5 Term Sheets: Investor Rights and Protection 5 Term Sheets: Investor Rights and Protection
Venture investors rarely invest enough to take voting control of a start-up. Rather, they will use rights and preferences negotiated as part of their series investment to protect their positions from potential opportunistic behavior by founders. They do this by using negative covenants to approve corporate transactions or strategic decisions, providing for participation rights in future financings, rights of first refusal and co-sale rights, redemption rights as well as antidilution protections. We will consider how each of these affect incentives in turn.
5.1 Structure of the term sheet 5.1 Structure of the term sheet
Economics and control.
Price/Value
Liquidation Preference
- Original Issue Price & Mulitple
- Dividends
- Participating
- Participating (with a cap)
- Nonparticipating
Conversion features
- Voluntary
- Automatic
Antidilution Protections
- Full Ratchet
- Broad-based Weighted Average
- Pay to Play
Redemption Rights
Registration Rights
Board Representation and Voting
Negative Covenants
5.2 Liquidation Preferences 5.2 Liquidation Preferences
The liquidation preference is a core feature of start-up investing. The liquidiation preference places preferred stockholders senior to common stockholders in the event of a deemed liquidation event (merger, sale of assets, or dissolution).
With the exception of participating preferred stock, it's worth keeping in mind that series investors do not really want to receive the liquidation preference. The liquidation preference plays a role in providing series investors down-side protection. Series investors looking to maximize their return are hoping that a sale comes at a price that far exceeds the amount of money they might have received via their preference so they can convert to common stock and reap a larger return.
Like other aspects of preferred stock rights, the rights to a liquidation preference in the event of a liquidation event are heavily negotiated contractual provisions. Courts will not presume what parties intended when they negotiated the rights for themselves. Parties represented by sophisticated counsel who had the opportunity to negotiate for certain rights or protect themselves against certain eventualities should not expect the courts to rescue them when the contracts are sought to be enforced against them.
In Alta Berkeley, the parties disagree whether series investors were required to convert their shares to common stock rather than receive their liquidation preference when the company proposed to enter into a merger agreement.
5.2.1 Alta Berkeley VI C.V. v. Omneon, Inc. 5.2.1 Alta Berkeley VI C.V. v. Omneon, Inc.
ALTA BERKELEY VI C.V., Alta Berkeley VI S by S C.V., and Kiwi II Ventura Serviços De Consultoria, S.A., Plaintiffs Below, Appellants, v. OMNEON, INC., Defendant Below, Appellee.
No. 442, 2011.
Supreme Court of Delaware.
Submitted: Jan. 25, 2012.
Decided: March 5, 2012.
*382Norman M. Monhait (argued), Jeffrey S. Goddess and Jessica Zeldin, Esquires, of Rosenthal Monhait & Goddess, P.A., Wilmington, Delaware; for Appellants.
Peter J. Walsh, Jr. (argued) and Matthew F. Davis, Esquires, of Potter Anderson & Corroon LLP, Wilmington, Delaware; Of Counsel: Douglas J. Clark, Thomas J. Martin and Bryan J. Ketroser, Esquires, of Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California; for Appellee.
Before BERGER, JACOBS and RIDGELY, Justices.
The appellants, plaintiffs-below (referred to herein as “appellants” or “Series C-l preferred shareholders”), held Series C-l preferred shares in Omneon, Inc., a Delaware corporation (“Omneon”).1 The appellants held their Series C-l preferred shares until September 15, 2010, when those shares were “automatically” involuntarily) converted into Omneon common stock by a majority vote of Omneon’s preferred shareholders (the “conversion”), other than the Series A-2.2 preferred. The conversion was a condition of, and occurred “immediately prior to” a merger *383of Omneon with Orinda Acquisition Corp. (“Orinda”), an entity controlled by the ultimate acquirer, Harmonic, Inc. (“Harmonic”), also a Delaware corporation.
Claiming that the forced conversion of their shares was unlawful, the Series C-l preferred shareholders sued Omneon in the Superior Court for breach of contract. Those shareholders, as plaintiffs, claimed that, because the conversion of their preferred shares was integral to Harmonic’s acquisition of Omneon, the conversion was part of a “Liquidation Event” under Om-neon’s certificate of incorporation,2 that entitled the Series C-l preferred shareholders to the liquidation “preference” payable for their shares.3 For every series of Om-neon preferred stock except for Series A-2.2 and Series C-l, the liquidation preference amount was less than the merger consideration value that Omneon’s shareholders would receive from Harmonic.4 For the Series C-l preferred shareholders, the liquidation preference would have exceeded the estimated merger consideration by about $5.5 million.5 Accordingly, the Series C-l preferred shareholders claimed entitlement to damages equal to the difference in amount between their liquidation preference and the merger consideration that they actually received.
