Court Opinion

ID: 4175399
Source: CourtListenerOpinion
Date Created: 2017-06-07 20:10:17.703189+00
Date Added: 2024-06-11T14:54:56.774582
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

                                    )
IN RE APPRAISAL OF                  )    C.A. No. 11723-VCMR
GOODCENTS HOLDINGS, INC.            )
                                    )

                      MEMORANDUM OPINION

                      Date Submitted: March 9, 2017
                       Date Decided: June 7, 2017

Marcus E. Montejo, Kevin H. Davenport, and John G. Day, PRICKETT, JONES &
ELLIOTT, P.A., Wilmington, Delaware; Attorneys for Petitioners.

Brock E. Czeschin and Sarah A. Galetta, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Charles E. Elder, IRELL & MANELLA LLP, Los Angeles,
California; Attorneys for Respondent.

MONTGOMERY-REEVES, Vice Chancellor.
      This is an 8 Del. C. § 262 appraisal action stemming from a 2015 merger. The

preferred stockholders of the target company were entitled to an approximately $73

million liquidation preference,1 but the merger valued the target at approximately

$57 million.    According to the company’s interpretation of its certificate of

incorporation, the merger triggered the preferred stockholders’ liquidation

preference.    As such, the preferred stockholders were paid the entire merger

consideration, and the common stockholders received nothing. Petitioners are

common stockholders who argue that the merger did not trigger the liquidation

preference in the certificate of incorporation. Instead, they assert that the certificate

of incorporation provides the preferred stockholders with a class vote or blocking

right in the case of a merger. Petitioners, thus, contend that the fair value of the

company should be allocated pro rata among the common stockholders and the

preferred stockholders on an as-converted basis.

      Petitioners and Respondent both move for partial summary judgment on the

question of the proper allocation of the fair value of the company among the

preferred and common stockholders. Based on the plain meaning of the certificate

of incorporation, and because this Court previously considered nearly identical

1
      Respondent contends that the preferred stockholders’ liquidation preference
      exceeded $73 million at the time of the merger. Resp’t’s Opening Br. 1. I need not
      and do not determine the actual value of the liquidation preference at this stage.

                                           1
language and deemed it a voting provision rather than an entitlement to a liquidation

preference, I hold that the certificate of incorporation provides only a voting right.

Thus, I grant Petitioners’ motion for partial summary judgment.

I.    BACKGROUND

      The facts in this opinion are undisputed and derive from the documents

attached to the affidavits of Marcus E. Montejo and Charles E. Elder. The parties

have not argued that there exists a genuine dispute of material fact. As such, under

Court of Chancery Rule 56(h), I consider these cross motions for summary judgment

on a stipulated record.2

      A.     Parties

      Respondent GoodCents Holdings, Inc. (“GoodCents”) is a privately held

Delaware corporation that works with utility companies to optimize both residential

and commercial consumption of power. It merged into AM Conservation Group,

Inc. (“AMCG”) in 2015.

      Dalford Lynn England is the founder and a common stockholder of

GoodCents. England was originally a petitioner in this case, but he has since been

substituted by Chapter 11 bankruptcy trustee Janet G. Watts.3

2
      Ct. Ch. R. 56(h).
3
      Stipulated Order Vacating Stay, Substituting Real Party in Interest, and Setting
      Briefing Schedule, In re Appraisal of GoodCents Hldgs., Inc., C.A. No. 11723-
      VCMR (Del. Ch. Jan. 19, 2017).

                                          2
      Petitioner Clayt Mason is the only other common stockholder of GoodCents.

      B.    Facts

      England founded GoodCents approximately 16 years ago. In 2007, GFI

Energy Ventures, LLC (“GFI”) acquired GoodCents through a merger. Under the

terms of the merger, England and Mason collectively reinvested $8.7 million into

GoodCents and became the sole owners of GoodCents common stock. Their

common stock represented 18.21% of the voting power of GoodCents. Also in

connection with the merger, GoodCents issued Series 1 Cumulative Convertible

Preferred Stock (the “Preferred Stock”) to OCM/GFI Power Opportunities Fund II,

L.P. and OCM/GFI Power Opportunities Fund II (Cayman), L.P., two GFI affiliates

(the “Preferred Stockholders”). Together, the Preferred Stockholders control the

other 81.79% of GoodCents’s voting power.

