In January, the Delaware Supreme Court ruled that a preferred shareholder who held a contractual right to “approve and consent” to a merger did not have "statutory" voting rights. As a result, the preferred shares did not have to be included in determining whether a controlling shareholder owned enough shares to engage in a short form merger. Matulich v. Aegis Communications Group, Inc., ___ A.2d ___, 2008 WL 187511 (Del. Jan. 15, 2008).
Aegis, a provider of customer relations management outsourcing services, is a wholly owned subsidiary of the World Focus company. Prior to the merger with World Focus, Aegis had two classes of stock, Common stock and Series B Preferred Stock. The Series B Preferred shares had a contractual right to “approve and consent” to any merger. However, the certificate of designation for the class also stated that holders of the preferred stock had “no voting rights.”
World Focus owned approximately 95% of the common stock immediately prior to the merger. There was also a class of Series B Preferred shares that, while not having voting rights generally, did have a right to approve a merger. Unable to find the owners of these shares, World Focus filed for equitable relief with the Court of Chancery seeking a declaration that the holders had “approved and consented” to the merger.
With the court awarded approval, World Focus opted to undertake a short form merger. Matulich, a common stock holder, brought suit challenging the merger. While recognizing that World Focus owned more than 90% of the common stock, he argued that Section 253 likewise required that World Focus own at least 90% of the Class B shares. See Del. Gen. Corp. Law §253 (to undertake short form merger, shareholder must own 90% of the outstanding stock of each class that "would be entitled to vote on such merger."). The Court of Chancery held that Series B shareholders had no statutory right to vote on the merger, and therefore, World Focus owned “90% of each class of stock entitled to vote on the merger as required by the short-form merger statute." Matulich v. Aegis Communications Group, Inc., 2007 WL 1662667 (Del. Ch. 2007).
The Delaware Supreme Court focused on the fundamental difference between common stock and preferred stock. While the rights and obligations of common shareholders are mostly uniform, and are mostly determined by statute, each preferred share can be totally distinct from the next. The drafters of the preferred share may decide to assign any number of special rights or preferences to shareholders. This scheme can create huge variation in the intended rights of various preferred shares. As such, the rights of preferred shareholders are primarily determined by the contractual terms that define each individual class of stock.
Thus, the most appropriate tools to interpret the rights of preferred shareholders are those of ordinary contract interpretation. The Delaware Supreme Court affirmed the Court of Chancery’s interpretation of the certificate of designation for the Series B shares, noting with emphasis the two disclaimers that stated the shares had “no voting rights.” The Court noted that the certificate specifically differentiated the statutory right to vote and the contractual right of consent to the merger.Primary materials for the Supreme Court and Court of Chancery decisions can be found on the DU Corporate Governance website.