IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CEDARVIEW OPPORTUNITIES 

MASTER FUND, L.P., CETUS 

CAPITAL III, L.P., CORRIB 

CAPITAL MANAGEMENT, L.P., 

LITTLEJOHN OPPORTUNITIES 

MASTER FUND L.P., 

RAVENSOURCE FUND, 

STONEHILL INSTITUTIONAL 

PARTNERS, L.P., STONEHILL 

MASTER FUND LTD., 

STORNOWAY RECOVERY FUND 

L.P., VSS FUND, L.P., WEST FACE 

LONG TERM OPPORTUNITIES 

GLOBAL MASTER L.P., and 

WOLVERINE FLAGSHIP FUND 

TRADING LIMITED, 

Plaintiffs,

v.

SPANISH BROADCASTING 

SYSTEM, INC.,

Defendant.

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 C.A. No. 2017-0785-AGB

MEMORANDUM OPINION

Date Submitted: May 1, 2018

Date Decided: August 27, 2018

Jon E. Abramczyk, D. McKinley Measley, and Alexandra M. Cumings of MORRIS, 

NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Shireen A. Barday 

of KIRKLAND & ELLIS LLP, New York, New York; Patrick J. Nash of 

KIRKLAND & ELLIS, Chicago, Illinois; Counsel for Plaintiffs.
Robert S. Saunders, Matthew P. Majarian, and Haley S. Stern of SKADDEN, ARPS, 

SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Counsel for 

Defendant.

BOUCHARD, C.
This action is the latest in a series of disputes that have led to litigation in this 

court between Spanish Broadcasting System, Inc., a Spanish-language media and 

entertainment company that operates in the United States, and holders of its Series 

B preferred stock.1 This iteration involves essentially two distinct disputes.

First, certain Series B holders have filed claims asserting that the Company 

improperly incurred “Indebtedness” without their consent in violation of the 

certificate of designations governing the Series B preferred stock and the implied 

covenant of good faith and fair dealing. For these alleged violations, the Series B 

holders seek damages and certain forms of specific performance.

Second, the Series B holders have filed claims asserting that the Company 

improperly cancelled their share certificates and suspended virtually all of their 

rights as Series B holders in violation of the Company’s certificate of incorporation, 

which contains certain limitations on the percentage of foreign or “alien” ownership 

of its capital stock. These limitations parallel provisions of the Communications Act 

of 1934 that regulate foreign investment in entities that control a United States 

broadcast license. For these alleged violations, the Series B holders seek damages 

 

1 See Brevan Howard Credit Catalyst Master Fund Ltd. v. Spanish Broad. Sys., Inc., 2015 

WL 2400712 (Del. Ch. May 19, 2015); Brevan Howard Credit Catalyst Master Fund Ltd. 

v. Spanish Broad. Sys., Inc., 2014 WL 2943570 (Del. Ch. June 27, 2014); Lehman Bros.

Holdings Inc. v. Spanish Broad. Sys., Inc., 2014 WL 718430 (Del. Ch. Feb. 25, 2014). 
2

and a declaratory judgment that the operative provision of the certificate of 

incorporation is invalid.

The Company has moved to dismiss all of the Series B holders’ claims under 

Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. It also has 

moved to dismiss the declaratory judgment claim under Court of Chancery Rule 

12(b)(1) for lack of ripeness. For the reasons explained below, the motion is granted 

in part and denied in part.

I. BACKGROUND

The facts recited in this opinion are taken from the Verified Amended 

Complaint filed on December 22, 2017 (the “Amended Complaint”)2 and documents 

incorporated therein.3 Any additional facts are either not subject to reasonable 

dispute or subject to judicial notice. 

A. The Parties

Defendant Spanish Broadcasting System, Inc. (“SBS” or the “Company”) is a 

Spanish-language media and entertainment company that operates radio and 

television stations in Hispanic markets throughout the United States. Non-party 

Raúl Alarcón Jr. is the Company’s Chairman, CEO, and President. He is also SBS’s 

 

2 Dkt. 9. 

3 See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (citation and internal 

quotations omitted) (“[P]laintiff may not reference certain documents outside the 

complaint and at the same time prevent the court from considering those documents’ actual 

terms” in connection with a motion to dismiss).
3

controlling stockholder, holding approximately 85% of the combined voting power 

of its two classes of common stock. 

Plaintiffs hold approximately 94.16% of SBS’s outstanding 10 3⁄4% Series B 

Cumulative Exchangeable Redeemable Preferred Stock (the “Series B Preferred 

Stock,” and all holders thereof, the “Series B Holders”).4 Certain of these plaintiffs, 

holding approximately 69.9% of the outstanding Series B Preferred Stock, are 

foreign entities.

5 The Communications Act of 1934, 47 U.S.C. § 151, et seq. (the 

“Communications Act”), refers to such foreign entities as “aliens.” 

Some of the plaintiffs also hold SBS’s 12.5% senior notes (the “Senior 

Notes”). In total, plaintiffs hold approximately $85,265,000 of the face amount of 

the Series B Preferred Stock and $30,792,000 in principal amount of the outstanding 

Senior Notes.6

B. The Series B Preferred Stock

On October 29, 2003, SBS authorized the issuance of Series A Preferred 

Stock.7 On February 18, 2004, the Company issued shares of Series B Preferred 

Stock in exchange for the outstanding Series A, pursuant to a certificate of 

 

4 Am. Compl. ¶ 2.

5 Am. Compl. ¶¶ 13-22; Ex. D at 9-11. 

6 Am. Compl. ¶ 13.

7 Am. Compl. ¶ 29 & n.14.
4

designations for the Series B Preferred (the “Certificate”).8 The only relevant

difference between the two securities is that the Series B Preferred Stock, as opposed 

to the Series A, is freely transferable.9 

The Certificate sets forth the “designations, preferences, relative, 

participating, optional and other special rights and the qualifications, limitations and 

restrictions” of the Series B Preferred Stock. Absent special circumstances expressly 

set forth in the Certificate or as required by law, the Series B Holders have no voting 

rights.10 Upon the occurrence of a Voting Rights Triggering Event (“VRTE”), 

however, certain rights, voting and otherwise, do arise.

11

 A VRTE occurs, among 

other times, when:

 Dividends on outstanding Series B Preferred Stock are in arrears and unpaid 

for four consecutive quarterly dividend periods;

 SBS fails to discharge any redemption or repurchase obligation with respect 

to the Series B Preferred Stock;

 SBS breaches or violates any covenants or agreements in Section 11 of the 

Certificate (addressed further below); and

 SBS defaults under any indenture by failing to pay principal or interest.12

 

8 Am. Compl. ¶ 29 n.14; Ex. B.

9 Am. Compl. ¶ 29 n.14.

10 Am. Compl. Ex. B §§ 9(a), 15.

11 Am. Compl. Ex. B § 9(b).

12 Am. Compl. Ex. B § 9(b)(i)-(ii), (iv)-(v).
5

When a VRTE occurs, the number of directors constituting SBS’s board is 

increased to permit the Series B Holders to elect two additional members.

13

 

Additionally, for as long as a VRTE continues, the Company is prohibited from 

making certain “Restricted Payments” to “Junior Securities,” as defined in the 

Certificate, and SBS may not enter into certain types of transactions, such as mergers 

or consolidations.

14 Most importantly for the present action is that the Certificate 

bars SBS from incurring Indebtedness during a VRTE without the consent of the

Series B Holders.

15

 The definitions of “incur” and “Indebtedness,” which are central 

to this action, are discussed later in this opinion. 

Absent a VRTE, SBS can incur Indebtedness if the Company’s “Debt to Cash 

Flow Ratio” is no greater than 7.0 to 1.0 at the time of incurrence of such 

Indebtedness.

16

 This Debt to Cash Flow Ratio restriction does not apply, however,

to twelve enumerated categories of “Permitted Debt,” which are obligations that SBS 

may incur as long as there is no VRTE in effect.

17

 

 

13 Am. Compl. Ex. B § 9(b)(v).

14 Am. Compl. Ex. B §§ 11(a), (c). 

15 Am. Compl. ¶ 4; Ex. B § 11(b). 

16 Am. Compl. Ex. B § 11(b).

17 Am. Compl. Ex. B § 11(b).
6

C. The Senior Notes 

In February 2012, SBS issued $275 million in principal amount of Senior 

Notes pursuant to the Senior Secured Notes Indenture (the “Indenture”).

18

 The 

Senior Notes are secured by substantially all of the Company’s assets, and 

approximately $260 million in face value of the Senior Notes are currently 

outstanding.19 Under the Indenture, the Senior Notes became due and payable in full 

on April 17, 2017.20 

Before the Senior Notes due date, the Indenture required the Company to pay 

interest on the Senior Notes semi-annually in arrears on April 15 and October 15 of 

each year.21 After the Senior Notes due date, if the Senior Notes are overdue, SBS 

must make interest payments “from time to time on demand at the interest rate on 

the [Senior] Notes.”22

 

18 Transmittal Aff. of Matthew P. Majarian (“Majarian Aff.”) Ex. 2 at 1 (Dkt. 13); Am. 

Compl. ¶ 5 & n.6.

19 Am. Compl. ¶ 5 n.6; Majarian Aff. Ex. 3 at 5.

20 Am. Compl. ¶ 5. 

21 Majarian Aff. Ex. 2 at A-5.

22 Id.
7

D. Multiple VRTEs Have Occurred and are Uncured by SBS

The Company “encountered financial difficulties as a result of the 2008 

recession and its financial position has since deteriorated.”23 Consequently, a 

number of VRTEs have occurred since then and remain uncured because the 

Company does not “currently have sufficient funds legally available to it to be able 

to satisfy the conditions for terminating them.”24 

A VRTE was triggered in April 2009 when the Company stopped paying 

dividends to the Series B Holders.

25

 As of September 30, 2017, SBS owed 

approximately $72.6 million in accrued and unpaid dividends to the Series B 

Holders, an amount that continues to grow.

A second VRTE occurred on October 15, 2013, when a majority of the Series 

B Holders exercised their right to require SBS to repurchase their preferred stock at 

$1,000 per share, but the Company failed to do so.

26

 Due to a lack of legally 

available funds, SBS only repurchased 1,800 of the 92,223 shares for which holders 

exercised their repurchase rights.