      In the summer of 2015, the common stockholders received from GoodCents

a Notice to Stockholders of Appraisal Rights and of Action by Written Consent of

Less Than All of the Outstanding Shares of Capital Stock, dated July 24, 2015 (the

“Notice”).4 The Notice indicated that GoodCents had been sold to AMCG. The

merger consideration was $33 million in cash, subject to a working capital

adjustment,5 and GoodCents was permitted to use approximately $24 million in cash

4
      Montejo Aff. Ex. 6.
5
      Agreement and Plan of Merger § 2.6.1 (July 24, 2015).

                                         3
on hand to redeem shares of the Preferred Stock.6 The common stockholders seek

appraisal because they received none of the approximately $57 million in cash paid

to the Preferred Stockholders.

       The GoodCents Amended and Restated Certificate of Incorporation (the

“Certificate of Incorporation” or “Certificate”) contains the Preferred Stockholders’

rights and preferences.7      Under the Certificate of Incorporation, the Preferred

Stockholders are entitled to cumulative dividends as follows:

              Subject to clause 2.b below, the holders of shares of the
              Series 1 Cumulative Convertible Preferred Stock shall be
              entitled to receive dividends, out of any assets legally
              available therefor, prior and in preference to any
              declaration or payment of any cash dividend on the
              Common Stock or any other Junior Stock of this
              corporation, dividends per share computed at the rate of
              8% per annum, compounded annually based on the
              Original Issue price . . . .8

But generally, the Preferred Stockholders cannot be paid a dividend unless the

common stockholders receive an equal dividend per share on an as-converted basis.

Clause 2.b states, in part, that:

              [E]xcept in a transaction governed by Section B.6 of this
              Article V, the corporation shall not declare, pay or set
              aside any dividends on shares of Series 1 Cumulative
              Convertible Preferred Stock unless the holders of the

6
       Id. Sched. 5.1.2.
7
       Montejo Aff. Ex. 1; Elder Aff. Ex. A (the “Certificate of Incorporation”).
8
       Certificate of Incorporation art. V, § B.2.a.

                                              4
             Common Stock then outstanding simultaneously receive a
             dividend on each outstanding share of Common Stock
             equal to the per share dividend (determined on an as if
             converted basis) to be declared, paid or set aside for the
             Series 1 Cumulative Convertible Preferred Stock.9

The exception to that rule is for transactions governed by section B.6 of article V,

which includes the Preferred Stockholders’ right to a liquidation preference (the

“Liquidation Preference”). Section B.6 states, in part, that:

             a.     In the event of any voluntary or involuntary
             liquidation, dissolution or winding up of the corporation,
             the holders of shares of Series 1 Cumulative Convertible
             Preferred Stock then outstanding shall be entitled to be
             paid out of the assets of the corporation available for
             distribution to its stockholders, before any payment shall
             be made to the holders of shares of Junior Stock [including
             Common Stock], by reason of their ownership thereof, an
             amount equal to the greater of (x) the Original Issue Price
             per share . . . plus any dividends declared and/or accrued
             but unpaid thereon . . . , or (y) such amount per share as
             would have been payable had each such share been
             converted into Common Stock pursuant to Section B.4
             immediately prior to such liquidation, dissolution or
             winding up.

             b.     If upon any such liquidation, dissolution or winding
             up of the corporation, the remaining assets of the
             corporation available for distribution to its stockholders
             shall be insufficient to pay the holders of shares of Series
             1 Cumulative Convertible Preferred Stock the full amount
             to which they shall be entitled, the holders of Series 1
             Cumulative Convertible Preferred Stock . . . shall share
             ratably in any distribution of the remaining assets and
             funds of the corporation in proportion to the respective
             amounts which would otherwise be payable in respect of

9
      Id. art. V, § B.2.b.

                                          5
             the shares held by them upon such distribution if all
             amounts payable on or with respect to such shares were
             paid in full.

             c.     Without the affirmative vote of the holders of a
             majority of the Series 1 Cumulative Convertible Preferred
             Stock, the corporation [i.e. GoodCents] shall not . . . effect
             any merger or consolidation . . . unless the agreement or
             plan of merger . . . shall provide that the consideration
             payable to the stockholders of the corporation . . . shall be
             distributed to the holders of capital stock of the
             corporation in accordance with Sections B.6.a. and B.6.b
             above.10

This dispute focuses on the meaning of article V, section B.6.c.

      C.     Procedural History

      Petitioners filed the petition for appraisal in this case on November 18, 2015,

and Respondent answered on December 18, 2015. The parties conducted discovery,

and Respondent moved for partial summary judgment on August 26, 2016.

