In In re Appraisal of GoodCents Holdings, Inc., C.A. No. 11723-VCMR, Vice-Chancellor Montgomery-Reeves held that, following a merger, a provision in the target company’s certificate of incorporation only provided preferred stockholders a voting right, not an entitlement to a liquidation preference.
The target company, GoodCents Holdings, Inc. (“GoodCents”), had previously been acquired in a separate 2007 merger in which the company founder and another party became the sole owners of GoodCents common stock, holding 18.21% of voting power. GoodCents also issued Series 1 Cumulative Convertible Preferred Stock (the “Preferred Stock”) to two affiliates of the acquiring company (the “Preferred Stockholders”). The Preferred Stockholders held the remaining 81.79% of voting power. In July 2015, the common stockholders received a notice stating that GoodCents had been sold for $33 million in cash, and that the Preferred Stockholders’ liquidation preference set forth in the certificate of incorporation required distribution of the purchase price proceeds together with $24 million in cash on hand to redeem shares of the Preferred Stock. The common stockholders did not receive any of this money and subsequently sought an appraisal.
The Preferred Stockholders argued that Section B.6.c of Article V of the certificate of incorporation conferred a liquidation preference, entitling them to the entire merger consideration, because Section B.6.c states that “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 [which set forth the Preferred Stockholders’ preference in the event of a liquidation, dissolution or winding up of GoodCents].”
The common stockholders countered that Section B.6.c actually provided that: (1) GoodCents cannot enter into a merger without the approval of the Preferred Stockholders, and (2) the Preferred Stockholders lose their ability to block a merger by withholding their vote if the terms of the merger agreement provide that the consideration paid is “distributed to the holders of capital stock of the corporation in accordance with [the Preferred Stockholders’ liquidation preference.]” In other words, Section B.6.c simply provided the Preferred Stockholders voting rights, not a right to a liquidation preference in the event that GoodCents entered into a merger, and in the event that a merger agreement provided the Preferred Stockholders with a liquidation preference, the Preferred Stockholders would lose their ability to block the merger altogether.
The court concurred with the common stockholders. To bolster its conclusion, the Court pointed out that Sections B.6.a expressly provides for payment of the liquidation preference to Preferred Stockholders in the event that GoodCents was liquidated, dissolved, or wound up. The fact that Section B.6.c did not do the same inasmuch as it addressed a merger or consolidation of GoodCents was instructive. The Court also cited to a similar ruling in another appraisal case, In re Appraisal of Ford Holdings, Inc. Preferred Stock, that featured a provision with “nearly identical” language. There, Chancellor Allen also found that the provision only granted voting rights.
Lastly, the Court held that the common stockholders were entitled to a proportionate share of the fair value of GoodCents considering the Preferred Stock on an as-converted basis without taking into account any additional value conferred on the Preferred Stock via the voting right in Section B.6.c.