Plaintiffs, preferred stockholders, brought a breach of contract action against the issuer Company for failing to redeem their stock as required by the parties’ stock purchase agreement. The stock purchase agreement contained a mandatory redemption provision permitting the stockholders to require the defendant company to redeem their shares if it failed to consummate an initial public offering within a specified period. Although no IPO was consummated, defendant refused plaintiffs’ request to redeem the shares on the ground that doing so would “impair” its capital in violation of Delaware law.

Under Delaware law, a corporation’s capital is impaired when funds necessary for redemption exceed the corporation’s “surplus,” that is, “[t]he excess, if any, at any given time, of the net assets of the corporation over the amount so determined to be capital.” Plaintiffs argued that an amendment to the governing statute applied, under which impairment is measured when the instrument is issued. The U.S. District Court for the Southern District of New York rejected plaintiffs’ argument because the amendment, by its terms, only applied to notes, debentures and other obligations, not stock purchase agreements. As a result, the Court granted defendant’s cross-motion for summary judgment, holding that under the plain language of the statute, impairment is to be measured at the time redemption is requested. (Azar v. 1-800 Doctors, Inc., No. 05 CV 8370 (KMW), 2007 WL 2702201 (S.D.N.Y. Sept. 17, 2007))