CCLD Interprets Certificate of Incorporation in Breach of Contract Claim

Posted by Travis S. Hunter of Richards, Layton & Finger, P.A. on August 15, 2011

By: Travis S. Hunter and Jason J. Rawnsley

As discussed in a previous entry, the Delaware Superior Court’s Complex Commercial Litigation Division (the “CCLD”) is quickly becoming a popular venue for business litigation.  One example of the complex issues that the CCLD encounters is found in the recent case of Alta Berkley VI C.V. v. Omneon, Inc., C.A. No. N10C-11-102 JRS [CCLD] (Del. Super. July 21, 2011), in which the Court concluded that a conversion of preferred to common stock that took place before a merger was not itself part of the merger so as to bring it within a certificate of incorporation’s definition of a liquidation event, even though the merger was conditioned on such a conversion. 

Alta Berkley arose as a result of the defendant’s decision to merge with another company.  The plaintiffs, holders of the defendant’s series C-1 preferred stock, alleged that the defendant had breached certain provisions of its own certificate of incorporation by denying the plaintiffs a liquidation preference upon the merger.  The certificate defined a “liquidation event” as an acquisition of the company that could take place in a “series of transactions.”  The “First Step Merger” called for in the reorganization agreement was conditioned on a vote of the preferred stockholders to convert their shares to common stock, which they did.  According to the plaintiffs, this was a step in a “series of transactions” that entitled them to the liquidation preference.  The defendant argued that the clear and unambiguous terms of the certificate precluded any liquidation preference because the plaintiffs’ series of preferred stock was converted to common stock before the merger. 

According to the Court, “the rights of preferred shareholders, expressed as contractual terms within a certificate of incorporation, must ‘be strictly construed.’”  The Court examined the “four corners” of the certificate and found that it was clear and unambiguous.  One of its clauses stated that a particular series of preferred stock would not be converted to common stock by a vote of the other preferred stockholders if a liquidation event was conditioned on such a conversion.  The plaintiffs—who did not hold this series—argued that this carve-out “simply provide[d] assurance” to the holders of that series of preferred stock. 

The Court agreed that the conversion was an “integral component” of the merger.  But the only way to give full effect to the carve-out provision, which outlined a scenario identical to how the merger proceeded and clearly distinguished between a conversion and a liquidation event, was to find that the conversion was not part of a “series of related transactions.”  Because the plaintiffs’ shares had converted to common stock before the “First Step Merger,” they were not entitled to a liquidation preference. 

Complex Commercial Litigation Division off to a Fast Start

Posted by Anne Gaza of Richards, Layton & Finger P.A. on July 11, 2011

On May 1, 2011, the Delaware Superior Court’s Complex Commercial Litigation Division (the “CCLD”) celebrated its one-year anniversary.  It has quickly become a popular choice for litigation practitioners in Delaware.  The CCLD was created to offer an alternative venue for business disputes that would provide predictability and encourage the expeditious resolution of such cases.  Major advantages of the CCLD are that it offers flexibility in trial scheduling and allows parties to craft their own schedules to fit the needs of a particular case.  Parties are also offered the security of knowing that a case will remain assigned to the same judge for all purposes through final disposition.

The CCLD is available to hear cases that include a claim with an amount in controversy of one million dollars or more, that involve an agreement with an exclusive choice of venue provision or a judgment that results from such an agreement, or that the President Judge designates for the CCLD.  Certain cases, such as mortgage foreclosure actions, condemnation proceedings, and any case that contains a claim for personal, physical, or mental injury, are excluded from the CCLD.  

Practitioners are quickly taking advantage of the benefits that the CCLD has to offer, and 64 cases have already been assigned to the CCLD.  Of the 64 cases assigned, 45 cases are still pending.  Incoming cases are assigned on a rotating basis to a four-judge panel comprised of Judges Fred S. Silverman, Joseph R. Slights, III, Jan R. Jurden, and Mary M. Johnston. 

Of the 45 cases currently pending before the CCLD panel, Judge Silverman has 16 of the cases, Judge Slights has 15 of the cases, and Judges Jurden and Johnston each have 7 of the cases.  Since the beginning of 2011, 21 cases have been designated to the CCLD.   

Overall, the CCLD appears to be accomplishing its goal of offering an attractive venue for business disputes, and it is likely that the popularity of the CCLD will continue to grow among litigants located inside and outside of Delaware.