27

 The Series B Holders thereafter exercised their 

 

23 Def.’s Opening Br. 1 (Dkt. 13).

24 Am. Compl. ¶ 45 (quoting SBS, Quarterly Report (Form 10-Q) (Nov. 14, 2017) at 19).

25 Am. Compl. ¶ 46 & n.33.

26 Am. Compl. ¶ 47; Ex. B §§ 7(a), 9(b)(ii).

27 Am. Compl. ¶ 47.
8

right to elect two additional directors to the Company’s Board.28 SBS has 

acknowledged the occurrence and continuance of this VRTE in its public filings, 

including its quarterly report dated November 14, 2017.29

A third VRTE occurred on the Senior Notes due date, April 17, 2017, when 

SBS failed to pay off the Senior Notes and an Event of Default arose under the 

Indenture.30 To avoid a foreclosure on the assets secured by the Senior Notes—

which are all or substantially all of SBS’s assets—SBS executed a forbearance 

agreement with holders of approximately 75% of the outstanding Senior Notes, 

dated May 8, 2017 (the “Forbearance Agreement,” and such forbearing holders, the 

“Forbearing Noteholders”).31 The plaintiffs in this action who also hold Senior 

Notes are not among the Forbearing Noteholders.32 

The Forbearance Agreement provided, in relevant part, that the Forbearing 

Noteholders would forbear from exercising any of their rights and remedies under 

the Indenture with respect to SBS’s failure to repay the Senior Notes until May 31, 

 

28 Am. Compl. ¶ 42. According to plaintiffs, “the two Series B-elected board members 

recently resigned—upon information and belief—because of frustration over SBS’s failure 

to pursue a right-sizing of its capital structure in good faith.” Id.

29 Am. Compl. ¶ 47.

30 Am. Compl. ¶¶ 5, 48; Ex. B § 9(b)(v); Majarian Aff. Ex. 2 § 6.01(a)(1).

31 Am. Compl. ¶ 6; Majarian Aff. Ex. 1 at 1.

32 Am. Compl. ¶ 6 n.7.
9

2017.33 In exchange, SBS agreed to: (i) make two monthly interest payments to the 

holders of the Senior Notes (as opposed to paying interest on a semi-annual basis as 

set forth in the Indenture), totaling approximately $2.9 million each month;34 (ii) pay 

a one-time consent fee to the Forbearing Noteholders equal to 0.35% of their

outstanding principal;35 and (iii) pay the Forbearing Noteholders’ legal and financial 

advisor fees.36 The Forbearance Agreement did not purport to amend the Indenture 

or change any term of the Senior Notes.37

The Forbearance Agreement expired on May 31, 2017, with the Senior Notes 

remaining unpaid and outstanding.38 Although it does not have a new formal 

agreement with the Forbearing Noteholders, SBS has continued to make monthly 

interest payments on the Senior Notes and to pay the Forbearing Noteholders’

advisor fees.39 The holders of the Senior Notes, in turn, have not accelerated the

principal amount of their debt or commenced related legal proceedings.40

 

33 Am. Compl. ¶¶ 6-7; Majarian Aff. Ex. 1 §§ 2.01, 2.02.

34 Am. Compl. ¶ 6; Majarian Aff. Ex. 1 § 4.01(b).

35 Am. Compl. ¶ 6; Majarian Aff. Ex. 1 § 4.02.

36 Am. Compl. ¶ 6; Majarian Aff. Ex. 1 § 4.04.

37 Majarian Aff. Ex. 1 §§ 1.01(d), (f).

38 Am. Compl. ¶¶ 5, 7.

39 Am. Compl. ¶ 7 (citing SBS, Quarterly Report (Form 10-Q) (Nov. 14, 2017) at 16).

40 Am. Compl. ¶ 50.
10

E. SBS Suspends the Series B Holders’ Rights

On November 2, 2017, plaintiffs filed their initial complaint in this action, the 

thrust of which was that SBS breached the Certificate by impermissibly incurring 

debt during a VRTE by “extending, refinancing or renewing” the Senior Notes with 

the Forbearance Agreement.41 After reviewing the initial complaint, SBS claimed 

that it learned for the first time that “the collective ownership of non-U.S. entities 

exceeds 63 percent of the outstanding Series B Preferred Shares,”42 an amount that 

the Company says “exceeds the limitations on foreign ownership set forth in Section 

310” of the Communications Act and in Article X of SBS’s Third Amended and 

Restated Certificate of Incorporation (the “Charter”).43

Section 310(b)(4) of the Communications Act establishes “a 25 percent 

benchmark for investment by foreign individuals, governments and corporations in 

U.S.-organized entities that directly or indirectly control a U.S. broadcast . . . 

license.”44 Article X of the Charter incorporates the Communications Act’s alien 

ownership restrictions, purportedly “to enact protocols or undertake actions to

remain in compliance with the requirements of the [Communications] Act.”45 

 

41 Compl. ¶¶ 58-65 (Dkt. 1).

42 Am. Compl. ¶ 64 (quoting SBS, Current Report (Form 8-K) (Nov. 28, 2017), Ex. 4.1).

43 Am. Compl. Ex. C at 1.

44 Am. Compl. ¶ 64 (citation and internal quotations omitted and alterations in original).

45 Am. Compl. Ex. C at 2.
11

On November 28, 2017, SBS announced that it had suspended all Series B 

Holders’ rights as stockholders “other than [the] right to transfer [] shares to a citizen 

of the United States.”46 SBS asserted it did this “to ensure that transfers of Series B 

Preferred Shares that have been completed in violation of the [Communications] Act 

and the Certificate of Incorporation do not adversely affect its FCC broadcast 

licenses and ability to continue its business operations.”47

The Company has stated that the suspension of rights will remain in place 

with respect to each Series B Holder until SBS has concluded that: (i) the shares of 

such holder should be treated as not owned by a foreign entity; or (ii) the total 

ownership distribution of the Series B Preferred Stock complies with the 

requirements of the Communications Act and the Charter.48 According to SBS, a 

single Domestic Share Certificate represented all of the issued and outstanding 

Series B Preferred Stock.49 SBS cancelled that single Domestic Share Certificate 

 

46 Am. Compl. ¶ 63 (alterations in original and quoting SBS, Current Report (Form 8-K) 

(Nov. 28, 2017), Ex. 4.1).

47 SBS, Current Report (Form 8-K) (Nov. 28, 2017), Ex. 4.1.

48 Id.

49 Def.’s Reply Br. 26 (Dkt. 17). 
12

representing the Series B Preferred Stock,

50 and announced publicly on March 26, 

2018, that “it has not yet issued foreign share certificates evidencing such stock.”51

F. The FCC Proceeding

On December 8, 2017, plaintiffs’ counsel sent SBS a letter explaining its 

belief that the Communications Act had not been violated on account of the 

nationalities of the Series B Holders and that the Federal Communications 

Commission (the “FCC”) was likely to grant a declaratory ruling to that effect.52 

Plaintiffs also provided certain ownership information regarding the holders of the 

Series B Preferred Stock and offered “to consult with the FCC staff and file a petition 

for declaratory ruling” to establish that SBS was in compliance with the alien 

ownership restrictions of the Communications Act.53 Unbeknownst to plaintiffs, 

SBS already filed a petition with the FCC on December 4, 2017, seeking a

declaration that the Company was in compliance with the Communications Act after 

having suspended the Series B Holders’ rights.54

 

50 Am. Compl. ¶ 63.

51 Letter from R. Saunders, Esq. (Apr. 2, 2018) at 4 & Ex. 1 (SBS, Current Report (Form 

8-K) (Mar. 26, 2018), Item 8.01) (Dkt. 18). 

52 Am. Compl. ¶ 66; Ex. D.

53 Am. Compl. ¶ 66; Ex. D at 6.

54 Am. Compl. ¶ 67.
13

On January 25, 2018, while SBS’s FCC petition was being briefed, the FCC 

issued a letter indicating that the petition “does not provide enough information for 

[the FCC] to proceed with a comprehensive review or to address SBS’s prayer for 

relief.”55 As a result, the FCC deferred ruling on SBS’s position until February 26, 

2018 or until SBS could provide additional information to the FCC.56 The letter also 

clarified that “SBS will not be required to redeem the non-compliant foreign interest 

or to remedy the non-compliance while its [petition] is pending,” but “it must have 

a mechanism in place to come into compliance within thirty (30) days following an 

adverse decision on its [petition].”57 The FCC noted that it “take[s] no position on 

the outcome of any issue in” this Delaware action and “defer[s] to the Court and its 

conclusions.”58

II. PROCEDURAL HISTORY

Plaintiffs’ initial complaint, filed on November 2, 2017, asserted three claims. 

After SBS moved to dismiss that complaint on November 27, 2017, and purported 

to suspend the rights of the Series B Holders the next day, plaintiffs filed the 

Amended Complaint on December 22, 2017, adding two additional claims. 

 

55 Pls.’ Answering Br. Ex. 1 at 3 (Dkt. 14).

56 Id. at 5.

57 Id. at 4.

58 Id. at 3 n.17.
14

Counts I-III assert claims relating to the Certificate. Count I asserts that SBS 

breached the Certificate by “extending, refinancing, or renewing” the Senior Notes 

with the Forbearance Agreement.59 Count II asserts that the Company breached the 

Certificate’s implied covenant of good faith and fair dealing. Count III seeks the 

remedy of specific performance. 

Counts IV and V assert claims relating to the Charter. Count IV asserts that 

SBS breached Section 10.4 of the Charter by suspending the rights of the Series B 

Holders.60 Count V seeks a declaratory judgment that Section 10.4 of the Charter is 

invalid and unenforceable under Delaware law.

On January 2, 2018, SBS filed a motion to dismiss the Amended Complaint 

in its entirety under Court of Chancery Rules 12(b)(1) and 12(b)(6) for lack of 

subject matter jurisdiction and for failure to state a claim for relief. At the conclusion 

of argument on the motion held on April 12, 2018, the court requested supplemental 

briefing on: (i) the appropriate means of resolving any ambiguity in the Certificate 

provisions at issue; and (ii) the application of Generally Accepted Accounting 

Principles (“GAAP”) to certain items at issue in this action for purposes of the 

Certificate’s requirement (discussed below) that, to qualify as “Indebtedness,” an 

 

59 Am. Compl. ¶¶ 73-80.

60 Am. Compl. ¶¶ 92-93.
15

item must appear as a liability on a balance sheet prepared in accordance with 

GAAP.61 Supplemental briefing was completed on May 1, 2018.

III. ANALYSIS

The claims in the Amended Complaint fall into two discrete categories: (i) 

claims concerning the alleged incurrence of Indebtedness (the Certificate claims);

and (ii) claims concerning the suspension of certain rights of the Series B Holders 

(the Charter claims). Discussion of each category is divided between Sections A

and B, respectively. 

SBS seeks dismissal of all claims under Court of Chancery Rule 12(b)(6) for 

failure to state a claim for relief. The standards governing such a motion are wellsettled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even 

vague allegations are “well-pleaded” if they give the opposing party 

notice of the claim; (iii) the Court must draw all reasonable inferences 

in favor of the non-moving party; and ([iv]) dismissal is inappropriate 

unless the “plaintiff would not be entitled to recover under any 

reasonably conceivable set of circumstances susceptible of proof.”62

With respect to one of the Charter claims (Count V), SBS also seeks dismissal under 

Court of Chancery Rule 12(b)(1) for lack of ripeness. The standards governing such 

a motion are discussed below in the analysis of Count V.

