Company Did Not Breach Mandatory Redemption Provision Where Special Committee Determined Company Lacked Funds To Redeem All Preferred Shares
Cont’l Investors Fund LLC v. TradingScreen, Inc., C.A. No. 10164-VCL (Del. Ch. July 23, 2021)
A holder of preferred stock often possesses redemption rights that permit the stockholder to require a company to repurchase the stockholder’s shares. But what happens if the company determines that it lacks the funds to repurchase the stock? As illustrated in this case, a stockholder challenging the determination bears the burden of proof to show that the company’s determination was improper.
Here, the plaintiff preferred stockholder exercised mandatory redemption rights in 2013. When the company only redeemed a portion of its shares, the plaintiff alleged that the company breached its redemption obligation. After trial, but before the Court’s decision, the company sold additional equity and offered to use the proceeds to redeem all of the preferred shares. The plaintiff continued to press its claim that the company owed additional, contractual default interest since 2013.
The Court concluded that the company met its redemption obligations in 2013 by redeeming all of the shares that it could. A special committee aided by a financial advisor evaluated the number of funds available for redemptions, including whether the company could obtain debt financing to pay more, and the amount of cash the company needed to continue to operate as a going concern and remain solvent for the foreseeable future. Ultimately, the committee determined that the company could use $7.2 million for redemptions and that the company should keep $20 million cash, an amount the committee thought was needed to retain and attract business in the company’s industry (i.e., providing electronic trading solutions to institutional investors around the world).
In reaching its conclusion, the Court observed that the Committee’s determination was “a judgment-laden exercise entitled to deference” absent a showing of bad faith, unreliable methods or data, or fraud. The defendants did not have the burden to show that paying more would have rendered the company insolvent. Rather, the preferred stockholder had the burden to prove the existence of additional funds legally available to redeem its shares. The Court also rejected the argument that the committee erred by reserving funds for two years of operation, rather than one, reasoning that directors have the discretion to evaluate the appropriate time horizon and resources required for their particular corporation to continue as a going concern.
Because the company did not default in its redemption obligations in 2013, the Court held that interest did not run from then, but rather, from the date that the Company obtained the additional capital and offered to redeem the shares in 2020.Share