The Delaware Court of Chancery recently held that a provision in the certification of incorporation of the target company in a $57 million merger granted preferred stockholders voting rights to veto a merger, but not preferential liquidation rights.
GoodCents Holding, a privately corporation that works with utility companies to optimize power consumption, merged into AM Conservation Group in 2015. The company’s founder, Dalford England, and a second individual, Clayt Mason, were the only common stockholders, holding 18.21 percent of the voting power. In connection with the merger, GoodCents issued Series 1 Cumulative Convertible Preferred Stock to companies affiliated with the acquiring company. Together, the preferred stockholders controlled the remaining 81.79 percent of GoodCents’ voting power.
In the summer of 2015, the common stockholders received a notice indicating GoodSense had been sold for $33 million in cash and that the company was permitted to use approximately $24 million in cash on hand to redeem the shares of the preferred stock. The common stockholders, who received none of the $57 million paid to the preferred stockholders, sought an appraisal.
The relevant section of the certificate of incorporation, section B.6.C, included two clauses important to the case. The first stated that “without the affirmative vote of the [Preferred Stockholders], [GoodCents] shall not . . . effect any merger or consolidation.” In other words, without the preferred stockholders’ approval, GoodCents cannot enter a merger. The second provided that “unless the agreement or plan of merger . . . shall provide that the 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.” (Those sections set forth the preferred stockholders’ preference in the event of a liquidation or winding up of GoodCents).
The company highlighted the second clause and argued it triggered the liquidation preference in the event of a merger. The common stockholders, for their part, argued section 6.B.c simply provided the preferred stockholders with voting rights (not a right to a liquidation preference) and in the event that a merger provided the preferred stockholders with a liquidation event, those stockholders would lose their ability to block a merger.
In a decision June 7, Vice Chancellor Tamika Montgomery-Reeves sided with the common stockholders and held the certificate of incorporation provides only a voting right. No part of the section, the judge said, provides that whenever GoodCents enter a merger, the preferred stockholders are to be paid their liquidation preference. The court also noted the language of another provision, section B.6.a, expressly requires payment of the preferred stockholders’ liquidation preference before any payment is made to junior stock in the case of a GoodCents’ liquidation, dissolution or winding up. Such language was noticeably absent from section B.6.c., the vice chancellor wrote.
Finally, the court cited a similar ruling in another case, In re Appraisal of Ford Holdings Inc. Preferred Stock. In that case, former Chancellor Allen considered language that was “nearly identical” to that at issue here and reached the conclusion that the language was merely a voting provision. “The plain meaning of the language controls, and I agree with Chancellor Allen’s reasoning in Ford Holdings interpreting nearly identical language,” the court wrote. “The Certificate of Incorporation grants the Preferred Stockholders the right to a class vote but not a right to the Liquidation Preference in the case of a merger.”
The case is In re Appraisal of GoodCents Holdings, Inc., C.A. No. 11723-VCMR.