L-5 Healthcare Partners, LLC v. Alphatec Holdings, Inc., C.A. No. 2019-0412-KSJM (Del. Ch. Oct. 12, 2020)

Pursuant to a share purchase agreement, a plaintiff stockholder had preemption rights that entitled the stockholder to participate on a pro-rata basis if the defendant company issued common stock equivalents to a third-party buyer. Defendant issued warrants convertible into common stock to a nonparty. In consideration of plaintiff’s preemption rights, defendant made a proposal for plaintiff to provide the company with a loan in exchange for acquiring warrants, based on a blended version of the prices and other terms of the issuance to the nonparty. The proposal was, however, subject to approval by defendant’s board and the nonparty, and contingent upon defendant drawing down on the loan provided by plaintiff. Plaintiff filed suit in the Delaware Court of Chancery, seeking to enforce its preemption rights, and moved for partial judgment on the pleadings.

The Court held that the defendant company’s issuance to the nonparty of warrants convertible into common stock triggered the plaintiff’s preemption rights to participate on a pro-rata basis in the defendant’s issuance. The plaintiff’s preemption rights were triggered when defendant authorized the issuance of warrants even if defendant had not immediately drawn down on the loan that was a condition for their issuance. The Court also concluded that defendant’s proposal to plaintiff did not constitute a sufficient offer to satisfy its preemption rights. Because defendant’s proposal was contingent on board approval and on the nonparty’s assent, the proposal lacked sufficient finality to constitute an offer to satisfy plaintiff’s preemption rights.