The Superior Court granted summary judgment in favor of Omneon, holding that under the plain language of Omneon’s certificate of incorporation, only one series of preferred stock — the Series A-2.2 — was legally entitled to a liquidation preference payout. The Series C-l preferred shareholders were not entitled to a liquidation preference payout, the court ruled, because the Series C-l preferred shares had been validly converted into common stock before the Omneon-Orinda merger took place. We agree and conclude that the conversion was not part of a “Liquidation Event” as defined by Omneon’s charter. Therefore, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Omneon is a privately-held technology company headquartered in Sunnyvale, California. Harmonic is a publicly-held technology company, also headquartered in Sunnyvale, whose shares trade on the NASDAQ.
On May 6, 2010, Omneon and Harmonic entered into a merger agreement (the “merger agreement”), under which Harmonic would acquire Omneon in a triangular merger involving a Harmonic-controlled entity, Orinda.6 The merger agreement relevantly provided that: (1) the Series A-2.2 preferred would receive its approximately $1.5 million liquidation preference as Omneon’s charter required; *384(2) the merger would not be consummated unless, and not until after, the remaining preferred shareholders approved, by majority vote, an “automatic” conversion of their preferred shares into common stock;7 (3) after the conversion, Orinda would be merged into Omneon; and (4) as consideration for their Omneon shares, Omneon’s (post-conversion) common shareholders would receive, in total, roughly $190 million in cash plus $120 million in Harmonic stock.
Because Harmonic had also entered into “lockup” voting agreements with a majority of Omneon’s shareholders — including a majority of the preferred shareholders— the approval of both the conversion and the merger were assured. The preferred share conversion was completed on September 15, 2010, and the merger was consummated later that same day.8 The Series C-l preferred shareholders filed their Superior Court complaint on November 10, 2010, seeking damages equal to the difference between their liquidation preference and the merger consideration they received following the conversion and merger.
Before the trial court, the Series C-l preferred shareholders claimed that they were entitled to their liquidation preference payout, because the conversion was a part of a “Liquidation Event” as defined in the Omneon certificate of incorporation.9 All parties agree that under the applicable Omneon charter provision, the merger was a Liquidation Event that would entitle every Series of preferred to its respective liquidation preference.10 The Series C-l preferred shareholders claimed that because the conversion was related and integral to the merger, the conversion was therefore part of a “Liquidation Event.” The Superior Court rejected that claim, and ruled that only the merger — but not the antecedent conversion — was a Liquidation Event. Because the conversion preceded the merger, the Series C-l shareholders were common stockholders at the time of the Liquidation Event (the merger), and as such were not entitled to a liquidation preference payment.
In reaching that result, the Superior Court also considered a separate Omneon charter provision (the “provided, however provision”) that expressly allowed only one Series — the Series A-2.2 preferred — to “opt out” of an “automatic” conversion in specified circumstances, including the circumstances of this case.11 Having exercised its exclusive right to opt out of the conversion, the Series A-2.2 was the only Series entitled to a liquidation payment upon the merger. To allow the Series C-l *385preferred shareholders also to recover their liquidation preference, the court held, would effectively read the “provided, however” provision out of the Omneon charter. The trial court granted summary judgment for Omneon, and this appeal followed.
ANALYSIS
On appeal, the Series C-l preferred shareholders claim that the Superior Court erred in holding that the conversion was not a part of a “Liquidation Event,” that would trigger their contractual entitlement to a liquidation preference payment. The appellants rely upon Omneon’s admission that the conversion was “related and integral” to the merger that indisputably constituted a Liquidation Event. They claim that the conversion was necessarily a part of that Liquidation Event, because it was one of a “series of related transactions” that constituted that “event.” Therefore, the conversion fell within the Omneon charter’s Liquidation Event definition.
Any entitlement that appellants may have to a liquidation preference must derive from the provisions of the certificate of incorporation that created those preferential rights.12 In this case, it is undisputed that under the Omneon charter, a “Liquidation Event” must occur to trigger the right of the Series C-l preferred to a liquidation preference payment. It is also undisputed that “Liquidation Event” includes, without limitation, any “reorganization, merger, or consolidation” that transfers a control bloc from Omneon’s shareholders to the acquirer. The sole issue, therefore, is whether the antecedent conversion constituted, or was a part of, a “Liquidation Event” as defined by Om-neon’s charter.
