In SV Investment Partners, LLC et al. v. Thoughtworks, Inc. (Del. 2011), Delaware's Supreme Court recently affirmed the Court of Chancery's deferring to the way a board interpreted "funds legally available."
Thoughtworks' charter gave its preferred stockholders the right to have their stock redeemed out of "funds legally available therefor." Its board concluded that, despite Thoughtworks' having cash, it had no legally available cash for the redemption. So Thoughtworks stopped redeeming its preferred stock. The preferred stockholders sued, asking the Chancery Court to decide what "funds legally available" meant.
The Delaware Supreme Court's and Chancery Court's analyses give these lessons and reminders:
- "Funds legally available" does not mean surplus. It means cash both accessible and usable in conformity with applicable law (not just the Delaware General Corporation Law).
- A corporate charter is a contract. Preferred stock's rights, duties, powers, preferences and the like come from the charter and are matters of contract construction.
- The board cannot authorize a redemption (i) unless the corporation's net assets exceed the redemption amount and (ii) unless after the redemption the corporation can pay its debts as they come due.
- Both the Delaware General Corporation Law and common law limit a corporation's power to redeem its equity securities.
- Delaware law permits a board to calculate net assets in many ways.
- In redemption provisions, investors should consider the
following:
- using the phrase "any property legally available" rather than "funds legally available."
- requiring the corporation to sell assets to raise cash for the redemption.
- requiring the board to value the corporation using multiple,
specified methods and to select the highest of those values.
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