Alta Berkeley VI C.V. v. Omneon, Inc., C.A. No. N10C-11-102 (Del. Mar. 5, 2012) (Jacobs, J.)

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Alta Berkeley VI C.V. v. Omneon, Inc., C.A. No. N10C-11-102 (Del. Mar. 5, 2012) (Jacobs, J.)

In this decision, the Delaware Supreme Court affirmed the Court of Chancery’s decision that certain preferred stockholders were not entitled to a liquidation preference payment with respect to their preferred stock in connection with a merger because their shares had been involuntarily converted into common stock immediately prior to and as a condition of the merger, because the conversion was not part of a “Liquidation Event,” as defined by the company’s charter. 

Plaintiff-appellants previously held Series C-1 preferred shares (the “Series C-1 Preferred Stockholders”) in Omneon, Inc. (“Omneon”), a privately-held Delaware corporation.  As a condition of and immediately prior to a merger of Omneon with Orinda Acquisition Corp. (“Orinda”), an entity controlled by the ultimate acquirer, Harmonic, Inc. (“Harmonic”), also a Delaware corporation, the Series C-1 Preferred Stockholders’ shares were automatically and involuntarily converted into Omneon common stock by a majority vote of Omneon’s preferred stockholders (the “Conversion”), in accordance with the terms of the certificate of incorporation.  The Series C-1 Preferred Stockholders sued Omneon in the Superior Court for breach of contract, claiming the Conversion was part of a Liquidation Event under Omneon’s certificate of incorporation that entitled them to a liquidation preference payment for their shares at a price greater than the merger consideration.  The Superior Court granted summary judgment in favor of Omneon, holding that the Conversion was not part of a Liquidation Event, as defined in Omneon’s charter, and that the Series C-1 preferred shares were validly converted into common stock before the Omneon-Orinda merger and therefore not entitled to a liquidation preference payment.

On appeal, the Series C-1 Preferred Stockholders argued, among other things, that the Conversion was part of the Liquidation Event, because it was one of a “series of related transactions” that constituted the “event.”  The Delaware Supreme Court disagreed.  The Court supported its decision by examining the plain language of Omneon’s charter.  Under Omneon’s charter, a Liquidation Event was “deemed” to occur upon: (1) an “acquisition” in which the acquirer obtains majority voting power by means of any transaction or series of transactions, or (2) the closing of the transfer of a majority of voting stock to an acquirer in one transaction or a series of related transactions.  The Court explained that the contractual phrase “series of transactions” was intended to prevent accomplishing piecemeal what is specifically precluded if attempted as a single transaction.  The Court concluded that the Liquidation Event clause employed the “series” language for an anti-circumvention purpose.  Because the Series C-1 Preferred Stockholders failed to propose a reasonable alternative reading or claim that Omneon or Harmonic inequitably employed the Conversion to evade the occurrence of (and the legal consequences flowing from) a Liquidation Event,  the clause did not encompass the antecedent Conversion of the Series C-1 preferred shares. 

The Court also relied on the “provided, however” provision in Omneon’s charter to confirm the validity of its analysis.  The “provided, however” provision expressly provided Omneon’s Series A-2.2 preferred stockholders an exclusive right to “opt out”  of a conversion that either (i) was conditioned upon, or (ii) followed the consummation of a Liquidation Event.  The Court held that the Series A-2.2 preferred stockholders’ right to opt out of the Conversion was triggered because the merger was a condition of the Conversion.  The Court determined that the drafters  plainly considered the possibility that Conversion might be integral to, and precede, a Liquidation Event, but nevertheless would constitute a legally separate event from the Liquidation Event.  The Court refused to provide the Series C-1 Preferred Stockholders with an after-the-fact “opt out” right that they failed to bargain for or obtain contractually.  The Court ultimately held that Conversion validly converted the Series C-1 preferred shares into common stock before the Liquidation Event (i.e., the merger); therefore, the Series C-1 Preferred Stockholders were no longer entitled to any liquidation preference at the time the merger occurred.

The full opinion is available here.

 

Published In: Business Organization Updates, Civil Remedies Updates, Mergers & Acquisitions Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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