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