Petitioners cross moved for partial summary judgment on January 19, 2017, and the

Court heard oral argument on the motions on March 9, 2017. This opinion resolves

the parties’ motions for partial summary judgment on the issue of the proper

allocation of the fair value of GoodCents.

II.   ANALYSIS

      The Court may grant a motion for summary judgment “if the pleadings,

depositions, answers to interrogatories and admissions on file, together with the

10
      Id. art. V, § B.6.

                                           6
affidavits, if any, show that there is no genuine issue as to any material fact and that

the moving party is entitled to a judgment as a matter of law.”11

      The Delaware Supreme Court in Cavalier Oil Corp. v. Harnett12 addressed

the proper standard for valuing a dissenting stockholder’s shares in an appraisal

action. The Supreme Court held that dissenting stockholders are entitled to their

“proportionate interest in a going concern.”13 “To this end the company must be

first valued as an operating entity by application of traditional value factors,

weighted as required, but without regard to post-merger events or other possible

business combinations.          The dissenting shareholder’s proportionate interest is

determined only after the company as an entity has been valued.”14

      “As a general rule, preferred stock has the same appraisal rights as common

stock, but ‘[u]nlike common stock, the value of preferred stock is determined solely

from the contract rights conferred upon it in the certificate of designation.’”15 Thus,

“when determining the fair value of preferred stock, the court must consider the

11
      Ct. Ch. R. 56(c).
12
      564 A.2d 1137 (Del. 1989).
13
      Cavalier Oil, 564 A.2d at 1144 (quoting Tri-Cont’l Corp. v. Battye, 74 A.2d 71, 72
      (Del. 1950)).
14
      Id. (citation omitted).
15
      Shiftan v. Morgan Joseph Hldgs., Inc., 57 A.3d 928, 942 (Del. Ch. 2012) (quoting
      In re Appraisal of Metromedia Int’l Gp., Inc., 971 A.2d 893, 900 (Del. Ch. 2009)).

                                             7
contract upon which the preferred stock’s value was based,”16 which here is the

GoodCents Certificate of Incorporation.        “Corporate charters and bylaws are

contracts among a corporation’s shareholders.”17 “[T]he rules that govern the

interpretation of statutes, contracts, and other written instruments apply to the

interpretation of corporate charters and bylaws.”18          “[T]he construction and

interpretation of an unambiguous written contract is an issue of law within the

province of the court”19 that can be decided on a motion for summary judgment.

      The parties do not argue that the GoodCents Certificate of Incorporation is

ambiguous.     Both parties assert that the text unambiguously supports their

interpretation. I agree that the Certificate of Incorporation is unambiguous, and, as

such, I do not consider any extrinsic evidence.20

16
      Id. at 942.
17
      Strougo v. Hollander, 111 A.3d 590, 597 (Del. Ch. 2015) (quoting Airgas, Inc. v.
      Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010)) (internal quotation marks
      omitted).
18
      Id. (quoting Sassano v. CIBC World Mkts. Corp., 948 A.2d 453, 462 (Del. Ch.
      2008)) (internal quotation marks omitted).
19
      Bank of N.Y. Mellon v. Realogy Corp., 979 A.2d 1113, 1120 (Del. Ch. 2008)
      (quoting Law Debenture Trust Co. of N.Y. v. Petrohawk Energy Corp., 2007 WL
2248150, at *5 (Del. Ch. Aug. 1, 2007)).
20
      Respondent points to extrinsic evidence as proof that Petitioners believed that a
      merger would trigger the Preferred Stockholders’ Liquidation Preference.
      Respondent argues that although the Certificate of Incorporation is unambiguous,
      the extrinsic evidence bolsters its case. Cf. Shiftan, 57 A.3d at 940. Further,
      Respondent asserts that if the Certificate is actually ambiguous, the extrinsic
      evidence proves that Respondent’s interpretation is correct. Because I agree that
                                           8
      A.     The Unambiguous Text of the GoodCents Certificate of
             Incorporation Grants the Preferred Stockholders a Voting Right
      I hold that the plain meaning of the Certificate comports with Petitioners’

position. The language of article V, section B.6.c. of the GoodCents Certificate is

composed of two clauses that are important here. The first clause provides that

“[w]ithout the affirmative vote of the [Preferred Stockholders], [GoodCents] shall

not . . . effect any merger or consolidation . . . .”21 The plain meaning of the first

clause of section B.6.c is that without the Preferred Stockholders’ approval,

GoodCents cannot enter a merger at all. The second important clause provides,

“unless the agreement or plan of merger . . . shall provide that the consideration

payable to the stockholders of the corporation . . . shall be distributed to the holders

of capital stock of the corporation in accordance with Sections B.6.a. and B.6.b

above.”22 Respondent highlights the second clause in section B.6.c and argues that

it unambiguously triggers the Liquidation Preference in the case of a merger. I

disagree. That language follows the word “unless” and simply means that the

Preferred Stockholders’ right to block a merger by withholding their affirmative vote

      the certificate is unambiguous, I need not consider the extrinsic evidence.
      Regardless, I would need a trial to resolve what the extrinsic evidence actually
      suggests because it raises disputes of fact.
21
      Certificate of Incorporation art. V, § B.6.c.
22
      Id.

