SV Inv. Partners, LLC v. Thoughtworks, Inc. - 7 A.3d 973 (Del. Ch. 2010)

Rule:

A corporation may be insolvent under Delaware law either when its liabilities exceed its assets, or when it is unable to pay its debts as they come due. Although a corporation cannot be balance-sheet insolvent and meet the requirements of Del. Code Ann. tit. 8, § 160, a corporation can nominally have surplus from which redemptions theoretically could be made and yet be unable to pay its debts as they come due. The common law prohibition on redemptions when a corporation is or would be rendered insolvent restricts a corporation's ability to redeem shares under those circumstances, giving rise to a situation in which "funds legally available" differs from "surplus." 

Facts:

The plaintiffs are a group of affiliated investment funds and their advisor, SV Investment Partners, LLC (collectively, "SVIP"). In 2000, they purchased over 94% of the Series A Preferred Stock (the "Preferred Stock") issued by the defendant ThoughtWorks, Inc. ("ThoughtWorks" or the "Company"). The amended and restated certificate of incorporation (CI) of ThoughtWorks dated April 5, 2000 (the "Charter") granted the holders of the Preferred Stock the right to have their stock redeemed "for cash out of any funds legally available therefor" beginning five years after issuance. SVIP first exercised its redemption right in 2005. SVIP sued ThoughtWorks, seeking a declaratory judgment as to the meaning of the phrase "funds legally available" in ThoughtWorks’ CI and a monetary judgment for the lesser of (i) the full amount of ThoughtWorks’ redemption obligation and (ii) the full amount of its "funds legally available." SVIP argued that "funds legally available" meant "surplus," and presented an expert who opined that defendant had a surplus sufficient to redeem all the preferred stock.

Issue:

Was the “funds legally available” equivalent to “surplus”?

Answer:

No.

Conclusion:

The court held that "funds legally available" was not equivalent to "surplus," but meant cash that was "available" (cash on hand or readily accessible through sales or borrowing) and that could be deployed "legally" for redemptions without violating Del. Code Ann. tit. 8, § 160 or other statutory or common law restrictions, including the requirement that the corporation be able to continue as a going concern and not be rendered insolvent by the distribution. Plaintiffs failed to prove that defendant's board of directors (i) acted in bad faith in determining whether defendant had legally available funds, (ii) relied on methods and data that were unreliable, or (iii) made determinations so far off the mark as to constitute actual or constructive fraud. In making its redemption decisions, the board acted in good faith and relied on detailed analyses developed by well-qualified experts.