In this memorandum opinion, the Delaware Court of Chancery held that a conversion of series A and series B preferred stock into common stock and a subsequent charter amendment that eliminated references to the preferred stock did not violate charter provisions that granted holders of the series B preferred stock the right to validate any action that altered or changed their rights.
Plaintiff, Greenmont Capital Partners I, LP (“Greenmont”), held shares of Series B Preferred Stock (“Series B”) in Defendant Mary’s Gone Crackers, Inc. (“MGC”). MGC’s certificate of incorporation (the “Charter”) authorized Common Stock, Series A Preferred Stock (“Series A” and together with the Series B, “Preferred Stock”), and Series B. Prior to the challenged actions, Series B shares accounted for a minority of the authorized shares of Preferred Stock.
The Charter granted Series B holders certain separate voting rights. For so long as any shares of Series B remained outstanding, approval by the holders of a majority of the outstanding shares of Series B was required for (i) any amendment, alteration, repeal, or waiver of any provision of the Charter, or (ii) any agreement or action that altered or changed the voting or other rights of the Series B. Additionally, the Charter provided for the automatic conversion of the Preferred Stock into Common Stock upon the affirmative election of the holders of at least fifty-one percent of the outstanding shares of Preferred Stock voting together as a single class.
On February 17, 2012, MGC received written consent from holders of more than fifty-one percent of the Preferred Stock, but not from holders of a majority of the Series B, to automatically convert the Preferred Stock into Common Stock (the “Automatic Conversion”). Later that day, the MGC board voted for and filed an amended and restated Charter that eliminated references to the Preferred Stock (the “Charter Amendment”). Both parties asserted that there were no material facts in dispute and asked the Court to declare as a matter of law whether the Automatic Conversion and subsequent Charter Amendment violated the Charter or Delaware law.
Greenmont argued that, in addition to the fifty-one percent Preferred Stock vote, a majority vote of the Series B was required for the Automatic Conversion. Greenmont argued that the Automatic Conversion eliminated the Series B rights by eliminating the Preferred Stock, thereby triggering the Series B vote required before altering or changing the rights. Maintaining that the Automatic Conversion was invalid, Plaintiff argued that the Charter Amendment, having not received Series B approval, was also invalid. MGC, on the other hand, argued that, because Automatic Conversion was one of the Series B rights, the exercise of the Automatic Conversion provision did not alter or change Series B rights. Additionally, MGC contended that the Charter Amendment was valid without Series B approval, because no shares of Series B remained outstanding following the Automatic Conversion.
The Court applied general principles of contract construction and, finding that the Charter was unambiguous, held that the holders of Series B were not entitled to a series vote on the Automatic Conversion. The Court found that the Automatic Conversion provision stood on equal footing with the other Series B voting rights. Rather than altering or changing a Series B right, the execution of the Automatic Conversion effectuated an existing right. Greenmont argued that an act that extinguished the Series B could not be a right of that series, but cited no authority in support of this argument. Greenmont also asserted that, given the Series B minority position, Greenmont would not have bargained for rights contingent upon the desires of the Series A stockholders. The Court concluded that the plain language of the Charter indicated that Automatic Conversion would not alter the Series B rights. The Court found support for its conclusion by comparing the Charter’s treatment of increases to the number of authorized shares of Common Stock with the treatment of an automatic conversion. Had the drafters of the Charter intended to include an automatic conversion among the actions requiring Series B approval, it was incumbent upon the drafters to provide precise language in the Charter to indicate such intent, as they did for increases to the number of authorized shares of Common Stock.
Having concluded that Automatic Conversion did not require Series B approval, the Court determined that the Charter Amendment did not require Series B approval. The Series B right to a separate series vote to validate amendments to the Charter applied only for so long as such shares remained outstanding. The Charter provided that the Automatic Conversion was deemed to have been made on the date on which the holders of fifty-one percent of the Preferred Stock voted to convert their shares. The Automatic Conversion did not require surrender of Preferred Stock certificates to be effective, unlike optional conversions of Preferred Stock, which the Charter deemed effective at the close of business on the date certificates are surrendered. Because the Automatic Conversion was effective on the date of Preferred Stock approval, there were no Series B shares outstanding and eligible for a series vote at the time of the Charter Amendment.
The Court also held that Section 242(b)(2) of the General Corporation Law of the State of Delaware, which requires a series vote on a charter amendment that decreases the number of authorized shares of the series, did not apply. Like the Series B voting rights set forth in the Charter, Section 242(b)(2) only applies “to the holders of outstanding shares.” The Court disagreed with Greenmont’s argument that the Court should evaluate the Automatic Conversion and Charter Amendment together as inextricably linked actions, noting that Delaware case law generally requires that corporate acts be evaluated independently.
Finally, the Court addressed Greenmont’s argument that the Automatic Conversion and Charter Amendment violated a voting agreement between MGC and certain of the MGC stockholders, including Greenmont. The Court found that this “perfunctory argument,” which was not seriously presented in Greenmont’s briefs, rested largely on Greenmont’s support for its other claims and was unpersuasive.
The full opinion is available here.