 

61 Tr. 121-24 (Apr. 12, 2018) (Dkt. 25).

62 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (citations omitted).
16

A. The Certificate Claims

The Certificate claims comprise Counts I, II, and III of the Amended 

Complaint. They are discussed below in that order.

1. Plaintiffs Have Stated a Claim for Breach of Contract

Count I asserts that SBS breached Section 11(b) of the Certificate by 

“extending, refinancing, or renewing” the Senior Notes with the Forbearance 

Agreement while a VRTE was in effect.

63

 “Under Delaware law, the elements of a 

breach of contract claim are: 1) a contractual obligation; 2) a breach of that 

obligation by the defendant; and 3) a resulting damage to the plaintiff.”64 

“The rules of construction which are used to interpret contracts and other 

written instruments are applicable when construing corporate charters and

certificates of designation.”65 “The starting point in construing any contract is to 

determine whether a provision is ambiguous, i.e., whether it is reasonably subject to 

more than one interpretation.”66 “A contract is not rendered ambiguous simply 

because the parties do not agree upon its proper construction.”67 “It is well 

 

63 Am. Compl. ¶¶ 73-80.

64 H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003) (citation omitted).

65 Matulich v. Aegis Commc’ns Grp., Inc., 942 A.2d 596, 600 (Del. 2008) (citation 

omitted).

66 Id. (citation omitted and emphasis in original).

67 Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 

1992).
17

established that a court interpreting any contractual provision, including preferred 

stock provisions, must give effect to all terms of the instrument, must read the 

instrument as a whole, and, if possible, reconcile all the provisions of the 

instrument.”68 “If no ambiguity is present, the Court must give effect to the clear 

language of the Certificate.”69 When a contract is “fairly susceptible of different 

interpretations”70 and is therefore ambiguous, “the court must turn to secondary 

methods of interpretation.”71

The analysis of Count I boils down to essentially one question: has SBS 

“incurred Indebtedness,” as those terms are defined in the Certificate, during the 

pendency of a VRTE in violation of Section 11(b) of the Certificate? I begin by 

quoting the relevant part of Section 11(b), which defines the term “incur,” and the 

separate definition of Indebtedness. 

Section 11(b) of the Certificate provides, in relevant part, as follows:

The Company shall not, and shall not permit any of its Restricted 

Subsidiaries to, directly or indirectly, create, incur, issue, assume, 

guarantee or otherwise become directly or indirectly liable, 

contingently or otherwise, with respect to (collectively “incur”) any 

Indebtedness . . . provided, however, that, so long as no Voting Rights 

Triggering Event has occurred and is continuing, the Company may 

incur Indebtedness . . . if, in each case, the Company’s Debt to Cash 

 

68 Elliot Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998) (citation omitted).

69 Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996) (citation omitted).

70 Id. (citation omitted).

71 Shiftan v. Morgan Joseph Holdings, Inc., 57 A.3d 928, 935 (Del. Ch. 2012) (Strine, C.).
18

Flow Ratio at the time of incurrence of such Indebtedness . . . would 

have been no greater than 7.0 to 1.0.

So long as no Voting Rights Triggering Event shall have 

occurred and be continuing or should be caused thereby, the provisions

of the first paragraph of this Section 11(b) will not apply to the 

incurrence of any of the following (collectively, “Permitted Debt”).

72

The term “Permitted Debt” is defined to include twelve different categories of 

obligations. One of several items listed in the eighth category is “the accrual of 

interest.”73

The complete definition of Indebtedness is set forth below, with the portions 

relevant to Count I emphasized: 

“Indebtedness” means, with respect to any Person, without 

duplication, (i) any indebtedness of such Person, whether or not 

contingent, in respect of borrowed money or evidenced by bonds, 

notes, debentures or similar instruments or letters of credit (or 

reimbursement agreements in respect thereof) or banker’s acceptances 

or representing Capital Lease Obligations or the balance deferred and 

unpaid of the purchase price of any property or representing any 

Hedging Obligations, except any such balance that constitutes an 

accrued expense or trade payable, if and to the extent any of the 

foregoing indebtedness (other than letters of credit and Hedging 

Obligations) would appear as a liability upon a balance sheet of such 

Person prepared in accordance with GAAP, (ii) all indebtedness of 

others secured by a Lien on any asset of such Person (whether or not 

such indebtedness is assumed by such Person) and (iii) to the extent not 

otherwise included, the guarantee by such Person of any indebtedness 

of any other Person of the sort described in clause (i) of this definition. 

Notwithstanding the foregoing, the term “Indebtedness” shall not 

include Non-Recourse Debt or indebtedness that constitutes 

 

72 Am. Compl. Ex. B § 11(b) (emphasis added).

73 Am. Compl. Ex. B § 11(b).
19

“Indebtedness” merely by virtue of a pledge of Equity Interests of an 

Unrestricted Subsidiary. Furthermore, for the avoidance of doubt, 

“Indebtedness” shall not include any Capital Stock or any liabilities in 

respect of Capital Stock. The amount of any Indebtedness 

outstanding as of any date shall be (A) the accreted value thereof, in 

the case of any Indebtedness issued with original issue discount, (B) the 

principal amount of the Indebtedness secured, together with any interest 

thereon that is more than 30 days past due, in the case of any 

Indebtedness of the type described in clause (ii) above, (C) the principal 

amount of the Indebtedness guaranteed, together with any interest 

thereon that is more than 30 days past due, in the case of any 

Indebtedness of the type described in clause (iii) above, (D) the amount 

of the net settlement payment payable on termination, in the case of any 

Indebtedness constituting a Hedging Obligation (assuming for this 

purpose that the Hedging Obligation was terminated on the date as of 

which the calculation of the amount of Indebtedness is being made), 

and (E) the principal amount thereof, together with any interest 

thereon that is more than 30 days past due, in the case of any other 

Indebtedness.

74

The first sentence of the definition of Indebtedness is divided into three 

clauses. Plaintiffs’ argument focuses only on the first clause, which has two parts,

and which implicates the last clause of the last sentence. Thus, the Certificate’s 

definition of Indebtedness relevant to plaintiffs’ claims has essentially three 

components. First, under clause (i), Indebtedness means “any indebtedness of such 

Person, whether or not contingent, in respect of borrowed money or evidenced by 

bonds, notes, debentures or similar instruments.”75 Second, to qualify as 

 

74 Am. Compl. Ex. B at 8 (emphasis added).

75 Am. Compl. Ex. B at 8.
20

Indebtedness under clause (i), an item also must “appear as a liability upon a balance 

sheet of such Person prepared in accordance with GAAP.”76 Third, “the amount of 

any Indebtedness outstanding as of any date” includes “the principal amount thereof, 

together with any interest thereon that is more than 30 days past due, in the case of 

any other Indebtedness.”77 

Seemingly ignoring the component of the definition of Indebtedness in clause 

(i) that requires it to be recorded as a liability on a GAAP-compliant balance sheet, 

plaintiffs initially argued that a host of payments and obligations associated with the 

Senior Notes and the Forbearance Agreement constituted impermissible incurrences 

of Indebtedness during a VRTE.78 When responding to the court’s request for 

supplemental submissions, however, plaintiffs narrowed their contentions and 

identified only two categories of SBS’s obligations they argue would appear as a 

liability on a balance sheet prepared in accordance with GAAP such that they would 

qualify as Indebtedness under clause (i) of the definition quoted above: (i) accrued 

but unpaid interest on the Senior Notes, and (ii) accrued but unpaid professional fees 

associated with the Senior Notes and the Forbearance Agreement.79 I address each 

category in turn.

 

76 Am. Compl. Ex. B at 8.

77 Am. Compl. Ex. B at 8.

78 See Pls.’ Answering Br. 17-25.

79 Pls.’ Suppl. Br. 1-2 (Dkt. 23).
21

a. Plaintiffs’ Accrued Interest Allegations Satisfy the 

First Two Elements of a Breach of Contract Claim 

The logic of plaintiffs’ argument with respect to accrued but unpaid interest 

on the Senior Notes goes as follows. Plaintiffs start with the general rule in 

paragraph one of Section 11(b) that there is an absolute restriction on incurring 

Indebtedness. As plaintiffs point out, however, the latter part of that paragraph 

permits the incurrence of Indebtedness so long as there is no pending VRTE and the 

Company’s Debt to Cash Flow Ratio does not exceed 7.0 to 1.0.

Plaintiffs next move to paragraph two of Section 11(b), which provides a 

further exception to the prohibition on incurring Indebtedness. More specifically, 

paragraph two allows SBS to incur twelve enumerated forms of “Permitted Debt” so 

long as no VRTE is in place, without regard to SBS’s Debt to Cash Flow Ratio. 

From this premise, plaintiffs reason that, because SBS cannot incur any Permitted 

Debt when a VRTE is in effect, the twelve categories of Permitted Debt are examples 

of Indebtedness. As noted above, one type of “Permitted Debt” includes “the accrual 

of interest.”80 Thus, according to plaintiffs, any accrual of interest is a type of 

Permitted Debt, which in turn is a subset of Indebtedness that cannot be incurred 

during a VRTE. Plaintiffs argue further that the constant accrual of interest meets 

 

80 Am. Compl. Ex. B § 11(b)(viii).
22

the Certificate’s definition of “incurring” a form of Indebtedness, since the term 

“incur” is defined broadly.81 

The Company concedes that accrued but unpaid interest on the Senior Notes 

would appear as a liability on a GAAP-compliant balance sheet,82 but argues that the 

fatal flaw in plaintiffs’ theory is that, for accrued interest to qualify as Indebtedness, 

the Certificate requires that the interest is “more than 30 days past due.”83 For 

support, SBS points to one of the parts of the definition of Indebtedness emphasized 

above; namely, that the calculation of the amount of SBS’s Indebtedness outstanding 

at any given time includes the principal amount plus interest on the principal “that 

is more than 30 days past due.”84 In other words, SBS’s position is that this 

definition recognizes that interest can be “Indebtedness,” but only when payment on 

interest is more than thirty days in arrears. 

