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Liquidation Preference in Certificate of Incorporation Found to Not Apply to Merger Proceeds

Matthews v. Groove Networks, Inc., C.A. No. 1213-N, 2005 WL 3529317 (Del. Ch. Dec. 8, 2005). Subsequent to merger between corporate Defendant and Microsoft, common stockholder objected to payment of liquidation preference in favor of the corporation's preferred stockholders. The certificate of incorporation stated that, in the event of a merger, the preferred stockholders would be paid from the corporation's "Distributable Assets," "whether from capital, surplus or earnings." The certificate clarified that in the event of a sale of a majority of the corporation's assets, the Distributable Assets would be the net proceeds of such sale. But the certificate did not contain a corollary statement clarifying what would constitute Distributable Assets in the event of a merger. The common stockholder sued, arguing that the merger consideration was not intended to be part of the assets of the corporation. The court disagreed and granted summary judgment in Defendants' favor. The court noted that a corporation's assets in the sense of capital, surplus and earnings are not distributed to target shareholders in the event of a merger; they are transferred to the acquiring corporation in return for cash or other consideration paid to shareholders. Thus, the court noted that if it were to adopt Plaintiff's interpretation, the liquidation preference would apply in the event of a merger but would have no effect, which would not be reasonable. The court also found that Plaintiff's reading would render at least one other provision in the certificate nonsensical. Share
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