                                             9
falls away if the terms of the merger agreement “shall provide that the consideration

payable to the stockholders of the corporation . . . or consideration payable to the

corporation . . . shall be distributed to the holders of capital stock of the corporation

in accordance with [the Preferred Stockholders’ Liquidation Preference].”23 No part

of section B.6.c provides that whenever GoodCents enters a merger, the Preferred

Stockholders shall be paid their Liquidation Preference.

      Respondent also asserts that section B.6 must be read as a whole. It contends

that section B.6.a covers situations after which GoodCents will cease to exist—such

as a liquidation, dissolution, or winding up—and that section B.6.c covers situations

after which the corporation will continue to exist as a going concern—such as a

merger, consolidation, sale, or large offering of shares. Thus, Respondent argues

that section B.6.c should be read to grant the Preferred Stockholders the Liquidation

Preference like section B.6.a. I agree that section B.6.a is different from section

B.6.c, as Respondent suggests. But I do not agree that the difference supports

Respondent’s position. To the contrary, a comparison of the text of section B.6.c to

the text in the remainder of section B.6 supports Petitioners’ position. The operative

language in section B.6.a expressly requires payment of the Preferred Stockholders’

23
      Id.

                                           10
Liquidation Preference before any payment is made to junior stock in the case of a

GoodCents liquidation, dissolution, or winding up. Section B.6.a states as follows:

             In the event of any voluntary or involuntary liquidation,
             dissolution or winding up of the corporation, the holders
             of shares of [Preferred Stock] then outstanding shall be
             entitled to be paid out of the assets of the corporation
             available for distribution to its stockholders, before any
             payment shall be made to the holders of shares of Junior
             Stock, by reason of their ownership thereof, an amount
             equal to [the Liquidation Preference].24

Such language specifically providing for a right to payment is noticeably absent from

section B.6.c.     Section B.6 of the Certificate of Incorporation, therefore,

unambiguously grants the Preferred Stockholders a voting right but not a right to the

Liquidation Preference in the case of a merger.25

      B.     This Court’s Reasoning in In re Appraisal of Ford Holdings, Inc.
             Preferred Stock Supports This Reading
      Former Chancellor Allen considered language nearly identical to section B.6.c

in In re Appraisal of Ford Holdings, Inc. Preferred Stock26 and reached the same

conclusion. In that case, certain preferred stockholders brought an appraisal action

24
      Id. art. V, § B.6.a (emphasis added).
25
      The GoodCents Preferred Stockholders did not attempt to exercise their blocking
      right of the merger with AMCG. Rather, they used their control of over 80% of the
      GoodCents vote to approve the merger. And Respondent does not assert that the
      Preferred Stockholders’ voting right was frustrated. Cf. Fletcher Int’l, Ltd. v. Ion
      Geophysical Corp., 2013 WL 6327997 (Del. Ch. Dec. 4, 2013) (awarding damages
      to a preferred stockholder whose right to consent to a note issuance was frustrated).
26
      698 A.2d 973 (Del. Ch. 1997).

                                              11
after a merger in which they were paid only their liquidation preferences. The

preferred stockholders contended that the fair value of their shares was greater than

the liquidation preferences. The certificate of designations for the Auction Preferred

Series D stock stated as follows:

             Without the affirmative vote of the holders of a majority
             of the Outstanding shares of all series of Auction
             Preferred, Voting Preferred and Parity Preferred, voting as
             a single class, . . . [Holdings] may not . . . merge with or
             into any other corporation unless, in the case of a . . .
             merger, each holder of shares of Auction Preferred, Voting
             Preferred and Parity Preferred shall receive, upon such . .
             . merger, an amount in cash equal to the liquid preference,
             Merger Premium, if any, and accumulated and unpaid
             dividends . . . .27

