Because a certificate of incorporation is a contract between the corporation and its shareholders, it is interpreted according to the rules of contract construction. Accordingly, the court must give effect to the intent of the contracting parties as evidenced by the language of the certificate and the circumstances surrounding its creation and adoption.
On June 4, 1996, Zapata Corporation (the defendant), Houlihan's Restaurant Group, Inc., and Zapata Acquisition Corp., a wholly owned subsidiary of Zapata specially created to effect the Merger ("Zapata Sub"), entered into the Merger Agreement. Under that Agreement, Houlihan's will merge with and into Zapata Sub, and Houlihan's stockholders will receive shares of Zapata in exchange for their Houlihan's stock. The Merger Agreement provides that only the approval of a simple majority of Zapata's outstanding shares is required to approve the Merger. Pasternak, et. al., shareholders of Zapata instituted a claim challenging the proposed merger and seeking an injunction to prohibit the proposed merger. The shareholders alleged that the proposed merger is invalid because the Merger Agreement requires approval by only a simple majority of Zapata's shareholders, whereas Article SEVENTH of Zapata's Restated Certificate of Incorporation (the "Supermajority Provision") requires approval by 80% of Zapata's shareholders.
In light of the apparent discrepancy between the Merger Agreement and Zapata’s Restated Certificate of Incorporation regarding the percentage of Zapata’s shareholders required to approve the proposed merger, can the Merger Agreement between Zapata and Houlihan be held valid?
The Court held that the Merger Agreement which requires only a simple majority stockholder approval of the proposed Merger contravenes Article SEVENTH of Zapata's Certificate of Incorporation. On that basis, the Court concluded that an injunction prohibiting the consummation of the proposed Merger will issue.