Opinion ID: 2294957
Heading Depth: 2
Heading Rank: 1

Heading: The Omneon Charter's Liquidation Preference Framework

Text: Omneon's pre-merger capital structure was somewhat complex, as it included nine different Series of preferred stock, spread across three preferred classes (Classes A, B, and C). Article (4)(B)(2)(a) of the Omneon charter (entitled Liquidation Preference) stated that [i]n the event of any voluntary or involuntary liquidation . . . distributions to the stockholders of the Company shall be made in the following manner. Following that statement, in subsection (i), was a list of specific per share liquidation dollar amounts that vary depending on which Series of preferred stock is implicated. [19] Of the nine Series of preferred, only two (the Series C-1 and the Series A-2.2) were entitled to a liquidation preference distribution that exceeded the consideration being paid by Harmonic in the merger. [20] The Series C-1 liquidation preference payout was nearly $29 per share, and the Series A-2.2 was far greater$1,513,032.40 per share. Two provisions of Omneon's certificate of incorporation are material to resolving this dispute. The first is Article 4(B)(2)(b) (the Liquidation Event clause), upon which the appellants primarily rely. Article 4(B)(2)(b) defines what constitutes a Liquidation Event that would entitle the preferred shareholders to a liquidation preference distribution under Article 4(B)(2)(a). Article 4(B)(2)(b) relevantly provides: (b) Liquidation Event . . . a liquidation shall be deemed to be occasioned by, or to include, (i) the acquisition of the Company by any person or entity by means of any transaction or series of related transactions by the Company or its stockholders in which the stockholders of the Company immediately prior to such transaction or series of related transactions own less than 50% of the Company's voting power immediately after such transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation. . . .); (ii) the closing of the transfer (whether by merger, consolidation or otherwise), in one transaction or a series of related transactions, by stockholders of the Company to a person or group of affiliated persons . . . of the Company's then outstanding securities if, after such closing, such person or group . . . would hold 50% or more of the outstanding voting stock of the Company.. . . [21] The Series C-1 preferred shareholders claim that the conversion was part of a series of related transactions that culminated in the merger i.e., in the Liquidation Event described in subsections (i) and (ii) of Article 4(B)(2)(b). Because the conversion constituted a part of the Liquidation Event (the argument goes), the Series C-1 preferred shares were not converted at the time of the Liquidation Event and, accordingly, were entitled to their liquidation preference payment under Article (4)(B)(2)(a). Omneon responds, and the Superior Court found, that the conversion was not part of a series of related transactions that constituted a Liquidation Event. Only the merger constituted a Liquidation Event. Because the conversion took place before the merger, at the time of the merger the Series C-1 preferred shareholders held only common stock that had no liquidation preference rights. To support its position, Omneon points to a separate charter provision (the provided, however provision), that is found in Article 4(B)(3)(b) of the charter. Clause (B)(3)(b) authorizes, by majority vote of the preferred shareholders, an automatic conversion of all preferred shares into common stock, as follows: (b) Automatic Conversion. Each share of Preferred Stock shall automatically be converted into . . . Common Stock. . . upon . . . (2) . . . the election of the holders of a majority of the outstanding shares of such Preferred Stock voting together as a single class on an as-converted to common stock basis and not as separate series; provided, however, in the event that such conversion is conditioned upon or follows consummation of a Liquidation Event . . . then, solely with respect to the Series A-2.2 Preferred Stock, the election of the holders of a majority of the outstanding shares of the Series A-2.2 Preferred Stock (and the holders of all other series of Preferred Stock would then vote together excluding the Series A-2.2 Preferred Stock). [22] Importantly, the provided, however provision excepts or carves out only one Seriesthe Series A-2.2 preferredfrom automatic or forced conversion. That is, under the provided, however provision, only the Series A-2.2 preferred is entitled to opt out of any conversion vote and thereby preserve its contractual right to a liquidation preference distribution. The Superior Court found that if a conversion immediately preceding a merger were deemed a part of a Liquidation Event (as the appellants argued), then all Series of preferred would effectively have the same opt out right as the Series A-2.2. That interpretation would ignore the limited scope of the provided, however provision and thereby render it superfluous. For the reasons next discussed, we agree with the Superior Court's reasoning and the result it reached.