Court of Chancery Grants Preliminary Injunction Against Majority Stockholder Seeking to Purchase Additional Shares for a Penny Each in an Attempt to Convert Some of its Debt to Equity
Flight Options Int'l, Inc. v. Flight Options, LLC, C.A. No. 1459-N, 2005 WL 2335353 (Del. Ch. July 11, 2005).
Plaintiff Flight Options International, Inc. ("FOI") sought a preliminary injunction against defendant Flight Options LLC ("the Company"), a Delaware limited liability company.
Plaintiff FOI owned 31% of defendant Company, and Raytheon Travel Air Company ("RTA") owned 69% (and had four representatives on the seven member governing board). Since the formation of the Company, Raytheon and its affiliates, such as its wholly owned subsidiary RTA, had supported the Company with more than $300 million in debt and preferred equity investments. FOI, on the other hand, had only contributed $2 million.
As the Company's financial picture deteriorated and the board unsuccessfully sought out external financing, Raytheon agreed to provide even more funds, which were conditioned on the Company entering into a purchase agreement that would allow Raytheon to purchase 5 billion common units of the Company for $0.01 a unit, essentially converting some of its debt to equity. Plaintiff FOI, which would have its equity stake diluted to 1% with such a deal, objected and brought an action to enjoin the Company from implementing the purchase agreement, pending arbitration of their substantive disputes.
The court held that plaintiff demonstrated a reasonable probability of success that the transaction was not at "arms length," as required by the LLC agreement, because the process used by the board was too informal to show that the price was equivalent to an arm's length result. For example, one valuation consultant relied exclusively on the discounted cash flow method and did not explore in depth the nature of the industry and its prospects. Another company that provided a valuation was solicited by a Raytheon director, not anyone at the Company. And, two of the three evaluators did not provide formal opinions.
The court also found that the severe dilution of plaintiff's share from 31% to 1% constituted irreparable harm.
The court granted plaintiff a preliminary injunction prohibiting consummation of the purchase agreement.
R. Christian Walker