The plaintiffs in this case brought suit against Morgan Joseph Holdings, Inc., an investment bank, regarding the preferred stock they had in the bank. The plaintiffs bought the stock in 2001 when the company was first starting to provide money for the start-up. In late 2010, Morgan Joseph merged with an investment bank called Tri-Artisan Capital Partners, LLC. A stock, governed by a new certificate of incorporation, was offered in place of the old stock. Instead of switching their shares, the plaintiffs decided to have their shares appraised under 8 Del. C. § 262. The new certificate of incorporation provided an automatic redemption of the new stock for $100 per share, which would be allowed 6 months after the merger.
CHANCELLOR STRINE A certificate of incorporation is a contract among the stockholders of the corporation to which the standard rules of contract interpretation apply. I must therefore take Delaware’s well-established contract interpretation principles and apply them to the Certificate.
What is a bit more complicated here are some of the interpretive principles that come into play when a contract is “fairly susceptible of different interpretations,” and therefore ambiguous. In that event, the court must turn to secondary methods of interpretation.
In the case of documents like certificates of incorporation or designation, the kinds of parol evidence frequently available in the case of warmly negotiated bilateral agreements are rarely available. Investors usually do not have access to any of the drafting history of such documents, and must rely on what is publicly available to them to understand their rights as investors. Thus, the subjective, unexpressed views of entity managers and the drafters who work for them about what a certificate means [have] traditionally been of no legal consequence, as it is not proper parol evidence as understood in our contract law.
Rather, in these contexts, another method of resolving ambiguity comes into play, which involves interpreting ambiguities against the drafter. Our Supreme Court has frequently invoked this doctrine of contra proferentem to resolve ambiguities about the rights of investors in the governing instruments of business entities. This is even true in the case of investors in preferred stock.
This use of contra proferentem in the context of preferred stock arguably is in tension with another principle of Delaware law. A line of precedent holds that preferences claimed by preferred stockholders must be clearly set forth in a certificate of incorporation or designation and will not be presumed or implied by the court.
With these interpretative principles in mind, I will now discuss why I believe the petitioners’ interpretation is the correct one.
A review of the plain language of the Certificate demonstrates that, by relying on § B(5)(c), Morgan Joseph is straining to create an ambiguity when in fact there is none. As the petitioners point out, there was no reference to “Excess Cash” in § B(5)(a), which was the logical place in which to impose such a requirement. Such a restriction would also have been symmetrical with how the Excess Cash condition was applied to Optional Redemptions. Optional Redemptions were addressed in § B(5)

(b) of the Certificate, and they were expressly and directly conditioned on the availability of Excess Cash.
The plain language of the Certificate does not indicate that the Automatic Redemption provision in § B(5)

(a) would be, as Morgan Joseph contends, subject to the distribution scheme set forth in § B(5)(c). Section B(5)

(c) contained instructions for redeeming the Series A Preferred Stock in the event that either an Automatic Redemption or Optional Redemption took place. The first sentence of § B(5)(c), which defined “Redemption Date,” clearly and unambiguously applied to both types of redemptions. This makes sense because both an Automatic Redemption and Optional Redemptions would require an effective date. But, the sentence of § B(5)

(c) that detailed the distribution scheme in the event that Morgan Joseph did not have enough Excess Cash to go around applied only to Optional Redemptions.
Further, Morgan Joseph fails to address the obvious categorical difference between the triggering events for Automatic Redemptions and for Optional Redemptions that emerges from the face of the Certificate. Under the Certificate, an Automatic Redemption would be triggered largely by strategic events—a sale of substantially all assets, an initial public offering, or a merger in which Morgan Joseph was not the survivor. These are the sort of benchmark events that commonly trigger the right of a preferred security holder to receive a preference return based on its place in the capital hierarchy. In colloquial terms, these are harvest events. It is evident that July 1, 2011[,] was also such a harvest event, and was chosen consciously. The Series A Preferred Stock was issued exactly ten years before July 1, 2011. The only reasonable way to read the Certificate was that the Series A holders were entitled to an Automatic Redemption upon the occurrence of any of the harvest triggers listed in § B(5)

(a) of the Certificate, and at the latest on July 1, 2011, ten years after their investment was made. This right to an Automatic Redemption was not subject to any Excess Cash requirement; rather, payment was due to the Series A holders as the senior security holders so long as the company had legally available funds to make the redemption. In other words, the Series A holders, as holders of senior preferred securities, were entitled to harvest their investment at the latest after ten years were up. By contrast, the Series A holders could only exercise their right to an Optional Redemption if Morgan Joseph was sufficiently in the plush with Excess Cash.
Even if the Certificate were ambiguous, the parol evidence makes clear that the petitioners’ interpretation is indisputably correct. The petitioners submitted evidence that shows the shared beliefs of the parties at the time that Morgan Joseph sold its Series A Preferred Stock: the Information Material used by Morgan Joseph to market the Series A to investors. Because Morgan Joseph drafted the Information Material and put it into circulation, it is strong evidence of what Morgan Joseph believed when it authored the Certificate. Most important, because the Information Material was used as advertising to the buyers of the Series A Preferred Stock, it speaks to the reasonable expectations of the Series A investors. For these reasons, the Information Material is very powerful parol evidence that may be properly considered by the court. Moreover, Morgan Joseph has failed to advance any contradictory parol evidence or explain through a Rule 56(f)
affidavit how discovery would generate admissible parol evidence.
Under 8 Del. C. § 262, my task in an appraisal proceeding is to “determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation,” taking into account “all relevant factors.” Not only that, our Supreme Court has required this court to take into account all non-speculative information bearing on the value of the shares at issue in an appraisal.
Applied here, that means that when the court values the Series A Preferred Stock, it must take into account the economic reality that the Series A would have been entitled to a mandatory redemption on July 1, 2011, just six months after the Merger. The ability of the Series A holders to receive the full $100 per share on July 1, 2011[,] would of course have depended on whether Morgan Joseph had sufficient legally available funds to effect the redemption, but that specific, nonspeculative contractual right was inarguably an important economic factor bearing on the value of the Series A as of the Merger date that any reasonable investor or market participant would have taken into account.
It is by no means unusual to recognize that the value of preferred stock often depends materially on its contractual features. As a general rule, preferred stock has the same appraisal rights as common stock, but “[u]nlike common stock, the value of preferred stock is determined solely from the contract rights conferred upon it in the certificate of designation.” Therefore, when determining the fair value of preferred stock, the court must consider the contract upon which the preferred stock’s value was based.
At the trial stage, therefore, this court will have to perform two related, but discrete tasks. It will have to value Morgan Joseph under the standards applicable in appraisals. This means that I will have to determine the fair value of Morgan Joseph as a going concern as of the Merger date. But the percentage of that entity value that should be awarded to the Series A Preferred Stock must, as a matter of legal and economic reality, take into account the legal right of the Series A holders to the July 1 Automatic Redemption. This works no harm to the other equity holders, as that is what you sign up for when you invest in a company with senior security holders entitled to specific preferred rights with economic value, or to Morgan Joseph, which chose to effect the Merger knowing that it had different series of stock with differing contractual claims on the company’s value.
For the foregoing reasons, the petitioners’ motion for partial summary judgment is granted. It is so ordered.
CRITICAL THINKING:
Notice in the opinion that Chancellor Strine discusses the problems of the ambiguity in the contract and that the bank purposefully made elements in the contract ambiguous. Why would the bank do that?
ETHICAL DECISION MAKING:
Think about what Strine says about the differences between the provisions of the stock the investors originally bought and the provisions of the new stock. Did the bank provide the investors with a fair deal after the merger?