Elliott Associates, L.P. v. Avatex Corp.
1998 Del. LEXIS 328, 715 A.2d 843, 1998 WL 564531 (1998)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When a certificate of incorporation grants preferred stockholders a class vote on any 'amendment, alteration or repeal' of the certificate 'whether by merger, consolidation or otherwise' that adversely affects their rights, such a vote is required for a merger that nullifies the certificate and converts their shares, thereby eliminating their contractual protections.
Facts:
- Avatex Corporation had outstanding common stock and a class of 'First Series Preferred' stock.
- The certificate of designations for the First Series Preferred stock granted its holders a two-thirds class vote on any 'amendment, alteration or repeal, whether by merger, consolidation or otherwise,' of the certificate of incorporation that would 'materially and adversely affect' their rights.
- Avatex created a wholly-owned subsidiary, Xetava Corporation, for the sole purpose of a merger.
- Avatex then announced its intention to merge into Xetava, with Xetava being the surviving corporation.
- Under the proposed merger, the First Series Preferred stock of Avatex would be converted into common stock of Xetava.
- The merger would result in the nullification and repeal of Avatex's certificate of incorporation, which contained the protections for the preferred stockholders.
- The terms of the proposed merger did not provide for a class vote of the First Series Preferred stockholders.
Procedural Posture:
- Plaintiffs, preferred stockholders of Avatex, filed suit in the Delaware Court of Chancery seeking to enjoin a proposed merger.
- Defendants, Avatex and its directors, filed a motion for judgment on the pleadings.
- The Court of Chancery granted the defendants' motion, holding that the preferred stockholders were not entitled to a class vote on the merger.
- Plaintiffs (appellants) appealed the Court of Chancery's final judgment to the Delaware Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a provision in a certificate of incorporation granting preferred stockholders a class vote on any 'amendment, alteration or repeal' of the certificate 'whether by merger, consolidation or otherwise' that adversely affects their rights, require such a vote when a merger will nullify the certificate and convert their preferred shares into common stock?
Opinions:
Majority - Veasey, Chief Justice
Yes. A merger that results in the repeal of the certificate of incorporation and adversely affects the rights of preferred stockholders triggers a contractually provided class vote when the certificate explicitly grants such a right in the event of an 'amendment, alteration or repeal, whether by merger, consolidation or otherwise.' The court distinguished this case from prior precedent, primarily Warner v. Chris-Craft, because of the specific inclusion of the phrase 'whether by merger, consolidation or otherwise.' While Warner held that adverse effects from a merger typically flow from the stock conversion rather than a charter amendment, the specific language here explicitly identifies a merger as a potential mechanism for amending, altering, or repealing the certificate. The proposed merger renders the Avatex certificate a 'legal nullity,' which constitutes a 'repeal.' This repeal, caused by the merger, is the event that eliminates the stockholders' protections and thus adversely affects them, triggering their right to a class vote.
Analysis:
This decision provides a clear interpretive rule for preferred stock voting rights in mergers, establishing that the specific phrase 'whether by merger, consolidation or otherwise' is outcome-determinative. It distinguishes the holding from the established precedent in Warner, creating a clear path for corporate drafters to either grant or withhold a preferred class vote in a merger context. By enforcing the plain meaning of this contractual language, the court reinforces the principle that preferred stock rights are creatures of contract and must be explicitly defined. This ruling gives investors and corporate counsel a predictable framework for understanding the scope of voting rights in transactions that could eliminate preferred stock protections.