The key difference between the parties’ positions, in short, is that plaintiffs

argue that any accrual of interest constitutes Indebtedness through inverse reasoning 

based on the structure of Section 11(b), while SBS argues that only certain accrued 

interest (i.e., interest more than 30 days past due) constitutes Indebtedness based on 

 

81 Pls.’ Answering Br. 10.

82 Def.’s Suppl. Br. 12 n.10 (Dkt. 24).

83 Am. Compl. Ex. B at 8.

84 Am. Compl. Ex. B at 8 (emphasis added).
23

text in the paragraph of the Certificate that defines the term Indebtedness. Although 

SBS’s reliance on the paragraph that specifically defines Indebtedness intuitively 

seems like a sensible way to resolve the conflict,

85 I cannot rule out at the pleadings 

stage that both interpretations are reasonable and thus find that the Certificate is 

ambiguous.86 Reinforcing the ambiguity is that the “30 days past due” qualification 

does not appear in the part of the paragraph that actually defines the term 

Indebtedness, but rather in the part that calculates the amount of Indebtedness 

outstanding. As plaintiffs argue, a means of quantifying the amount of Indebtedness 

does not necessarily rule out that other things may qualify as Indebtedness. Having 

found the existence of ambiguity, the next question is what to do about it given that

the instrument at issue is a certificate of designations.

 

85 See DCV Holdings, Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005) (citation 

omitted) (“Specific language in a contract controls over general language, and where 

specific and general provisions conflict, the specific provision ordinarily qualifies the 

meaning of the general one.”). 

86 SBS also argues that plaintiffs’ position would lead to “absurd results” because an 

actionable breach of the Certificate would occur immediately upon the pendency of a

VRTE whenever SBS has outstanding debt because some interest necessarily would be 

accrued for some period of time. Plaintiffs, however, proffer a response to which the 

Company did not respond, i.e., that the Series B Holders “bargained” for a seat at the table 

when SBS has fallen behind on its debt. I cannot say as a matter of law that plaintiffs’

position is one “that no reasonable person would have accepted when entering the 

contract.” Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010) (citation 

omitted).
24

As Chief Justice Strine, writing as Chancellor, commented in Shiftan v. 

Morgan Joseph Holdings, Inc., things become “a bit more complicated” when a 

certificate of designations is “fairly susceptible of different interpretations.”

87

 In a 

typical case, a breach of contract claim survives a motion to dismiss where the 

relevant provisions are ambiguous, because usually “any ambiguity must be resolved 

in favor of the nonmoving party.”88 Thereafter, “a court normally will consider 

extrinsic evidence of the parties’ contractual intent.”89 

Parol evidence, however, may not be illuminative of the parties’ reasonable 

expectations in the context of certificates of designations because, for example,

“important parties in interest—the holders of the securities—were neither consulted 

about, nor involved in the drafting of,” the contract.

90 And even if such evidence 

 

87 Shiftan, 57 A.3d at 935.

88 Kahn v. Portnoy, 2008 WL 5197164, at *3 (Del. Ch. Dec. 11, 2008). 

89 Bank of New York Mellon v. Commerzbank Capital Funding Tr. II, 65 A.3d 539, 551 

(Del. 2013) (citation omitted).

90 Id.; see also Kaiser, 681 A.2d at 397-98 (citations and internal quotations omitted)

(“[S]uch an investigation would reveal information about the thoughts and positions of, at 

most, the issuer and the underwriter. . . . Since these sorts of provisions are . . . not the 

consequence of the relationship of particular borrowers and lenders and do not depend 

upon particularized intentions of the party to an indenture, evidence of the course of 

negotiations would not be helpful.”); Shiftan, 57 A.3d at 935 (citations omitted) (“In the 

case of documents like certificates of incorporation or designation, the kinds of parol 

evidence frequently available in the case of warmly negotiated bilateral agreements are 

rarely available. Investors usually do not have access to any of the drafting history of such 

documents, and must rely on what is publicly available to them to understand their rights 

as investors. Thus, the subjective, unexpressed views of entity managers and the drafters 
25

exists, courts are “reluctant to risk disuniformity by adverting to evidence of the 

course of negotiation in a setting in which the same language can be found in many 

different contracts.”91 Thus, in the context of resolving ambiguities with respect to 

preferred stock, Delaware courts often have resorted to two alternative interpretive 

principles that, as the court noted in Shiftan, are “arguably . . . in tension with 

another.”92

One method of interpretation, which plaintiffs argue is controlling here, is the 

doctrine of contra proferentem, which resolves ambiguities in a certificate of 

designations in favor of investors in preferred stock.93 Our Supreme Court referred 

to the doctrine in Kaiser Aluminum Corp. v. Matheson as one of “last resort [to be 

applied where] the language of the certificate presents a hopeless ambiguity, 

particularly when alternative formulations indicate that these provisions could easily 

have been made clear.”

94 Despite this caution, it has invoked contra proferentem to 

 

who work for them about what a certificate means has traditionally been of no legal 

consequence, as it is not proper parol evidence as understood in our contract law.”).

91 Kaiser, 681 A.2d at 398.

92 Shiftan, 57 A.3d at 936.

93 Kaiser, 681 A.2d at 398-99.

94 Id. at 399 (citation omitted).
26

resolve ambiguities about the rights of investors in the governing instruments of 

business entities on a number of occasions.95 

The second method of construction, which SBS argues is controlling here, 

was articulated by our Supreme Court in Rothschild International Corp. v. Liggett 

Group Inc.96 There, the high court explained that “[p]referential rights are 

contractual in nature and therefore are governed by the express provisions of a 

company’s certificate of incorporation. Stock preferences must also be clearly 

expressed and will not be presumed.”97 This is because “stock preferences are in 

derogation of the common law,”98 so “[a]ny rights, preferences and limitations of 

preferred stock that distinguish that stock from common stock must be expressly and 

clearly stated, as provided by statute.”99 The upshot of this principle is that courts 

 

95 See, e.g., Commerzbank, 65 A.3d at 551-52 (applying the principle to discern the 

meaning of “Parity Securities” in an LLC Agreement); Penn. Mut. Life Ins. Co. v. Oglesby, 

695 A.2d 1146, 1149-50 (Del. 1997) (citation omitted) (“It is the obligation of . . . the issuer 

of securities to make the terms of the operative document understandable to a reasonable 

investor whose rights are affected by the documents. Thus, if the contract in such a setting 

is ambiguous, the principle of contra proferentem dictates that the contract must be 

construed against the drafter.”); Kaiser, 681 A.2d at 398 (applying the “well-accepted 

principle that ambiguities in a contract should be construed against the drafter” to construe 

preferred stockholders’ conversion rights under a certificate of designations). 

96 474 A.2d 133 (Del. 1984).

97 Id. at 136 (citation omitted).

98 Waggoner v. Laster, 581 A.2d 1127, 1134 (Del. 1990) (citation omitted).

99 Elliot Assocs., 715 A.2d at 852 (citing 8 Del. C. § 151(a)).
27

have been unwilling to recognize or read in implied rights, preferences, or limitations 

in certificates of designations.100

Chief Justice Strine described the potential clash of these two interpretive 

principles in Shiftan:

One could argue that these interpretive principles come into direct 

conflict in a very particular context. Imagine a situation where 

preferred stockholders argue that a certificate of designation can be 

reasonably read to grant a particular preference. The court agrees, but 

also agrees with the corporation that the relevant provision in the 

certificate is not clear. There is no parol evidence on the subject. Do 

the preferred stockholders win because of contra proferentem? Or does 

the corporation win because preferences of preferred stock “will not be 

presumed” unless they are clearly expressed in the certificate?101

He ultimately “side-stepped” this issue because he found the relevant provision not 

to be ambiguous,102 but noted that, had he found ambiguity, he would have been 

willing to consider probative extrinsic evidence:

The principle that the preferences of preferred stockholders must not be 

presumed, but rather be clearly expressed, does not, it seems to me, 

prevent a court from consulting parol evidence, if that is available. 

Avatex itself seemed to require this resolution, as it suggested that the 

prior decision of Waggoner v. Laster, which identified “strict 

construction” as the analytical methodology for interpreting stock 

preferences, was problematic. Avatex, and cases like Kaiser, which did 

 

100 See, e.g., Waggoner, 581 A.2d at 1135; Rothschild, 474 A.2d at 136; Benchmark Capital 

Partners IV, L.P. v. Vague, 2002 WL 1732423, at *13-14 (Del. Ch. July 15, 2002), aff’d 

sub nom. Benchmark Capital Partners IV, L.P. v. Juniper Fin. Corp., 822 A.2d 396 (Del. 

2003) (TABLE).

101 57 A.3d at 937 (citing Rothschild, 474 A.2d at 136).

102 Id. at 937-38.
28

not mention any requirement of strict construction, therefore suggest to 

me that this disciplinary principle of narrow interpretation of stock 

preferences is not intended to blind a court to all relevant evidence, but 

instead to prevent the judiciary from implying or presuming 

preferences without a clear basis for doing so. In other words, unless 

the parol evidence resolves the ambiguity with clarity in favor of the 

preferred stock, the preferred stockholders should lose.103 

I agree with the Shiftan court’s reasoning with respect to the consideration of 

parol evidence. In my view, the parties should be permitted to develop a factual 

record to see if any probative extrinsic evidence exists of the parties’ shared beliefs 

about the meaning of “incurring Indebtedness.” As an example, information that 

SBS used to market the Series B Preferred Stock may provide helpful evidence of 

(i) what the issuer believed when it authorized the preferred stock, and (ii) what the 

investors should have reasonably believed that they were purchasing.104 Ultimately, 

such evidence may not exist and the court will need to determine the meaning of the 

Certificate through the application of interpretive principles, but I need not resolve 

that issue now. 

 

103 Id. (citations omitted); see also id. at 938 n.28 (admitting “to having a harder time 

reconciling” the two interpretive principles “when no parol evidence is available” and 

explaining “[m]aking [the] decision [who wins] more difficult is the fact that other 

investors rely on the certificate and other publicly available documents describing the 

certificate, and granting rights to the preferred stock on the basis of an ambiguous 

certificate could disrupt the reasonable expectations of the other investors”).

104 Id. at 940.
29

To summarize, because I have found the Certificate to be ambiguous, and 

because I do not read the Kaiser line of cases105 or the Rothschild line of cases as 

precluding the court from considering probative parol evidence, if it exists, when 

interpreting a preferred stock instrument, I conclude that plaintiffs’ accrued interest 

theory satisfies the first two elements of a contract claim, i.e., the existence of a 

contractual obligation and breach of that obligation by defendant. 

b. Plaintiffs’ Accrued Professional Fees Allegations 

Satisfy the First Two Elements of a Breach of Contract 

Claim 

Plaintiffs’ second theory for how SBS violated Section 11(b) of the Certificate 

can be addressed in short order.

106

 Plaintiffs contend that professional fees the 

Company incurred in connection with obtaining the Forbearance Agreement are 

“indebtedness . . . in respect of borrowed money”107 because these obligations arose 

in conjunction with the Senior Notes and the Forbearance Agreement, and that the 

accrual of such obligations should be recorded as liabilities on a GAAP-compliant 

balance sheet.

108

 

 

105 Indeed, the Kaiser court stated that “[w]e caution against this principle [i.e., contra 

proferentem] becoming a short-cut for avoiding the sometimes difficult tasks of 

determining expectations.” 681 A.2d at 399 (citation and internal quotations omitted).

