Warner Commun. v. CHRIS-CRAFT INDUSTRIES
583 A.2d 962 (1989)
Rule of Law:
The existence and extent of special stock rights, being contractual in nature and defined by the certificate of incorporation, must be clearly expressed and are not presumed; statutory provisions for charter amendments do not automatically extend class voting rights to mergers, which are governed by separate statutory requirements under the doctrine of independent legal significance.
Facts:
- Warner Communications Inc. (Warner), Chris-Craft Industries, Inc., and BHC, Inc. (BHC) entered into an Exchange Agreement on December 29, 1983.
- Under the Exchange Agreement, Warner acquired BHC preferred stock, and BHC acquired 15,200,000 shares of Warner's Series B Variable Rate Cumulative Convertible Preferred Stock (Series B Preferred).
- The Series B Preferred Stock's certificate of designation outlined specific voting rights, including a general right to vote as one class with common stock, but also special class voting rights under Sections 3.3(i) and 3.4(i) for certain alterations or amendments.
- Time Incorporated (Time), later renamed Time Warner Inc., executed a merger agreement with Warner to acquire all of Warner's outstanding stock in a two-step transaction.
- The first step of the transaction was a public tender offer by Time for approximately 50% of Warner's common stock, which closed on July 24, 1989.
- The proposed "back-end" of the transaction involved a merger where TW Sub Inc. (a wholly owned subsidiary of Time) would merge into Warner, with Warner surviving as a wholly owned subsidiary of Time.
- In the proposed back-end merger, the Warner Series B Preferred Stock would be cancelled and converted into Time Series BB Convertible Preferred stock.
- For the purpose of this motion, it was stipulated that the substitution of Time Series BB Preferred for Warner Series B Preferred would adversely affect the defendants (BHC).
Procedural Posture:
- Warner Communications Inc., Time Warner Inc. (formerly Time Incorporated), and TW Sub Inc. filed a declaratory judgment action in the Court of Chancery of Delaware, New Castle County.
- The plaintiffs sought a determination that the holders of Warner's Series B Preferred stock were not entitled to a class vote on the proposed merger.
- Chris-Craft Industries, Inc. and BHC, Inc., as the holders of the Series B Preferred stock, were named as defendants and counterclaim plaintiffs.
- The plaintiffs subsequently filed a motion for judgment on the pleadings, arguing that no material facts were in dispute and the legal question could be resolved based on the existing pleadings.
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Issue:
Does the certificate of designation for Warner Communications Inc.'s Series B Preferred Stock grant its holders a right to a class vote on a proposed merger that would convert their shares into a new security, even if that conversion adversely affects them, under provisions for altering stock rights or amending the certificate of incorporation?
Opinions:
Majority - Allen, Chancellor
No, the certificate of designation for Warner Communications Inc.'s Series B Preferred Stock does not grant its holders a right to a class vote on the proposed merger under provisions for altering stock rights or amending the certificate of incorporation. Chancellor Allen reasoned that special stock rights are contractual in nature and must be clearly expressed in the certificate of incorporation, not presumed. The court applied principles of contract interpretation, construing the certificate of designation in its entirety to reconcile its provisions. Specifically, Section 3.4(i), which provides a series vote for charter amendments that adversely affect the Series B Preferred, was found inapplicable because the adverse effect was caused by the conversion of stock in the merger pursuant to 8 Del.C. § 251, not by the subsequent, ministerial amendments to Warner's certificate of incorporation under 8 Del.C. § 242. The conversion flows from the merger itself, not from the amendment. Similarly, Section 3.3(i), which requires a class vote to "alter or change any rights...of the Preferred Stock so as to affect the holders...adversely," does not apply to a merger. The court noted the close textual similarity between Section 3.3(i) and 8 Del.C. § 242(b)(2), a statutory provision for charter amendments which does not itself create a right to a class vote on a merger. Applying the bedrock doctrine of independent legal significance, the court held that satisfaction of 8 Del.C. § 251 (governing mergers) is sufficient, and the requirements for charter amendments do not automatically extend to mergers. Furthermore, the certificate of designation explicitly addressed mergers in Section 3.4(iii), creating limited voting rights for specific merger scenarios not present here, which strongly implied that this was the exclusive certificate-created right to vote on a merger. Therefore, absent such explicit language, the Series B Preferred holders had no right to a class vote on the proposed merger.
Analysis:
This case reinforces the Delaware corporate law principle that preferred stock rights, especially voting rights in extraordinary transactions like mergers, are strictly construed and must be clearly and expressly stated in the corporate charter or certificate of designation. It underscores the doctrine of independent legal significance, distinguishing between statutory requirements for different corporate actions (e.g., mergers vs. charter amendments). The ruling limits the ability of preferred shareholders to veto mergers without explicit contractual protection, establishing that broad language concerning "alterations" or "amendments" to stock rights does not implicitly extend to cover conversions in a merger.
