Court of Chancery Enforces Redemption Rights and Addresses the Potential Effect of a Merger on Previously-Exercised Put Rights
This decision is necessary reading for drafters of redemption rights. It involves the interpretation of a redemption rights agreement granting a stockholder the right to force the company to buy back its shares and some interplay between those put rights and the DGCL in the event of a merger.
Briefly, the stockholder in this case had exercised its put rights, but the payment date was tolled according to the contract’s terms and based on the company’s then-present financial circumstances. Before the company could satisfy the put, it was acquired. The acquirer declined to respect the put. The stockholder sued and the Court ruled in its favor.
In doing so, the Court first rejected the acquirer’s argument that the put rights were a one-time exercise opportunity, rather than an ongoing obligation if funds were not available at exercise. According to the Court, the acquirer’s position would result in a commercially irrational forfeiture without the necessary clear language requiring a forfeiture. The Court also rejected the stockholder’s argument that the merger consideration constituted legally available funds of the company to satisfy the put. The Court further found that, had the stockholder continued to hold its stock, its rights may have been limited to accepting its share of the merger consideration. But the Court ultimately ruled in the stockholder’s favor because it had transferred the put shares to the company at the time of its exercise, making it a contractual creditor, no longer a stockholder. The payment obligation of the company became the obligation of the acquirer under Section 259 of the DGCL and was due and owing.