715 A.2d 843, 852–53 (Del. 1998)
Avatex Corporation is a Delaware corporation with both common stock and preferred stock outstanding, including First Series Preferred and Series A Preferred.1 The plaintiffs, including Elliott Associates, L.P., Harbor Finance Partners Ltd., and Anvil Investment Partners, L.P., are all holders of Avatex's First Series Preferred stock.2 The individual defendants are the members of Avatex's board of directors.3
On April 13, 1998, Avatex created Xetava Corporation as its wholly-owned subsidiary.4 The following day Avatex announced its plan to merge into Xetava, with Xetava as the surviving corporation that would then change its name to Avatex Corporation.5 The merger terms provide for conversion of Avatex preferred stock into common stock of the surviving entity.6
The merger would nullify Avatex's certificate of incorporation, including the certificate of designations establishing the rights and preferences of the preferred stock.7 The merger agreement does not provide for any class vote by the First Series Preferred stockholders.8
The certificate of designations for the First Series Preferred stock, effective March 18, 1983, states that so long as any shares remain outstanding, the consent of at least two-thirds of the shares voting separately as a class is necessary to permit, effect or validate the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any provisions of the certificate of incorporation or the certificate of designations that would materially and adversely affect any right, preference, privilege or voting power of the First Series Preferred stock.9
Plaintiffs filed suit in the Court of Chancery to enjoin the merger, contending that the transaction required the consent of two-thirds of the First Series Preferred holders.10 Defendants moved for judgment on the pleadings. The Court of Chancery granted the motion.11 The Supreme Court of Delaware accepted the appeal for review.12
Whether the certificate of designations for the First Series Preferred stock requires the consent of two-thirds of those holders voting separately as a class for the proposed merger?13
Rights of preferred stockholders are contractual in nature and must be expressly and clearly stated in the certificate of incorporation or designations pursuant to 8 Del. C. § 151(a).14 Therefore, these rights, preferences and limitations will not be presumed or implied. When a certificate grants a class vote on any amendment, alteration or repeal whether by merger, consolidation or otherwise that materially and adversely affects the rights, preferences, privileges or voting power of the preferred stock, the holders are entitled to that vote because the language expressly contemplates merger as a triggering event that can nullify the certificate and eliminate the protections.15
Yes. The established facts show that Avatex Corporation is a Delaware corporation with outstanding common stock and First Series Preferred stock whose certificate of designations effective March 18, 1983 expressly requires the consent of at least two-thirds of the First Series Preferred holders voting separately as a class to permit, effect or validate the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any provisions of the certificate of incorporation or the certificate of designations that would materially and adversely affect any right, preference, privilege or voting power of the First Series Preferred stock.16
On April 13, 1998 Avatex created Xetava Corporation as its wholly-owned subsidiary and the next day announced the plan to merge into Xetava with Xetava surviving and renaming itself Avatex Corporation, converting the preferred stock into common stock of the surviving entity and nullifying Avatex's certificate of incorporation including the certificate of designations.17 The merger agreement does not provide for any class vote by the First Series Preferred stockholders.
Plaintiffs filed suit in the Court of Chancery to enjoin the merger on the ground that the transaction required the two-thirds consent, but the Court of Chancery granted defendants' motion for judgment on the pleadings.18 The Supreme Court of Delaware reversed because the merger renders the Avatex certificate a legal nullity, which constitutes a repeal within the meaning of the certificate language, and the assumed material and adverse effect on the rights of the First Series Preferred stockholders therefore triggers the class vote requirement.19 The court applied the rule that preferred stock rights must be expressly stated by holding that the drafters could not reasonably have intended any consequence other than granting the two-thirds class vote to any merger that would result in elimination of the protections if the rights would thereby be adversely affected.20
The certificate of designations requires the consent of two-thirds of the First Series Preferred stockholders voting separately as a class for the proposed merger.21
Whether the phrase 'whether by merger, consolidation or otherwise' in the certificate of designations distinguishes the voting rights of the First Series Preferred stock from the provisions addressed in Warner Communications Inc. v. Chris-Craft Industries Inc.?22
When a certificate of designations grants a class vote only on an amendment, alteration or repeal without the additional phrase whether by merger, consolidation or otherwise, preferred stockholders have no class vote in a merger.23 When the certificate adds that phrase and a merger results in an amendment, alteration or repeal that causes a material adverse effect on the preferred stock, there is a class vote because the phrase expressly extends protection to mergers that nullify the certificate.24 This distinguishes the case from Warner where the phrase was absent and the adverse effect was held to flow only from the stock conversion rather than from any amendment or repeal of the certificate.25
Yes. The established facts demonstrate that the Avatex certificate of designations contains the phrase whether by merger, consolidation or otherwise while the Warner Series B certificate did not.26
The proposed merger of Avatex into Xetava causes both the conversion of the preferred stock and the repeal of the Avatex certificate by rendering it a legal nullity.27 In Warner the adverse effect was caused only by the conversion because the Warner certificate lacked language expressly covering merger as a method of amendment or repeal.28 The Court of Chancery had relied on Warner to conclude that the adverse effect flowed from the conversion rather than from any amendment, alteration or repeal.29
The Supreme Court of Delaware held that the presence of the additional phrase entirely changes the analysis and compels the result that the First Series Preferred stockholders have the right to a class vote.30 The court further explained that the word consolidation in the phrase would be rendered surplusage under any narrower reading that confined the protections to Section 251(b)(3) amendments to a surviving corporation's certificate.31 This confirms that the drafters intended the protections to apply to transactions such as the present merger in which the Avatex certificate disappears.32
Because the facts establish both the presence of the distinguishing phrase and that the merger effects a repeal causing the assumed material adverse effect, the voting rights of the First Series Preferred stock are materially different from those in Warner.33
The phrase whether by merger, consolidation or otherwise distinguishes the voting rights of the First Series Preferred stock from the provisions addressed in Warner Communications Inc. v. Chris-Craft Industries Inc. and requires a class vote on the proposed merger.34