SV Investment Partners, LLC v. ThoughtWorks, Inc.

Supreme Court of Delaware · Corporations

CorporationsPreferred stock redemptionFunds legally availableSurpluspreferred stockredemption rightsfunds legally availablesurplus

Facts

SVIP invested $26.6 million in ThoughtWorks in exchange for Series A Preferred Stock and a charter-based right to require redemption after five years if no qualified public offering occurred, but only out of funds legally available and not designated by the board for working capital for the fiscal year of the redemption date. After no IPO occurred, SVIP demanded full redemption, and ThoughtWorks' board, after consulting legal and financial advisors, determined it lacked sufficient legally available funds and made only limited redemptions over time. In the ensuing litigation, SVIP argued that funds legally available meant statutory surplus and relied on expert valuation testimony to show that ThoughtWorks had sufficient equity value to satisfy the redemption obligation. The Court of Chancery rejected that position and also found that SVIP had not proved the existence of redeemable funds even under its own surplus-based theory.

Issue

Did SVIP prove that ThoughtWorks had funds legally available to satisfy its preferred stock redemption obligation under the charter? More specifically, even assuming funds legally available meant statutory surplus, did the evidence show that ThoughtWorks had sufficient surplus to redeem the preferred shares without impairing capital in violation of DGCL § 160?

Rule

Under DGCL § 160, a corporation may redeem its shares only if the redemption does not impair capital; unless shares are redeemed and retired to reduce capital, the corporation may use only surplus for a redemption. A board's determination of available surplus is entitled to deference absent bad faith, reliance on unreliable methods or data, or determinations so far off the mark as to constitute actual or constructive fraud. A plaintiff seeking to enforce a redemption right conditioned on legally available funds bears the burden to prove that such funds existed.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Analytics, Inc., a Delaware corporation based in Denver, issued preferred stock with a charter redemption right payable only from funds legally available. After the redemption date passed, Nora Patel, a preferred holder in Phoenix, sued for full redemption but offered only the charter, the unpaid demand, and proof that the company had grown revenue over the prior two years.

Who is most likely to prevail on Nora's claim for a money judgment requiring redemption?

Explanation. A plaintiff seeking to enforce a redemption right conditioned on legally available funds bears the burden to prove that such funds existed. The majority held that the preferred holder lost because it failed to prove sufficient legally available funds even under its own theory. Evidence of revenue growth alone does not show funds that can be used for redemption without impairing capital.