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Chancery Applies Contract Principles in Preferred-Shares Dispute

April 23, 2015
Lewis H. Lazarus
Delaware Business Court Insider

In Choupak v. Rivkin, C.A. No. 7000-VCL (Del. Ch. April 6, 2015), the Delaware Court of Chancery concluded after a trial that the defendant and counterclaim-plaintiff, Vladimir Rivkin, forged documents, lied about exercising options, verified interrogatory responses and pleadings that he knew contained falsehoods, and testified falsely in deposition and at trial. The court found that Rivkin's conduct was motivated by his desire to profit from a 2011 sale by merger of Inc., even though in 2008 he had sold his 4.4 percent equity interest in Intermedia to Intermedia's founder, plaintiff Michael Choupak, and another Intermedia executive for $300,000. The court noted that had Rivkin prevailed on his claim that he was entitled to an additional 4 percent of the equity through preferred shares, he would have received over $5 million in damages based on the 2011 merger sale price of $127.5 million. The details of the facts that led the court to reach its findings are distressing but of wider import are the court's application of traditional contract principles in ruling for Choupak, the court's assessment of an equitable claim to unjust enrichment when the parties' relationship is governed by contract, and its dicta agreeing with other Delaware decisions holding that exclusive forum-selection provisions are procedural and hence permitted in a bylaw.

Court Analyzes Employment Agreement and Preferred Stock Option

The gravamen of Rivkin's counterclaim was that his employment agreement gave him an option to purchase shares of preferred stock equal to 4 percent of the company's equity. He claimed that a preferred stock option memorialized that grant, that he exercised the preferred stock option, and that the company breached its obligations by not issuing the shares to which he was entitled. In rejecting that claim, the court held the lack of detail in the two agreements rendered the terms "preferred stock" and "anti-dilution" ambiguous. Under conventional contract analysis, the court reviewed the extrinsic evidence to determine the parties' intent. Based on the trial evidence, the court found that Rivkin, a recent law school grad Choupak hired as company counsel in 2000, had attempted to document "the basic concept that [Rivkin] would receive at least 4 percent of Intermedia's equity." The court also found that Rivkin understood the term "preferred stock" to mean anti-dilution protection and that Choupak signed both documents evidencing his agreement to those terms. The court held that Rivkin received the benefit of his bargain when he sold his slightly more than 4 percent interest in 2008 and therefore there was no breach.

The court noted the same result would occur if the term "preferred stock" were deemed unambiguous. Under applicable Delaware law, "unless preferences are clearly spelled out in the certificate of incorporation (or by a separate resolution authorized by the corporate charter) they do not exist," as noted in Shanghai Power v. Delaware Trust, 316 A.2d 589, 593 (Del. Ch. 1974), affirmed in pertinent part sub nom. Judah v. Delaware Trust, 378 A.2d 624 (Del. 1977). Here, the certificate of incorporation "never designated any shares of preferred stock with rights, powers, or preferences different than common stock." The court noted that the only preference Rivkin identified was for anti-dilution. Therefore, "by issuing Rivkin sufficient shares of common stock to ensure he received at least 4 percent of Intermedia's equity, the company satisfied its contractual obligation," the opinion said.

Validity of Bylaw Provisions Mandating Forum Selection

In a 2010 decision, the court held that corporations by charter provision could mandate an exclusive forum for intra-entity disputes. In dicta, the court explained that subsequent decisions established the statutory validity of a bylaw adopting an exclusive forum-selection clause. Vice Chancellor J. Travis Laster noted his agreement with those decisions in that a forum-selection bylaw is a procedural, not a substantive limitation. Therefore, a forum-selection bylaw "does not constitute a substantive 'qualification, limitation or restriction' on the right to sue that would need to be included in the charter," he said.

Court Denies Claim for Unjust Enrichment

As an alternative to contract damages, Rivkin asserted a right to recovery under the doctrine of unjust enrichment. The court dispatched of that claim by citing to Delaware case law that "a party cannot seek recovery under an unjust enrichment theory if a contract 'is the measure of [the] plaintiff's right.'" Here, the court held that the employment agreement and preferred stock option "established the measure of Rivkin's rights." By buying Rivkin's shares in 2008 at a price that equaled or exceeded the price reflected in those agreements, the court held that Intermedia had satisfied its obligations to Rivkin.

Lessons Learned

The bottom-line lesson is that a claim based on an alleged issuance of preferred stock is not likely to succeed in the absence of contemporaneous written documentation spelling out the claimant's rights. Where the parties' contractual agreements are ambiguous, the court will look to extrinsic evidence to ascertain the parties' intent. And where a party satisfies its contractual obligations, a plaintiff cannot prevail on a claim of unjust enrichment if the contract establishes the measure of the plaintiff's rights.

Delaware Business Court Insider  |  April 21, 2015