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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Court of Chancery Holds Convertible Preferred is Still Equity
Posted In Corporate ChartersHarbinger Capital Partners Master Fund I, Ltd. v. Granite Broadcasting Corporation, C.A. No. 2205-N, 2006 WL 1875918 (Del. Ch. June 29, 2006). The Court of Chancery has held that convertible preferred stock, even with a mandatory redemption date, is still to be considered equity under the Delaware General Corporation Code. This remains true even if under the revised GAAP rules the preferred would be treated as debt. In so deciding the Court cited to numerous other decisions that both agreed and disagreed with the Court of Chancery's holding. However, as the Court pointed out, to hold that any preferred stock should be considered as debt would significantly alter the rights of the preferred stockholders notwithstanding what was spelled out in the certificate of incorporation. For example, in this case the preferred holder sought to enforce rights as a creditor, such as to preclude an allegedly fraudulent transfer. Yet, those rights were not given to the preferred in the company's certificate of incorporation, the traditional source of the rights of preferred stockholders.