106 See, e.g., Am. Compl. ¶¶ 7, 50.

107 Am. Compl. Ex. B at 8.

108 Pls.’ Suppl. Br. 2.
30

I agree that this theory, to which the Company has offered no substantive 

response, also satisfies the first two elements of a contract claim given the broad 

terms of the definition of Indebtedness quoted above and given that the professional 

fees in question were incurred to procure a Forbearance Agreement relating to the 

Senior Notes. Whether the Company actually accrued such fees and whether their 

accrual would be recorded as a liability on a GAAP-compliant balance sheet are fact 

issues appropriate for discovery. 

c. Plaintiffs Have Alleged a Cognizable Theory of 

Compensable Damages

The Company argues that “[e]ven if Plaintiffs had adequately alleged a breach 

of the Certificate, their claims would still fail as a matter of law because Plaintiffs 

have not alleged any cognizable theory of damages.”109 SBS contends this is so 

because plaintiffs have alleged that the Company does not have sufficient funds to 

pay off even the Senior Notes and thus, had the holders of the Senior Notes refused 

to enter into the Forbearance Agreement and foreclosed on SBS’s assets, the Series 

B Preferred Stock would be worthless.110 

As an initial matter, this argument is based on a hypothetical, i.e., what the 

Series B Holders would have recovered had the holders of the Senior Notes

 

109 Def.’s Opening Br. 41.

110 Id. at 42.
31

foreclosed. There has been no foreclosure, however, and it is reasonably

conceivable from the facts pled that plaintiffs could establish compensable damages. 

For example, plaintiffs allege that the Senior Notes are trading above par value.

111

 

Thus, the possibility of a recovery for plaintiffs on their claims cannot be foreclosed.

The Company admits, furthermore, that “money damages in the form of a 

hypothetical consent fee could remedy a proven breach of the Certificate.”112 Thus, 

if plaintiffs establish that SBS breached the Certificate, a potential recovery for 

plaintiffs could be how much the Company would have had to pay the Series B 

Holders for their permission to incur Indebtedness with respect to the Senior Notes 

during the pendency of a VRTE.113 The court expresses no opinion whether such a 

measure of damages would be appropriate, but provides this illustration simply to 

demonstrate another way that compensable damages are reasonably conceivable.114

 

111 Am. Compl. ¶¶ 5, 51.

112 Def.’s Opening Br. 43-44 (citing Lehman Bros., 2014 WL 718430, at *8); see also 

Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2013 WL 6327997, at *1 (Del. Ch. Dec. 4, 

2013) (Strine, C.) (determining “damages based on [an] admittedly imperfect attempt to 

discern how a hypothetical negotiation would have occurred between [the issuer] and [the 

investor] over the consent”).

113 See Fletcher, 2013 WL 6327997, at *18 (citation omitted and emphasis in original) 

(“Consent rights are commonly viewed as protective devices meant to shield the holder of 

the rights against being harmed by a new transaction that is adverse to its interests,” and 

when those rights are violated and the holder had some leverage in a hypothetical 

negotiation, “it is entitled to have its reasonable expectations honored”).

114 See Delaware Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *15 (Del. Ch. Oct. 

23, 2002) (citation omitted) (“The law does not require certainty in the award of damages 

where a wrong has been proven and injury established. Responsible estimates that lack 
32

* * * * *

Based on the foregoing discussion, plaintiffs’ allegations with respect to 

Count I satisfy the three elements of a contract claim and thus states a claim for 

relief. The next issue is whether SBS has advanced a defense that would preclude 

the claim at the pleadings stage as a matter of law.

d. Adjudication of SBS’s Acquiescence Defense Would be 

Premature

In its reply brief, the Company argued for the first time that, even if Count I 

states a claim for relief with respect to the accrual of interest, it should be barred by 

acquiescence.

115

 According to SBS, “[n]othing about SBS’s April 17, 2017 default 

on the [Senior] Notes altered how or in what amount interest accrued thereon; 

accordingly there are no new circumstances that would permit Plaintiffs to pursue a 

claim that arose (if at all) when a VRTE occurred in October 2013.”116

To prevail on a defense of acquiescence, a defendant must show: “(1) the 

plaintiff remained silent (2) with knowledge of her rights (3) and with the knowledge 

or expectation that the defendant would likely rely on her silence, (4) the defendant 

knew of the plaintiff’s silence, and (5) the defendant in fact relied to her detriment 

 

mathematical certainty are permissible so long as the court has a basis to make a 

responsible estimate of damages.”).

115 Def.’s Reply Br. 9-11.

116 Def.’s Suppl. Br. 12 n.10.
33

on the plaintiff’s silence.”117 “[A]ffirmative defenses . . . are not ordinarily wellsuited for treatment on [a motion to dismiss]. Unless it is clear from the face of the 

complaint that an affirmative defense exists and that the plaintiff can prove no set of 

facts to avoid it, dismissal of the complaint based on an affirmative defense is 

inappropriate.”118

In Lehman Brothers Holdings Inc. v. Spanish Broadcasting System, Inc., Vice 

Chancellor Glasscock granted summary judgment in SBS’s favor based on an 

acquiescence defense where plaintiffs were holders of the very same Series B 

Preferred Stock at issue in this action. Specifically, he held that, assuming that a 

VRTE had occurred, plaintiffs acquiesced to two issuances of debt, including the 

issuance of the Senior Notes in February 2012.

119

 The Vice Chancellor specifically 

enumerated the factors that formed the basis for his decision, including: (i) plaintiffs 

should have known (under their reading of the Certificate) that a VRTE was in effect; 

(ii) plaintiffs knew, or should have known, that SBS intended to enter into the debt 

transactions; (iii) plaintiffs raised no objections to the debt transactions, leading SBS 

to believe that plaintiffs acquiesced to the debt transactions; (iv) that belief was 

reasonable; (v) SBS entered into the debt transactions in reliance on plaintiffs’ 

 

117 Lehman Bros., 2014 WL 718430, at *10.

118 Reid v. Spazio, 970 A.2d 176, 183-84 (Del. 2009) (citations omitted).

119 2014 WL 718430, at *12.
34

acquiescence; and (vi) if plaintiffs were permitted to pursue damages, SBS’s reliance 

would be detrimental to the Company because “had the Plaintiffs notified SBS of 

their objections prior to the debt incurrence, SBS could have chosen for itself its 

lowest cost alternative for resolving the dispute.”120 

Although SBS ultimately may succeed on its defense of acquiescence to bar 

plaintiffs’ claim that the accrual of interest constitutes an impermissible incurrence 

of debt, it would be premature to decide that issue now for essentially two reasons. 

First, plaintiffs have not had a full and fair opportunity to respond to this defense 

because the Company did not raise the argument until its reply brief.

121

 Second, the 

court does not have a sufficient record to adjudicate the issue at this time. 

As noted above, Vice Chancellor Glasscock’s finding of acquiescence in 

Lehman Brothers was made in adjudicating a motion for summary judgment where 

the parties could present an appropriate factual record. Here, certain information 

necessary to decide an acquiescence defense is not before the court. For instance, 

the record does not reflect when the various plaintiffs in this action acquired their 

 

120 Id.

121 See Thor Merritt Square, LLC v. Bayview Malls LLC, 2010 WL 972776, at *5 (Del. Ch. 

Mar. 5, 2010) (citations and internal quotations omitted) (“Under the briefing rules, a party 

is obliged in its motion and opening brief to set forth all of the grounds, authorities and 

arguments supporting its motion. The failure to raise a legal issue in an opening brief 

generally constitutes a waiver of the ability to raise that issue in connection with a matter 

under submission to the court. Thus, courts routinely have refused to consider arguments 

made in reply briefs that go beyond responding to arguments raised in a preceding 

answering brief.”).
35

Series B Preferred Stock. As such, no determination can be made whether they 

impermissibly remained silent for some period of time when they should have 

spoken up and disputed SBS’s accrual of interest during a VRTE. In short, I cannot 

say that plaintiffs can prove no set of facts to avoid dismissal based on SBS’s belated 

acquiescence defense. 

2. Plaintiffs Have Failed to State a Claim for Breach of the 

Implied Covenant of Good Faith and Fair Dealing

Count II of the Amended Complaint asserts that the Company breached the 

Certificate’s implied covenant of good faith and fair dealing by continuing “to 

improperly incur funded debt obligations” during a VRTE without plaintiffs’ 

consent.122 

The implied covenant “attaches to every contract,”123 including certificates of 

designations,124 and is “employed to analyze unanticipated developments or to fill 

gaps in [a] contract’s provisions.”125 “Existing contract terms control, however, such 

that implied good faith cannot be used to circumvent the parties’ bargain, or to create 

 

122 Am. Compl. ¶¶ 83-84.

123 Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005) (citation omitted).

124 See, e.g., Blue Chip Capital Fund II Ltd. P’ship v. Tubergen, 906 A.2d 827, 833 (Del. 

Ch. 2006); Gale v. Bershad, 1998 WL 118022, at *4 (Del. Ch. Mar. 4, 1998).

125 Dunlap, 878 A.2d at 441 (citations omitted); see also Nemec v. Shrader, 991 A.2d 1120, 

1126 (Del. 2010) (citation omitted) (“The implied covenant only applies to developments 

that could not be anticipated, not developments that the parties simply failed to consider.”).
36

a ‘free-floating duty unattached to the underlying legal document.’”126 Thus, “the 

implied covenant only applies where a contract lacks specific language governing 

an issue and the obligation the court is asked to imply advances, and does not 

contradict, the purposes reflected in the express language of the contract.”127 In my 

view, plaintiffs’ implied covenant claim fails to state a claim for relief because 

plaintiffs have not identified a gap in the Certificate arising from an unanticipated 

development, but seek instead to rehash their request for relief in Count I.

As explained above with respect to the accrual of interest, the Certificate is 

ambiguous as to the meaning of “incur Indebtedness.” The fact that the contractual 

language is unclear, however, does not mean that a hole or gap exists in the 

Certificate for the implied covenant to fill. Rather, as pled, plaintiffs’ breach of the 

implied covenant claim is merely “an impermissible rehashing of plaintiffs’ breach 

of contract claim.”

128

 The “subject at issue”129 here is what obligations SBS may 

incur during the pendency of a VRTE. The Certificate expressly, albeit not

 

126 Dunlap, 878 A.2d at 441 (citations and alterations omitted).

127 All. Data Sys. Corp. v. Blackstone Capital Partners V L.P., 963 A.2d 746, 770 (Del. Ch. 

2009) (Strine, V.C.) (citation omitted), aff’d, 976 A.2d 170 (Del. 2009) (TABLE).

128 US Ecology, Inc. v. Allstate Power Vac, Inc., 2018 WL 3025418, at *7 (Del. Ch. June 

18, 2018) (citation omitted).

