Wood v. Coastal States Gas Corp.
1979 Del. LEXIS 376, 401 A.2d 932 (1979)
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Rule of Law:
The rights of preferred stockholders are strictly defined by their contract (the Certificate of Designations), and a court will not use general principles of fairness to grant rights not expressly or implicitly provided for in that contract. A corporate spin-off distributing shares of a new entity to common stockholders does not constitute a "recapitalization" if the original common stock is not exchanged or surrendered.
Facts:
- Coastal States Gas Corporation's (Coastal) subsidiary, Lo-Vaca Gathering Co. (Lo-Vaca), was unable to honor its long-term, fixed-price contracts to supply natural gas to Texas customers due to a massive price increase during the 1970s energy crisis.
- Numerous customers filed breach of contract suits against Lo-Vaca, its parent companies, and Coastal's CEO, Oscar Wyatt.
- The Railroad Commission of Texas ultimately denied Lo-Vaca's request for rate relief and ordered the company to refund over $1.6 billion to customers, an amount that was about three times Coastal's net worth.
- To settle the extensive litigation and resolve the massive liability, Coastal's board of directors developed and approved a complex settlement plan.
- A central part of the plan was to spin off one of its subsidiaries, which would be renamed Valero Energy Corporation, and distribute 86.6% of Valero's stock as an extraordinary dividend to Coastal's common stockholders only.
- Holders of Coastal's preferred stock were excluded from this distribution of Valero stock.
- For the previous twenty years, Coastal had paid regular dividends to its preferred stockholders but had paid only one minor dividend to its common stockholders.
Procedural Posture:
- Holders of Coastal's preferred stock (plaintiffs) filed a class-action lawsuit in the Delaware Court of Chancery against Coastal States Gas Corporation and its subsidiaries (defendants).
- The suit sought to enjoin a special stockholders' meeting called to approve the settlement plan, alleging the plan violated the preferred stockholders' contractual rights.
- After a trial on the merits, the Vice Chancellor of the Court of Chancery entered judgment in favor of the defendants.
- The trial court ruled that the spin-off was not a 'recapitalization' under the preferred stock Certificate and thus did not require participation by the preferred stockholders.
- The plaintiffs (appellants) appealed the Court of Chancery's judgment to the Supreme Court of Delaware.
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Issue:
Does a corporate settlement plan that spins off a subsidiary and distributes the new company's stock as a dividend exclusively to common stockholders constitute a 'recapitalization' under the terms of the preferred stock Certificate, thereby entitling preferred stockholders to participate in the distribution?
Opinions:
Majority - Duffy, Justice
No. The spin-off and distribution of Valero stock to Coastal's common shareholders is not a 'recapitalization' within the meaning of the preferred stock Certificate. The court reasoned that the rights of preferred stockholders are strictly contractual and must be found within the four corners of their Certificate. The Certificate's anti-destruction clause, Section (c)(5), which protects preferred stockholders in a 'recapitalization,' applies only when something is received 'in lieu of' the existing common stock, implying an exchange or surrender of shares. Since Coastal's common stock remained in existence and was not exchanged, the event was not a recapitalization under the contract. Moreover, the court found that Section (c)(7) of the Certificate specifically permitted Coastal to pay a dividend to common stockholders in property or securities (other than its own stock) without triggering any adjustment or participation rights for the preferred stockholders. Therefore, the distribution of Valero stock was a permissible property dividend, not a recapitalization requiring preferred stockholder participation.
Analysis:
This decision solidifies the Delaware legal principle that the rights of preferred stockholders are primarily contractual and will be strictly construed. It establishes that significant corporate restructurings, such as spin-offs that distribute substantial assets to common stockholders, will not trigger anti-destruction protections for preferred stock unless the specific language of the share contract is met. The court's refusal to invoke broader concepts of fairness or fiduciary duty in this context underscores the importance of precise and comprehensive drafting in corporate charters. This case serves as a crucial precedent, warning preferred stock investors that their protections are limited to what is explicitly negotiated and written, and that courts will not create rights where the contract is silent or ambiguous.
