Opinion ID: 1992274
Heading Depth: 1
Heading Rank: 2

Heading: Applicability of Supermajority Vote Provision

Text: The Court of Chancery granted Emerald a preliminary injunction enjoining the consummation of the merger because the stockholder approval of the merger failed to meet the supermajority voting requirements of Article Fourteenth of May's certificate of incorporation. The first issue to be decided on appeal is whether this supermajority vote requirement is applicable to the merger proposal. In pertinent part, the supermajority vote provision states: No Business Combination shall be effected unless it is approved at a meeting of the Corporation's stockholders called for that purpose. The presence in person or by proxy of the holders of not less than 80% of the voting securities of the Corporation shall be required to constitute a quorum at any such meeting. The affirmative vote of 66-2/3% of the voting power present, in person or by proxy, at such meeting, excluding all voting securities owned beneficially, by the Acquiring Entity, shall be required for approval of any such Business Combination. May's certificate of incorporation defines a Business Combination as any merger or consolidation of the Corporation [May] with or into any other corporation, person or other entity which is the beneficial owner, directly or indirectly, of 30% or more of the outstanding voting securities of the Corporation. May's certificate of incorporation also provides that the supermajority vote of minority stockholders is required unless the May Board authorized the Business Combination: prior to the time that any such corporation, person or other entity became the beneficial owner, directly or indirectly, of 30% or more of the outstanding voting securities of the Corporation. A corporation, person or other entity which is the beneficial owner, directly or indirectly, of 30% or more of the Corporation's outstanding voting securities (taken together as a single class) is herein referred to as the Acquiring Entity. The Court of Chancery interpreted Article Fourteenth of May's certificate of incorporation as requiring a supermajority vote to approve a merger with any entity that held 30% or more of May's outstanding common stock at the time the May Board voted to recommend the merger. This interpretation makes the percentage of stock ownership on the date of the directors' vote determinative of the applicability of Article Fourteenth. The Court of Chancery concluded that since the May Board authorized the merger on November 30, 1987, long after Mr. Hall, the Acquiring Entity, obtained 30% of May's stock and while he still controlled it, the supermajority vote requirements were applicable to the merger. Emerald urges this Court to affirm that conclusion. The appellants contend that the critical time for determining the applicability of Article Fourteenth is the date of the stockholder vote. The appellants argue that the supermajority vote provision applies only to a merger with an Acquiring Entity (30% stockholder). Since Hall only owned 25% of May's common stock at the time the merger was ratified by the stockholders, the appellants contend that there was no Acquiring Entity being merged into May. Accordingly, the appellants argue that the supermajority vote provision in Article Fourteenth did not apply to the proposed merger. In examining the provisions of a certificate of incorporation, courts apply the rules of contract interpretation. Hibbert v. Hollywood Park, Inc., Del.Supr., 457 A.2d 339 (1983). We only construe the [provision] ... as it is written, and we give language which is clear, simple, and unambiguous the force and effect required. Id. at 343. Put another way, the best evidence of the intention of the parties is often found in the express language of a written contract. 4 S. Williston, A Treatise on the Law of Contracts § 610 (3d edition 1961 & Supp.1988). Nevertheless, the contract rights of the stockholders of the corporation are also subject to the provisions of the Delaware General Corporation Law. Loew's Theatres, Inc. v. Commercial Credit Company, Del. Ch., 243 A.2d 78, 81 (1968). The provision for a supermajority vote in May's certificate of incorporation is applicable only to a Business Combination. May's certificate of incorporation defines a Business Combination as any merger or consolidation between May and any other... entity which is the beneficial owner ... of 30% or more of the outstanding voting securities of [May]. (emphasis added). The Delaware General Corporation Law provides that, notwithstanding certain filing requirements, see e.g., 8 Del.C. § 103 (1983 & Supp.1988), a merger is not complete until the stockholders of the corporations have voted to approve it. See, 8 Del.C. § 251(c) (Supp.1988). In this case, we find no inconsistency between May's certificate of incorporation and the applicable provisions of the Delaware General Corporation Law. The Court of Chancery correctly recognized that the proposed merger could not be effective until the stockholders voted. However, the Court of Chancery concluded that, by its terms, Article Fourteenth applied at the time the May stockholders voted upon this merger, because Hall owned more than 30% (52%) of May's stock at the time the directors voted to recommend it. We do not find that there is anything in the language of Article Fourteenth which requires its application to any merger with an entity, which is not then the owner of 30% or more of the company, if that entity had ever previously owned 30% or more of May's stock. If Article Fourteenth was intended to apply to such situations, it could have expressly so provided. [7] Supermajority provisions take various forms and are generally intended to offer protection to minority stockholders from a majority stockholder who would, but for the supermajority provision, be able to force a merger onto the corporation. [8] This is so because in the absence of the supermajority provision, a mere simple majority of the outstanding stock of the corporation entitled to vote on the merger is needed to approve a merger. 8 Del.C. § 251(c) (Supp. 1988). The provisions of the May certificate of incorporation are specifically designed to protect minority stockholders only from a major stockholder who has the ability to dominate a merger proposal at both stages of the process, i.e., when the board votes and when the stockholder votes. The May certificate of incorporation does not require a supermajority vote, even with an Acquiring Entity, if the May Board authorized the merger proposal prior to the time when 30% of the May stock was acquired. The protection of a supermajority vote was apparently deemed unnecessary and was not made applicable to a merger proposed by a board that was not capable of being influenced by a major stockholder (holder of a 30% or more interest). Conversely, even if a major stockholder was capable of influencing the board in proposing a merger, the requirement of a supermajority vote is not provided for in the May certificate of incorporation to protect the minority stockholders from continued influence at the time of the stockholder's vote, if there has been a reduction in stock ownership below the 30% level. Apparently, it was thought that whatever influence might have been exerted upon the board to suggest the merger proposal could no longer be brought to bear at the stockholder's meeting, after the reduction in stock ownership below 30%. The terms of the supermajority provision are unambiguous. We find that the relevant time to assess whether the supermajority vote provision in May's certificate of incorporation is triggered is when the merger proposal is presented to the stockholders for a vote. On the date of the stockholder vote, [9] if the proposal is for a merger with an Acquiring Entity, the provisions of the May certificate of incorporation direct one to look back to the date of the directors' resolution to determine the percentage of votes which are needed to pass the proposal. If the Acquiring Entity also owned a 30% interest on the date of the directors' resolution, a supermajority vote is needed. If the Acquiring Entity held less than a 30% interest prior to the directors resolution, only a majority vote by the stockholders is necessary. If no one holds a 30% interest on the date of the stockholders' vote, there can be no merger with an Acquiring Entity and Article Fourteenth has no applicability at all. The operation of the provisions and the protections afforded by the supermajority provisions in the May certificate of incorporation are manifested by the facts of this case. When Hall determined that he might be unable to gather the requisite supermajority vote, he decided to reduce his ownership of May stock below 30% to avoid the applicability of Article Fourteenth. However, in so doing, Hall ceased to be a majority stockholder, and thus, was incapable of forcing ratification of the proposed merger by the stockholders.