Rothschild International Corp. v. Liggett Group Inc.
1984 Del. LEXIS 310, 474 A.2d 133 (1984)
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Rule of Law:
The rights of preferred stockholders are strictly contractual and are governed by the express provisions of the certificate of incorporation. A cash-out merger is legally distinct from a corporate liquidation and does not trigger a liquidation preference payment unless the charter explicitly defines it as such.
Facts:
- Liggett Group, Inc.'s certificate of incorporation provided that in the event of 'any liquidation of the assets of the Corporation,' holders of its 7% cumulative preferred stock were entitled to be paid the $100 par value of their shares.
- Grand Metropolitan Limited (GM), through a subsidiary, initiated a takeover of Liggett.
- GM's acquisition was structured as a two-step transaction, starting with a tender offer for Liggett's shares.
- Following the tender offer, GM executed a reverse cash-out merger, causing a GM subsidiary to merge into Liggett, thereby eliminating all remaining minority stock interests.
- As a result of the tender offer and subsequent merger, the 7% preferred stockholders' interests were eliminated for a price of $70 per share.
- After the merger, Liggett maintained its corporate identity and continued its business operations as an integrated part of GM; it was not wound down, and its assets were not sold off.
Procedural Posture:
- Rothschild International Corp. filed a class action suit in the Delaware Court of Chancery on behalf of 7% preferred stockholders of Liggett Group, Inc.
- On motion by the defendants, the Court of Chancery dismissed Grand Metropolitan Limited as a party for lack of personal jurisdiction and dismissed another subsidiary that ceased to exist post-merger.
- Both parties filed cross-motions for summary judgment on the merits of the claims.
- The Court of Chancery granted summary judgment in favor of the defendants, dismissing Rothschild's complaint.
- Rothschild, as plaintiff-appellant, appealed the summary judgment order to the Delaware Supreme Court.
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Issue:
Does a combined tender offer and reverse cash-out merger, which eliminates the interests of preferred stockholders, constitute a 'liquidation of the assets of the Corporation' that triggers a contractual right to a liquidation preference payment under the company's certificate of incorporation?
Opinions:
Majority - Justice Horsey
No. A cash-out merger does not constitute a 'liquidation' that would trigger the preferred stockholders' contractual right to a liquidation preference payment. Preferential rights are contractual in nature and must be clearly expressed in the certificate of incorporation; they will not be presumed. The term 'liquidation' has a well-defined legal meaning: the winding up of a corporation's affairs, which did not occur here as Liggett continued as a going concern. Under the doctrine of independent legal significance, a corporate action taken under one section of Delaware law (e.g., the merger statute) is legally independent of other sections (e.g., dissolution statutes). Therefore, a merger is not legally equivalent to a liquidation, and shareholders are on notice that their preferential rights can be eliminated by a legally permissible merger.
Analysis:
This decision firmly establishes that the rights of preferred stockholders in Delaware are strictly contractual and will be narrowly construed according to the plain language of the corporate charter. It powerfully reaffirms the doctrine of 'independent legal significance,' giving corporate planners flexibility to structure transactions, like mergers, to achieve their goals without triggering provisions tied to legally distinct events, like liquidations. This case clarifies that the economic effect on a shareholder is secondary to the legal form of the transaction, protecting the predictability of corporate actions under Delaware law.
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