129 Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146 (Del. Ch. 2009) (citation 

and internal quotations omitted).
37

unambiguously in one respect, covers this issue—i.e., the Company may not incur 

“Indebtedness” during a VRTE without the consent of the Series B Holders. 

The “subject at issue” in Count II, furthermore, does not arise from some

unanticipated development. Indeed, a number of factors demonstrate that the sorts 

of obligations that SBS would be able to incur at any given time were specifically 

considered, including the fact that the Certificate: (i) contains a general ban on the 

incurrence of Indebtedness, subject to certain quantitative (i.e., a maximum 7.0 to 

1.0 Debt to Cash Flow Ratio) and qualitative (i.e., Permitted Debt) exceptions; (ii) 

specifically defines “incur” and “Indebtedness”; (iii) sets up a framework of what 

SBS can and cannot do during the pendency of a VRTE; and (iv) provides the Series 

B Holders certain governance rights during a VRTE. 

In sum, Count II does not plead facts alleging a basis for relief independent of 

plaintiffs’ breach of contract claim in Count I. Thus, the merits of plaintiffs’ alleged 

contractual grievance must rise and fall with Count I. 

3. Plaintiffs’ Request for Specific Performance is Viable in Part 

Count III of the Amended Complaint seeks specific performance, requesting 

that the court “require compliance with the Certificate by prohibiting SBS from 

making any payments on account of the Senior Notes and requiring SBS to redeem 

the Series B Preferred Stock at face value plus accrued dividends.”130 Thus, the relief 

 

130 Am. Compl. ¶ 89.
38

that plaintiffs seek in Count III has two components, which seem at odds with each 

other on their face: (i) an order requiring SBS to respect the Series B Holders’ 

consent rights; and (ii) an order requiring SBS to repurchase the Series Preferred B 

Stock. I address each request in turn. 

“A remedy at law, i.e. money damages, will foreclose the equitable relief of 

specific performance when that remedy is ‘complete, practical and as efficient to the 

end of justice as the remedy in equity, and is obtainable as [a matter] of right.’”131 

As explained above, Count I states a claim for breach of contract against SBS for 

impermissibly incurring Indebtedness. A possible measure of damages for that 

claim could be the amount of a hypothetical consent fee. At the motion to dismiss 

phase, however, plaintiffs are not precluded from pleading reasonably conceivable 

alternative remedies.132 As Chief Justice Strine, writing as Chancellor, observed in 

Fletcher International, Ltd. v. Ion Geophysical Corp., “consent rights cases are 

better dealt with by injunctive relief if the court can act with alacrity and give the 

parties a reasonable period to have the negotiation or work around the consent 

 

131 NAMA Holdings, LLC v. Related World Mkt. Ctr., LLC, 922 A.2d 417, 437 (Del. Ch. 

2007) (citation omitted).

132 See, e.g., Bear Sterns Mortg. Funding Tr. 2006-SL1 v. EMC Mortg. LLC, 2015 WL 

139731, at *15 (Del. Ch. Jan. 12, 2015) (permitting claims “framed alternatively in the 

language of damages, specific performance, and declaratory judgment” to survive a motion 

to dismiss).
39

rights.”133 Accordingly, I am reluctant to foreclose a possible remedy at this stage 

of the case, and decline to do so with respect to plaintiffs’ claims regarding the 

Company’s alleged violation of the Series B Holders’ consent rights.

Plaintiffs, however, are not entitled to an order requiring SBS to redeem the 

Series B Preferred Stock as a matter of law. “Delaware courts have held consistently 

that preferred stock is equity, not debt.”134 This is because “the holder of preferred 

stock is not a creditor of the corporation. Such a holder has no legal right to annual 

payments of interest, as long term creditors will have, and most importantly has no 

maturity date with its prospect of capital repayment or remedies for default.”135 “The 

existence of a mandatory redemption right, even one that has ripened, does not 

convert the holder of preferred stock into a creditor.”136 “Authority spanning three 

different centuries adverts to and enforces limitations on the ability of preferred 

 

133 Fletcher, 2013 WL 6327997, at *19.

134 Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *12 (Del. Ch. 

Apr. 14, 2017) (citation omitted).

135 HB Korenvas Invs., L.P. v. Marriott Corp., 1993 WL 205040, at *5 (Del. Ch. June 9, 

1993) (Allen, C.).

136 Hsu, 2017 WL 1437308, at *12.
40

stockholders to force redemption.”137 A redemption right may be subject to 

statutory, common law, and contractual limitations.138

Section 7 of the Certificate granted the Series B Holders, on October 15, 2013, 

“the right to require the Company to repurchase (subject to the legal availability of 

funds therefor and to Section 170 of the DGCL) all or a portion of the Series B 

Preferred Stock held by such Holder” at a specified price and in accordance with 

certain procedures.139 Key to plaintiffs’ claim here, the Series B Holders’ 

redemption right is subject to contractual limitations, including “the legal 

availability of funds.” Plaintiffs recognize as much. The Amended Complaint 

pleads that SBS was unable to repurchase all of the requested shares due to a lack of 

legally available funds,140 and nowhere in the Amended Complaint have plaintiffs 

alleged that SBS violated the Certificate because it actually had greater legally 

available funds to repurchase additional Series B Preferred Stock.141 

 

137 SV Inv. Partners, LLC v. ThoughtWorks, Inc., 7 A.3d 973, 990 (Del. Ch. 2010) (citation 

omitted).

138 Hsu, 2017 WL 1437308, at *12.

139 Am. Compl. Ex. B § 7(a).

140 Am. Compl. ¶ 47.

141 Cf. Brevan Howard, 2014 WL 2943570, at *8 (denying SBS’s motion to dismiss 

because the complaint “adequately pleads that SBS breached the Series B Certificate by 

failing in its contractual obligations to undertake appropriate actions to determine what 

‘legally available funds’ were at the Company’s disposal as of October 15, 2013”).
41

Plaintiffs’ allegations, rather, stem from the Company’s purported violation 

of the Certificate by incurring Indebtedness without the Series B Holders’ consent 

during the pendency of a VRTE. Given the failure to even allege in the Amended 

Complaint a breach of the Company’s buyback obligations in Section 7 of the 

Certificate, plaintiffs cannot be entitled to the remedy of specific performance as to 

that provision.

B. Charter Claims

I now turn to plaintiffs’ two claims regarding SBS’s suspension of the rights 

of the Series B Preferred Stock under Section 10.4 of the Charter. For the reasons 

explained below, both claims survive the motion to dismiss. 

1. Plaintiffs Have Stated a Claim for Breach of the Charter

Count IV of the Amended Complaint asserts that SBS “breached Section 10.4 

of the Charter and improperly disenfranchised Plaintiffs” because SBS “unilaterally 

suspended all rights of the Series B Holders, ‘other than [the] right to transfer [] 

shares to a citizen of the United States.’”142 

Section 10.4 of the Charter—entitled “Limitation on Foreign Ownership” and 

to which I refer at times as the “Enforcement Provision”—states in its entirety the 

following:

[1] Except as otherwise provided by law, not more than twenty-five 

percent of the aggregate number of shares of Capital Stock of the 

 

142 Am. Compl. ¶¶ 92-93.
42

Corporation outstanding shall at any time be owned of record by or for 

the account of aliens or their representatives or by or for the account of 

a foreign government or representatives thereof, or by or for the account 

of any corporation organized under the laws of a foreign country. [2] 

Shares of Capital Stock shall not be transferable on the books of the

Corporation to aliens or their representatives, foreign governments or 

representatives thereof, or corporations organized under the laws of 

foreign countries if, as a result of such transfer, the aggregate number 

of shares of Capital Stock owned by or for the account of aliens and 

their representatives, foreign governments and representatives thereof, 

and corporation [sic] organized under the laws of foreign countries shall 

be more than twenty-five percent of the number of shares of Capital 

Stock then outstanding. [3] If it shall be found by the Corporation that 

Capital Stock represented by a Domestic Share Certificate is, in fact, 

held by or for the account of aliens or their representative[s], foreign 

governments or representatives thereof, or corporations organized 

under the laws of foreign countries, then such Domestic Share 

Certificate shall be canceled and a new certificate representing such 

Capital Stock marked “Foreign Share Certificate” shall be issued in 

lieu thereof, but only to the extent that after such issuance the 

Corporation shall be in compliance with this ARTICLE X; provided, 

however, that if, and to the extent, such issuance would violate this 

ARTICLE X, then, the holder of such Capital Stock shall not be 

entitled to vote, to receive dividends, or to have any other rights with 

regard to such Capital Stock to such extent, except the right to 

transfer such Capital Stock to a citizen of the United States.

143

There are essentially two parts to Section 10.4. The first two sentences 

concern a 25% limitation on “alien” ownership of the Company’s “Capital Stock.” 

The term “alien” has the meaning ascribed to it by the FCC,

144 and the term “Capital 

 

143 Am. Compl. Ex. A § 10.4 (emphasis added).

144 Am. Compl. Ex. A § 10.1.
43

Stock” is defined to include SBS’s common stock and preferred stock.145 The second 

part of Section 10.4, found in the third sentence emphasized above, sets forth what 

the Company must do if it discovers that any of its Capital Stock “represented by a 

Domestic Share Certificate” is held by an alien.

SBS asserts that a “single Domestic Share Certificate” represents all of the 

Series B Preferred Stock146 and that, when it reviewed plaintiffs’ original complaint 

in this action, “it learned for the first time that certain Plaintiffs purport to be Series 

B Preferred stockholders and are foreign entities.”147 This prompted SBS to take the 

action that precipitated the filing of Counts IV and V: SBS suspended all Series B 

Holders’ rights as stockholders “other than [the] right to transfer [] shares to a citizen 

of the United States.”

148 To date, SBS has not issued a Foreign Share Certificate to 

any of the Series B Holders. 

The Company contends it was required under Section 10.4 to cancel the single 

Domestic Share Certificate representing the Series B Preferred Stock upon learning 

that some of the Series B Holders are aliens. It further contends that it could not 

issue any Foreign Share Certificate because: (i) Section 10.4 of the Charter requires 

 

145 Am. Compl. Ex. A § 5.1 (“The Common Stock and the Preferred Stock are sometimes 

referred to herein as the Capital Stock of the Corporation.”).

