Greenmont Capital Partners I, LP v. Mary's Gone Crackers, Inc. - No. 7265-VCP, 2012 Del. Ch. LEXIS 236 (Del. Ch. Sep. 28, 2012)

Rule:

Delaware corporate law recognizes that the ability of holders of preferred stock to convert their shares into shares of common stock is a right of the preferred shareholders.

Facts:

Plaintiff Greenmont Capital Partners I LP invested in companies in the natural products industry. One of its investments was in Series B Preferred shares in defendant Mary's Gone Crackers. Defendant produced and distributed organic and gluten-free baked goods. It was formed as a California limited liability company in 2004 and was converted to a Delaware corporation upon filing a certificate of incorporation. The Charter authorized two classes of stock, Common and Preferred, and two series of the Preferred class, Series A and Series B. Plaintiff disputed the validity of an automatic conversion of the preferred stock into common stock and a subsequent voted by the defendant's board to amend its certificate of incorporation to eliminate reference to preferred stock. Plaintiff maintained that a majority vote from series B was required to validate the conversion because the conversion effectively deprived the series B preferred stock holders of the special rights they enjoyed under the certificate. Plaintiff sought a declaratory judgment that the automatic conversion and the related Charter amendment were unlawful, void, and prohibited. The parties moved for judgment on the pleadings, Del. Ch. Ct. R. 12(c).

Issue:

Did defendant had the power to implement the automatic conversion and the certificate amendment without consent of the series B preferred stockholders?

Answer:

Yes.

Conclusion:

The court held that the certificate of incorporation was unambiguous. Also, its language did not entitle the series B preferred stockholders to a series vote on the conversion of preferred stock into common stock. Thus, the challenged conversion was a valid corporate action. Moreover, the subsequent certificate amendment was valid because it occurred when no preferred shares remained outstanding, hence, its validity was not contingent on a majority vote of the outstanding shares of series B preferred. The court then denied petitioner’s motion for judgment on the pleadings and defendant’s motion was granted.