Back in 2001, it must have seemed more than reasonable to provide investors an exit within 10 years. That’s what Morgan Joseph Holdings, an investment bank, promised its preferred stockholders in its Certificate of Incorporation: that in 10 years—on July 1, 2011—the company would redeem the preferred stock at $100 per share. Fast-forward through a troubled economic decade—bookended by the 9/11 disaster and the collapse of global markets—and the investment bank merges with another in December 2010, or nearly six months before the mandatory redemption. The resulting entity exchanged a new series of preferred stock for the old—but the former preferred investors rejected the offer and petitioned for an appraisal in the Delaware Court of Chancery. In a motion for partial summary judgment, they argued that any fair value assessment must include the $100-per-share redemption value, as provided in the original certificate. By contrast, the defendants claimed that the mandatory redemption rights were “irrelevant” to any fair value appraisal as-of the merger date.
“Unlike common stock, the value of preferred stock is determined solely from the contract rights conferred upon it in the certification of designation,” the court held, in agreeing with petitioners. In this case, the redemption of the preferred stock was “not a speculative possibility, but rather a legally required mandate of the Certificate,” it added, thereby sidestepping the problem of subsequent events. Accordingly, at trial, the court will determine the fair value of the investment bank as a going concern on the merger date while also “taking into account the legal rights of the [preferred shareholders] as of the mandatory redemption date.” Stay tuned . . .
In the meantime, a complete digest of Shiftan v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012) will appear in the March 2012 Business Valuation Update. The court’s decision will be posted soon at BVLaw.