146 Def.’s Opening Br. 46; Def.’s Reply Br. 26.

147 Def.’s Opening Br. 17; see also Am. Compl. ¶¶ 14-15, 17, 19-22.

148 Am. Compl. ¶ 63 (quoting SBS, Current Report (Form 8-K) (Nov. 28, 2017), Ex. 4.1).
44

that a Foreign Share Certificate be issued in lieu of a canceled Domestic Share 

Certificate “on a one-for-one basis”; and (ii) if SBS were to issue a single Foreign 

Share Certificate, the issuance would violate Section 10.2 of the Charter.149 

Section 10.2—which is entitled “Voting” and to which I refer as the “Voting 

Provision”—contains a different 25% limitation on alien ownership than the one in 

Section 10.4. Specifically, Section 10.2 provides as follows:

Except as otherwise provided by law, not more than twenty-five 

percent of the aggregate number of shares of Capital Stock of the 

Corporation outstanding in any class or series entitled to vote on any 

matter before a meeting of stockholders of the Corporation shall at any 

time be held for the account of aliens or their representatives or for the 

account of a foreign government or representative thereof, or for the 

account of any corporation organized under the laws of a foreign 

country.150

SBS argues that Section 10.2 prohibits alien ownership of more than 25% of 

the stock in any particular class or series that is entitled to vote on any matter at a 

stockholder meeting.151 According to the Company, the Voting Provision’s 25% 

 

149 Def.’s Reply Br. 27. At oral argument, SBS also argued that if it were to issue a single 

Foreign Share Certificate to represent all of the Series B Preferred Stock, the issuance 

would violate Section 10.3 of the Charter. Tr. 69-70 (Apr. 12, 2018). Section 10.3 of the 

Charter mandates that “[s]hares of Capital Stock issued to or held by or for the account of 

aliens . . . shall be represented by Foreign Share Certificates” and that “[a]ll other shares 

of Capital Stock shall be represented by Domestic Share Certificates.” Am. Compl. Ex. A 

§ 10.3.

150 Am. Compl. Ex. A § 10.2 (emphasis added).

151 Def.’s Reply Br. 28-29.
45

limitation has been violated because “the present VRTE granted certain voting rights 

to the Series B Preferred stockholders”

152 (i.e., the right to elect two directors to 

SBS’s board), and aliens hold approximately 69.92% of the outstanding Series B 

Preferred Stock.153 The Company further contends that, because it could not issue a 

single Foreign Share Certificate to replace the single Domestic Share Certificate it 

canceled because aliens then would have voting rights in excess of the limitation set 

forth in Section 10.2, the Company was forced to suspend all rights of the Series B 

Holders other than the right to transfer the Series B Preferred Stock to a citizen of 

the United States in order to comply with Section 10.4.

154

 As a secondary matter, 

SBS contends that “even if SBS were permitted to replace the canceled Domestic 

Share Certificate with an issuance of multiple Domestic and Foreign Share 

Certificates,” it could not do so because of a lack of information.

155

In response, plaintiffs advance essentially three arguments for why SBS’s 

actions breached Article X of the Charter. 

 

152 Def.’s Opening Br. 49 (citing Am. Compl. ¶ 42).

153 Id. at 7.

154 See Am. Compl. Ex. A § 10.4 (“[I]f, and to the extent, [the Foreign Share Certificate 

issuance] would violate this ARTICLE X, then, the holder of such Capital Stock shall not 

be entitled to vote, to receive dividends, or to have any other rights with regard to such 

Capital Stock to such extent, except the right to transfer such Capital Stock to a citizen of 

the United States.”).

155 Def.’s Reply Br. 27 n.13 (citing Am. Compl. Ex A §§ 10.2, 10.3).
46

First, they contend Section 10.1 provides that “Article X was designed to 

ensure compliance with the Communications Act of 1934, and not . . . to do more 

than that.”156 Plaintiffs thus argue that the clause “[e]xcept as otherwise provided by 

law”157 at the beginning of both Sections 10.2 and 10.4 means that those provisions

“will be disabled if foreign ownership otherwise complies with the restrictions 

contained in the Communications Act.”158 According to plaintiffs, because “the 

Series B Holders have not violated the Communications Act in these circumstances, 

and any such violations would be cured by the filing of an appropriate petition with 

the FCC,” SBS was not entitled to cancel the Series B Preferred Stock Domestic 

Share Certificate.159 More specifically, plaintiffs argue that there has been no 

violation of the Communications Act because the FCC told SBS that it did not need 

to take any remedial action while its petition is outstanding.160 

 

156 Tr. 95 (Apr. 12, 2018). Section 10.1 states, in relevant part, that “ARTICLE X shall be 

applicable to the Corporation so long as the provisions of Section 310 of the 

Communications Act . . . are applicable to the Corporation” and that “[i]f the provisions of 

Section 310 of the Communications Act . . . are amended, the restrictions in this ARTICLE 

X shall be amended in the same way, and as so amended, shall apply to the Corporation.” 

Am. Compl. Ex. A § 10.1.

157 Am. Compl. Ex. A §§ 10.2, 10.4.

158 Pls.’ Answering Br. 42.

159 Id. at 42 n.29.

160 Tr. 102-03 (Apr. 12, 2018).
47

Second, plaintiffs argue that the Company’s interpretation of how to calculate

the 25% ownership limitation in the Voting Provision is incorrect. Plaintiffs contend 

that, properly read, the limitation in Section 10.2 requires SBS to apply the 25% 

limitation to the “aggregate” of all classes and series entitled to vote on any matter 

before any meeting of stockholders,

161 and that, as a factual matter, “‘aliens’ never 

held ‘more than twenty-five percent of the aggregate shares of Capital Stock.’”162

In other words, in considering the alien ownership limitation in the Voting Provision, 

plaintiffs argue that SBS must tally all of the Capital Stock entitled to vote on any 

matter at a stockholder meeting and then determine whether aliens own more than 

25% of that sum, whereas the Company contends that that it must consider each class 

or series of stock individually.

Third, plaintiffs assert in the alternative that “even if the [25% ownership 

limitation in the Voting Provision] were applicable such that the Enforcement 

Provision were triggered, the Enforcement Provision applies—if at all—only ‘to the 

extent’ ownership of the Series B Holders violates the Charter.”163 According to 

plaintiffs, Section 10.4 requires SBS to “analyze the Series B Holder’s nationality 

 

161 Pls.’ Answering Br. 43-44; Tr. 99-100 (Apr. 12, 2018).

162 Am. Compl. ¶ 92 (emphasis in original).

163 Am. Compl. ¶ 71.
48

on an individual basis,”

164 because “Article X does not—and could not—authorize 

SBS to unilaterally suspend the rights of the holders of an entire class or series of 

stock on grounds that certain members may be foreign holders.”165 

I need not address, and express no opinion on, plaintiffs’ first and second 

arguments because, in my opinion, Count IV clearly states a claim for relief based 

on plaintiffs’ third argument, i.e., that SBS failed to issue new share certificates after 

canceling the Domestic Share Certificate “to the extent” that compliance with 

Article X could be maintained. In my view, a reasonable interpretation of the 

Enforcement Provision is that after canceling a Domestic Share Certificate, the 

Company had an obligation to issue replacement share certificates to the extent 

possible up to the alien ownership limitation threshold. Indeed, the Charter plainly 

contemplates that a class or series of stock would have both domestic and foreign 

holders. Thus, a reasonable interpretation of the Enforcement Provision is that SBS 

could issue multiple share certificates in lieu of a single Domestic Share Certificate

by issuing new Domestic Share Certificates for those Series B Holders qualified to 

 

164 Am. Compl. ¶ 71.

165 Pls.’ Answering Br. 46-47 (emphasis in original). During oral argument, plaintiffs 

advanced a fourth argument: SBS only could cancel the Domestic Share Certificate in the 

first place if it could also issue a replacement Foreign Share Certificate (or multiple ones) 

in its stead. Plaintiffs base this argument on the language in Section 10.4 that says SBS 

both “shall” cancel a Domestic Share Certificate and “shall” issue a Foreign Share 

Certificate upon discovering an alien holds Capital Stock represented by a Domestic Share 

Certificate. In other words, plaintiffs argue that this provision means “if you can’t issue as 

a result of canceling, you just can’t follow that option.” Tr. 107-08 (Apr. 12, 2018).
49

receive them and Foreign Share Certificates to the other Series B Holders up to the 

alien ownership limitation threshold. 

Notwithstanding the foregoing, the Company had not issued any replacement 

certificates, Foreign or Domestic, as of oral argument. Thus, it appears that none of 

the Series B Preferred Stock is represented by a share certificate and none of the 

Series B Holders has any rights other than to transfer the stock to a U.S. citizen. 

Indeed, as of oral argument, the Company had not even issued replacement Domestic 

Share Certificates for those plaintiffs who verified allegations of the Amended 

Complaint attesting that they are United States citizens.166 

I reject SBS’s contention that the only reasonable interpretation of Section 

10.4 is that it “requires that new Certificates be issued in lieu of cancelled 

Certificates on a one-for-one basis.”167 As an initial matter, this position is at odds 

with SBS’s own public filings referenced in the Amended Complaint and its April 

2, 2018 letter to the court, which suggest that SBS (presumably aware of the single 

Domestic Share Certificate for all the Series B Preferred Stock) planned to issue 

multiple replacement certificates to the Series B Holders.168 The clause in Section 

 

166 See, e.g., Am. Compl. ¶¶ 14, 15, 18, 71.

167 Def.’s Reply Br. 27.

168 See Am. Compl. ¶ 63 n.44 (citing SBS, Current Report (Form 8-K) (Nov. 28, 2017), 

Ex. 4.1) (emphasis added) (“Consistent with the requirements of Section 10.3 and 10.4 of 

the Certificate of Incorporation, your shares shall hereafter by represented by ‘Foreign 
50

10.4 on which the Company relies, moreover, appears to be simply illustrative in 

nature.

169 It does not address the scenario where a single certificate represents 

multiple underlying holders (domestic and/or foreign), and it seems implausible that 

this clause was intended to preclude the issuance of multiple certificates to replace 

a single certificate in that situation given that the Charter plainly contemplates that 

a class or series of stock would have both domestic and foreign holders. 

SBS complains that it does not know the citizenship of the Series B Holders 

and thus “cannot issue any new certificates without running the risk of erroneously 

issuing a Foreign Share Certificate to a domestic entity, issuing a Domestic Share 

Certificate to a foreign entity or issuing a Foreign Share Certificate to an alien that 

bought shares after the 25% ownership threshold in Section 10.2 of the Charter had 

been exceeded.”170 Putting aside the fact that this explanation contradicts the 

Company’s “one-for-one basis” argument, it does not negate the viability of Count 

 

Share Certificates,’ subject to the terms and provisions contained in the Certificate of 

Incorporation that are applicable to such shares, unless and until the Company subsequently 

determines that your shares are properly represented by ‘Domestic Share Certificates.’”); 

Letter from R. Saunders, Esq. (Apr. 2, 2018), Ex. 1 (emphasis added) (“[W]hile certain of 

its Series B Preferred Stock may have been transferred to non-U.S. entities, [SBS] has not 

yet issued foreign share certificates evidencing such stock.”).

