The Delaware Supreme Court recently upheld a Superior Court decision that in a merger, the holders of Omneon, Inc. (the "Company") Series C-1 preferred stock (the "Holders") were not entitled to a liquidation preference under the plain meaning of the Company's certificate of incorporation. The Court found that the pre-merger conversion of the Series C-1 preferred stock into common stock was a distinct and separate transaction from the merger itself, and therefore was not a "Liquidation Event" under the certificate of incorporation.
Here, the Company entered into a merger agreement conditioned on certain holders of preferred stock automatically converting their shares of preferred stock into common stock via a majority vote prior to the merger. Additionally, as part of the pre-merger conversion, the preferred shareholders would forego their contractual right to any liquidation preference payout that would otherwise be triggered by the merger. Under the Company's certificate of incorporation, a "Liquidation Event" (which includes a merger) is required to trigger the Holders' right to a liquidation preference payment. The stock conversion was duly approved, however, the Holders determined they would have received considerably more compensation for their stock had they been converted as part of a liquidation preference payout through the merger, versus the pre-merger conversion into common stock. The Holders argued that the pre-conversion was "integral" to the acquisition, and it should be deemed a part of the "Liquidation Event" entitling the Holders to additional payments for their shares. The Court disagreed, finding that the Holders' stock was "validly converted into common stock" prior to the actual merger taking effect, and declined to find that the conversion of preferred stock into common stock was part of a "series of related transactions" that constituted a "Liquidation Event." Instead, the Court determined that only the actual merger itself was a "Liquidation Event." As a result, when the "Liquidation Event" took place, the Holders were holders of common stock and not the Series C-1 preferred stock, and, therefore, were not entitled to any liquidation preference payout.
Alta Berkeley VI C.V., et al v. Omneon, Inc., C.A. No. N10C-11-102 (Del. March 5, 2012)