Law School Case Brief
Elliott Assocs., Ltd. P'ship v. Avatex Corp. - 715 A.2d 843 (Del. 1998)
Del. Code Ann. tit. 8, § 251 describes three ways that a merger or consolidation can affect the certificate of a constituent corporation: (1) Section 251(b)(3) Amendments. First, the merger agreement may call for amendments to the pre-existing certificate of the surviving corporation. (2) Displacement and Substitution by Merger. Second, the merger can designate the certificate of one of the constituent corporations as the certificate of the surviving entity, and thereby render the certificate of every other constituent corporation a legal nullity. (3) Displacement and Substitution via Consolidation. Finally, in the case of a consolidation, the certificate of the resulting corporation displaces and renders a legal nullity the certificate of every disappearing constituent corporation.
Avatex Corporation (Avatex) did not allow a vote by preferred stockholders on a merger that would have eliminated the articles of incorporation, which provided protections for preferred stockholders. The certificate allowed a vote when any amendment, alteration, or repeal, of any certificate articles occurred by merger, consolidation, or otherwise, and materially and adversely affected preferred stockholders. The lower court denied preferred stockholders an injunction against a proposed merger by Avatex.
Did the lower court err in denying preferred stockholders an injunction against a proposed merger by Avatex?
The court held that that certain preferred stockholders have the right to a class vote in a merger where: (1) the certificate of incorporation expressly provides such a right in the event of any "amendment, alteration or repeal, whether by merger, consolidation or otherwise" of any of the provisions of the certificate of incorporation; (2) the certificate of incorporation that provides protections for the preferred stock is nullified and thereby repealed by the merger; and (3) the result of the transaction would materially and adversely affect the rights, preferences, privileges or voting power of those preferred stockholders. In so holding, we distinguish prior Delaware precedent narrowly because of the inclusion by the drafters of the phrase, "whether by merger, consolidation or otherwise." The court held that the drafters referred in the added terms to events listed in Del. Code Ann. tit. 8, § 251 of ways a merger could have affected the certificate. Because the term "consolidation" was used, the drafters intended a vote even where there was no surviving corporation whose pre-existing certificate was subject to amendment. The court held that the merger caused the adverse affect of elimination of preferred stockholder rights, because the merger would have made the certificate, and preferred stockholders' rights, a nullity, which fit within the terms, "amendment, alteration, or repeal."
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