preference.
P claims: mandatory conversion provision in certificate may only be used by Quadra to force conversion when company’s common stock hits price of $25/share, far above the $8.50/share merger value.
-Evidence shows that Francisco partners wanted to increase Quadra’s borrowing after merger, and wanted to
eliminate the preferred stock because Certificate gave preferred stock a right to vote on any incurrence of debt in excess of $8M.


-Preferred have not met burden to justify enjoining merger.

  Did Quadra have a duty to make a fair allocation of Merger consideration between common and preferred stockholders.
HOLDING:  Court says no basis to find that directors sought to advantage the common at unfair expense of preferred.

-No contractual basis here.
Generally the rights and preferences of preferred stock are contractual in nature.  Directors owe fiduciary duties to preferred stockholders as well as common stockholders where the right claimed by the preferred “is not to a preference as against the common stock but rather a right owed equally with the common.”  
-Where this is not the case, however, generally it will be the duty of the board, where discretionary judgement is to be exercised, to prefer the interests of the common stock - as good faith judgment of the board seems to them to be-to the interests created by the special rights, preferences, etc., of the preferred stock, where there is a conflict.
-In circumstances where the interests of the common stockholders diverge from those of the preferred, it is possible that a director could breach her duty by improperly favoring the interests of the preferred stockholders over the common stockholders.
Look to the Contract → when, by contract, the rights of the preferred in a particular transactional context are articulated, it is those rights that the board must honor.
-When there is NO CONTRACTUAL basis for treatment of the preferred, then the board must act as a gap-filling agency and do its best to fairly reconcile the competing interests of the common and preferred.

-Board owes preferred stockholders fiduciary duties in connection with merger: Revlon, to take reasonable efforts to secure the highest price reasonably available for the corporation.

-Business Judgement Rule.  Corporate law must work in practice to serve the best interests of society and investors in creating wealth.  
-Equity Linked/Trados: it is the duty of the directors to pursue the best interests of the corporation and its common stockholders.  If that can be done faithfully with the contractual promises owed to the preferred, it avoids a policy dilemma (fact that board owns common and no preferred does not matter - P would have to show that this would be material to directors economic circumstances.
-Business Judgment Rule, not entire fairness standard, applies to the decision of special committee.

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