169 The relevant clause states simply that “[i]f it shall be found by the Corporation that 

Capital Stock represented by a Domestic Share Certificate is, in fact, held by or for the 

account of aliens . . . then such Domestic Share Certificate shall be canceled and a new 

certificate representing such Capital Stock marked ‘Foreign Share Certificate’ shall be 

issued in lieu thereof.” Am. Compl. Ex. A § 10.4.

170 Def.’s Reply Br. 27 n.13.
51

IV. Given the severity of depriving stockholders of fundamental rights, it is 

reasonable to expect that the Company would proceed with alacrity in issuing 

replacement certificates under Section 10.4. Yet, to repeat, many months had passed

since the instant motion was argued without any curative action being taken.

For the reasons explained above, I find that plaintiffs have sufficiently pled 

facts such that it is reasonably conceivable that SBS breached the Charter by 

canceling the Domestic Share Certificate, not issuing any replacement share 

certificates, and indiscriminately suspending the rights of all of the Series B 

Holders.171

2. Plaintiffs Have Stated a Claim that Section 10.4 is Invalid as 

Applied

Count V of the Amended Complaint seeks a declaratory judgment that Section 

10.4 of the Charter is invalid on the theory that it impermissibly “purports to permit 

the suspension of all rights of stockholders of a Delaware corporation.”172 According 

to plaintiffs, “the broad suspension of rights, in and of itself, is unenforceable facially 

and as-applied.”173 

 

171 The elements of a breach of charter claim are the same as a breach of contract claim. 

Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385-86 (Del. 2012). See supra Section 

III.A.1.

172 Am. Compl. ¶ 96.

173 Pls.’ Answering Br. 50.
52

Plaintiffs’ claim that Section 10.4 of the Charter is facially invalid must be 

dismissed. In a facial challenge to the validity of a charter provision, a plaintiff has 

the burden to show that the charter provision “cannot operate lawfully or equitably 

under any circumstances.”174 A plaintiff has this burden because charter provisions 

are “presumed to be valid, and the courts will construe the [charter provisions] in a 

manner consistent with the law rather than strike down the [charter provisions].”175 

Here, because plaintiffs have not attempted to explain how Section 10.4 cannot 

operate lawfully or equitably under any circumstances, their claim that the charter 

provision is facially invalid shall be dismissed.176 

I now turn to whether the Enforcement Provision, as applied here, is invalid. 

The Company argues that Count V should be dismissed under Court of Chancery 

Rules 12(b)(1) and 12(b)(6) for, respectively, lack of ripeness and the failure to state 

a claim for relief. 

 

174 Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 948 (Del. Ch. 2013) 

(citation omitted and emphasis in original) (Strine, C.). Boilermakers involved challenges 

to bylaws, rather than a charter provision, but Delaware courts have held that the legal 

principles relevant to interpreting a charter provision and a bylaw are identical. Id. at 948 

n.55. 

175 Id. at 948 (citing Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985)).

176 See Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (citation omitted) 

(“Issues not briefed are deemed waived.”).
53

Ripeness is a threshold issue.177 Under 10 Del. C. § 6501, Delaware courts 

only have subject matter jurisdiction over a declaratory judgment action where an 

“actual controversy” exists between the parties.178 An actual controversy requires, 

among other things, that “the issue involved in the controversy must be ripe for 

judicial determination.”179 A controversy is ripe where it has “matured to a point 

where judicial action is appropriate.”180 Our Supreme Court has described the

relevant analysis as follows:

A ripeness determination requires a common sense assessment of 

whether the interests of the party seeking immediate relief outweigh the 

concerns of the court in postponing review until the question arises in 

some more concrete and final form. Generally, a dispute will be 

deemed ripe if litigation sooner or later appears to be unavoidable and 

where the material facts are static. Conversely, a dispute will be 

deemed not ripe where the claim is based on uncertain and contingent

events that may not occur, or where future events may obviate the need 

for judicial intervention.181 

 

177 K&K Screw Prods., L.L.C. v. Emerick Capital Invs., Inc., 2011 WL 3505354, *6 (Del. 

Ch. Aug. 9, 2011).

178 Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479 (Del. 1989).

179 Id. at 480 (citation omitted).

180 XI Specialty Ins. Co. v. WMI Liquidating Tr., 93 A.3d 1208, 1217 (Del. 2014) (citation 

and internal quotations omitted).

181 Id. at 1217-18 (citations and internal quotations omitted).
54

Plaintiffs bear the burden of demonstrating that their claims are ripe, and the court 

may consider documents outside the complaint on a motion to dismiss for lack of 

subject matter jurisdiction.182

SBS argues that Count V is not ripe because plaintiffs “do not allege that any 

SBS stockholder attempted to exercise [its] rights (or wants to) and was denied” 

through the operation of Section 10.4 of the Charter.183 True enough, plaintiffs 

alleged in the Amended Complaint merely that “SBS appears to preclude Plaintiffs 

from exercising statutory inspection rights or bringing actions on behalf of SBS,” 

without pleading that they intended to exercise such rights or attempted to do so but 

were denied.184 In their answering brief and at oral argument, however, plaintiffs 

represented that one of the them, West Face Long Term Opportunities Global Master 

L.P., served on SBS a books and records demand under 8 Del. C. § 220 on January 

22, 2018 to, among other things, investigate West Face’s rights and obligations 

under the Foreign Share Certificates.185 The Company apparently rejected this 

 

182 E.I. du Pont de Nemours & Co. v. Bayer CropScience, L.P., 2008 WL 2673376, at *2 

(Del. Ch. July 2, 2008).

183 Def.’s Opening Br. 50.

184 Am. Compl. ¶ 72.

185 Pls.’ Answering Br. 49 n.43; Tr. 108 (Apr. 12, 2018).
55

demand on January 26, 2018, stating that West Face lacks standing to assert rights 

under Section 220.186 

Although “[a]rguments in briefs do not serve to amend the pleadings,”

187 the 

court may, as noted above, look outside of the pleadings to determine whether it has 

jurisdiction.188 Items that the court may consider include “the pleadings, proxy 

statements, affidavits, and briefs of the parties.”189 Here, plaintiffs have represented 

that one of them attempted to exercise its inspection rights but was rebuffed by SBS. 

SBS does not deny that this occurred. Accordingly, plaintiffs have a ripe claim with 

respect to Count V.

Count V also states a claim upon which relief can be granted in my opinion. 

A court will “only invalidate a certificate provision if it ‘transgress[es]’—i.e., 

vitiates or contravenes—a mandatory rule of our corporate code or common law.”190 

“A stockholder’s rights under [S]ection 220 cannot be eliminated or limited by a 

provision in a corporation’s certificate of incorporation.”191 “By default, ‘all stock 

 

186 Pls.’ Answering Br. 49 n.43.

187 In re MeadWestvaco Stockholder Litig., 168 A.3d 675, 688 n.68 (Del. Ch. 2017) 

(citation and internal quotations omitted).

188 Sloan v. Segal, 2008 WL 81513, at *6 (Del. Ch. Jan. 3, 2008) (Strine, V.C.).

189 Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 974 (Del. Ch. 2000).

190 Jones Apparel Grp., Inc. v. Maxwell Shoe Co., Inc., 883 A.2d 837, 846 (Del. Ch. 2004) 

(Strine, V.C.) (citing Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 118 (Del. 1952)). 

191 2 EDWARD P. WELCH ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION LAW

§ 220.01, at 7-203 (6th ed. Supp. 2018) (citing Marmon v. Arbinet-Thexchange, Inc., 2004 
56

is created equal,’”

192 so “all classes of stock enjoy the same rights and privileges 

unless an affirmative expression alters those rights.”193 If a certificate of 

incorporation or a certificate of designations “is silent on a particular issue, then as 

to that issue the preferred stock and the common stock have the same rights,”194 i.e., 

the “default rights remain unaltered.”195 

As noted above, “[a]ny rights, preferences and limitations of preferred stock 

that distinguish that stock from common stock must be expressly and clearly stated, 

 

WL 936512, at *5 n.12 (Del. Ch. Apr. 28, 2004)). In Marmon, the court explained that a 

“charter provision that conflicts with a statute is void,” so a charter provision “is void to 

the extent that it abridges or limits shareholder inspection rights.” 2004 WL 936512, at *5 

n.12. 

192 In re Trados Inc. S’holder Litig., 73 A.3d 17, 39 (Del. Ch. 2013) (citing MCG Capital 

Corp. v. Maginn, 2010 WL 1782271, at *6 (Del. Ch. May 5, 2010)).

193 MCG Capital, 2010 WL 1782271, at *6 (citing Jedwab v. MGM Grand Hotels, Inc., 

509 A.2d 584, 593-94 (Del. Ch. 1986) (Allen, C.)); see 8 Del. C. § 151(a) (“Every 

corporation may issue 1 or more classes of stock or 1 or more series of stock within any 

class thereof, . . . and which classes or series may have such voting powers, full or limited, 

or no voting powers, and such designations, preferences and relative, participating, optional 

or other special rights, and qualifications, limitations or restrictions thereof, as shall be 

stated and expressed in the certificate of incorporation or of any amendment thereto.”).

194 In re Trados, 73 A.3d at 39 (citation omitted).

195 MCG Capital Corp., 2010 WL 1782271, at *6 (citing Jedwab, 509 A.2d at 953-54 

(emphasis in original) (“If a certificate designating rights, preferences, etc. of special stock 

contains no provision dealing with voting rights or no provision creating rights upon 

liquidation, it is not the fact that such stock has no voting rights or no rights upon 

liquidation. Rather, in such circumstances, the preferred stock has the same voting rights 

as common stock . . . or the same rights to participate in the liquidation of the 

corporation.”)).
57

as provided by statute,”196 because “stock preferences are in derogation of the 

common law.”197 Here, however, SBS does not point to any alteration, limitation, 

or elimination in the Certificate of the Series B Holders’ right to inspect SBS’s books 

and records under 8 Del. C. § 220. As such, the Series B Holders have the right to 

inspect SBS’s books and records under Section 220, a right that SBS cannot limit or 

restrict in the Charter. Despite the existence of this right, the Company allegedly 

rejected West Face’s demand because it “lacks standing to assert rights under 

Section 220.”198 Accordingly, plaintiffs’ as-applied challenge to the validity of the 

Enforcement Provision states a claim, because it is reasonably conceivable that SBS 

used Section 10.4 to deny West Face’s inspection rights impermissibly.

IV. CONCLUSION

For the reasons explained above, SBS’s motion to dismiss is granted in part 

and denied in part. The parties are directed to confer and to submit an implementing 

order in accordance with this opinion within five business days. 

IT IS SO ORDERED.

 

196 Elliot Assocs., 715 A.2d at 852 (citing 8 Del. C. § 151(a)).

197 Waggoner, 581 A.2d at 1134 (citation omitted).

198 Pls.’ Answering Br. 49 n.34.