The Ford Holdings Court held that that provision granted the preferred stockholders

a right to vote as a class before a merger could be consummated. Chancellor Allen

wrote that these “voting provisions are, in the end, voting provisions” as opposed to

provisions related to the economic consideration to which preferred stockholders

were entitled.28 As such, the Court held that the provision did not clearly limit the

consideration payable to the Auction Preferred Series D stockholders in the case of

a merger. The Court held that the preferred stockholders were entitled to the fair

27
      Ford Hldgs., 698 A.2d at 978-79.
28
      Id. at 979.

                                         12
value of their shares under Section 262 because they had not contractually limited

their appraisal rights.29

       Respondent at oral argument attempted to distinguish Ford Holdings because

the issue in that case was whether the consideration to which the Auction Preferred

Series D stockholders were entitled was fixed at the liquidation preference or

whether it could exceed that amount.30 The issue was not whether the preferred

stockholders were entitled to at least their liquidation preference—the issue here.

But the Ford Holdings reasoning applies here as well. The Court held in Ford

Holdings that the fair value owed to the preferred stockholders could exceed their

liquidation preference because the certificate of designations provision in question

did not limit the preferred stockholders’ consideration.31 The Court reasoned that

the provision “assure[d] that the preferred stockholders [would] be able to vote as a

class to prevent the corporation from engaging in a merger that a majority of holders

find disadvantageous, but that the class loses that power if the preferred receive

specified consideration . . . .”32 Thus, while the issue was not identical to the issue

presented here, the Court in Ford Holdings considered nearly identical language in

29
       Id.
30
       Oral Arg. Tr. 8.
31
       Ford Hldgs., 698 A.2d at 979.
32
       Id.

                                          13
a dispute regarding the fair value of preferred stock in an appraisal action. And the

Court held that the language was merely a voting provision. Such a voting right is

not a right to the Preferred Stockholders’ Liquidation Preference in the case of a

merger.

      Respondent further argues that the operative language in Ford Holdings

appeared under the heading “Voting Rights” in the Auction Preferred Series D

certificate of designations.33 Respondent asserts that the Court in Ford Holdings

was influenced by the heading and did not need to meticulously consider the

language. But Chancellor Allen did parse the language in Ford Holdings and held

that it entitled the preferred stockholders “to vote as a class.”34 Further, section B.6

of the GoodCents charter is under a heading entitled “Liquidation, Dissolution or

Winding Up,” and those terms are not defined to include mergers.35 Thus, the

headings provide only limited guidance.36 Regardless, the plain meaning of the

language controls, and I agree with Chancellor Allen’s reasoning in Ford Holdings

33
      Oral Arg. Tr. 10.
34
      Ford Hldgs., 698 A.2d at 979.
35
      Certificate of Incorporation art. V, § B.6.
36
      See Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 582 n.35 (Del. Ch. 1998)
      (“Although contract headings are not controlling evidence of the meaning of a
      contract’s substantive provisions, they may be considered as additional evidence
      tending to support the substantive provisions.”).

                                            14
interpreting nearly identical language. The Certificate of Incorporation grants the

Preferred Stockholders the right to a class vote but not a right to the Liquidation

Preference in the case of a merger.

      C.     Respondent Does Not Assert That the Preferred Stockholders’
             Voting Right Should Be Considered in Appraisal
      Petitioners argue that the Preferred Stockholders’ voting right cannot be

considered in appraisal to reduce the fair value of the common stock. They cite the

Delaware Supreme Court’s opinion in Cavalier Oil, which held that “[t]he

application of a discount to a minority shareholder is contrary to the requirement that

the company be viewed as a ‘going concern.’”37 “Although Delaware law putatively

gives majority stockholders the right to a control premium, Cavalier Oil tempers the

realistic chance to get one by requiring that minority stockholders be treated on a

pro rata basis in appraisal.”38 Respondent does not counter that the voting right

provided in section B.6.c has value that should be separately considered in this

appraisal action. Respondent asserts only that a merger triggers the Preferred

Stockholders’ Liquidation Preference in the Certificate of Incorporation. But I have

held that the Certificate of Incorporation provides the Preferred Stockholders with

only a voting right in the case of a merger. As such, Petitioners are entitled to their

37
      Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1145 (Del. 1989).
38
      In re Orchard Enters., Inc., 2012 WL 2923305, at *8 (Del. Ch. July 18, 2012).

                                          15
proportionate share of the fair value of GoodCents considering the Preferred Stock

on an as-converted basis.

III.   CONCLUSION

       For these reasons, Petitioners’ motion for partial summary judgment is

granted, and Respondents’ motion for partial summary judgment is denied.

       IT IS SO ORDERED.

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