Certificates of incorporation are regarded as contracts between the shareholders and the corporation, and are judicially interpreted as such.13 A judicial interpretation of a contract presents a question of law that this Court reviews de novo.14 Unless there is ambiguity, Delaware courts interpret contract terms according to their plain, ordinary meaning.15 Contract language is not ambiguous merely because the parties dispute what it means.16 To be ambiguous, a disputed contract term must be fairly or reasonably susceptible to more than one meaning.17 Further, “[i]t is well established *386that a court interpreting any contractual provision, including preferred stock provisions, must give effect to all terms of the instrument, must read the instrument as a whole, and, if possible, reconcile all the provisions of the instrument.”18
We conclude that under the plain meaning of Omneon’s unambiguous charter language, the Superior Court ruled correctly, for two reasons. First, the “automatic” (i.e., forced) conversion was not a part of a Liquidation Event, because the conversion was not (as the Omneon charter required) a transaction in which Harmonic, or a related entity or Harmonic shareholders acquired Omneon, or voting power in Om-neon. Second, the conversion preceded the merger which, we find, was the only transaction constituting a Liquidation Event. It follows, therefore, that the Series C-l preferred shareholders were common stockholders at the time of the Liquidation Event, and as such were no longer entitled to any liquidation preference payment.
A. The Omneon Charter’s “Liquidation Preference” Framework
Omneon’s pre-merger capital structure was somewhat complex, as it included nine different Series of preferred stock, spread across three preferred classes (Classes A, B, and C). Article (4)(B)(2)(a) of the Om-neon charter (entitled “Liquidation Preference”) stated that “[i]n the event of any voluntary or involuntary liquidation .... distributions to the stockholders of the Company shall be made in the following manner.” Following that statement, in subsection (i), was a list of specific per share liquidation dollar amounts that vary depending on which Series of preferred stock is implicated.19 Of the nine Series of preferred, only two (the Series C-l and the Series A-2.2) were entitled to a liquidation preference distribution that exceeded the consideration being paid by Harmonic in the merger.20 The Series C-l liquidation preference payout was nearly $29 per share, and the Series A-2.2 was far greater — $1,513,032.40 per share.
Two provisions of Omneon’s certificate of incorporation are material to resolving this dispute. The first is Article 4(B)(2)(b) (the “Liquidation Event clause”), upon which the appellants primarily rely. Article 4(B)(2)(b) defines what constitutes a “Liquidation Event” that would entitle the preferred shareholders to a liquidation preference distribution under Article 4(B)(2)(a). Article 4(B)(2)(b) relevantly provides:
(b) Liquidation Event ... a liquidation shall be deemed to be occasioned by, or to include, (i) the acquisition of the Company by any person or entity by means of any transaction or series of related transactions by the Company or its stockholders in which the stockholders of the Company immediately prior to such transaction or series of related transactions own less than 50% of the Company’s voting power immediately after such transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation ....); (ii) the closing of the transfer (whether by merger, consolidation or otherwise), in one transaction or a series of related transactions, by stockholders of the Company to a person or group of affiliated persons ... of the Company’s then outstanding securities *387if, after such closing, such person or group ... would hold 50% or more of the outstanding voting stock of the Company. ... 21
The Series C-l preferred shareholders claim that the conversion was part of a “series of related transactions” that culminated in the merger — i.e., in the “Liquidation Event” described in subsections (i) and (ii) of Article 4(B)(2)(b). Because the conversion constituted a “part” of the Liquidation Event (the argument goes), the Series C-l preferred shares were not converted at the time of the Liquidation Event and, accordingly, were entitled to their liquidation preference payment under Article (4)(B)(2)(a).
Omneon responds, and the Superior Court found, that the conversion was not part of a “series of related transactions” that constituted a Liquidation Event. Only the merger constituted a Liquidation Event. Because the conversion took place before the merger, at the time of the merger the Series C-l preferred shareholders held only common stock that had no “liquidation preference” rights.
To support its position, Omneon points to a separate charter provision (the “provided, however provision”), that is found in Article 4(B)(3)(b) of the charter. Clause (B)(3)(b) authorizes, by majority vote of the preferred shareholders, an “automatic” conversion of all preferred shares into common stock, as follows:
(b) Automatic Conversion. Each share of Preferred Stock shall automatically be converted into ... Common Stock ... upon ... (2) ... the election of the holders of a majority of the outstanding shares of such Preferred Stock voting together as a single class on an as-converted to common stock basis and not as separate series; provided, however, in the event that such conversion is conditioned upon or follows consummation of a Liquidation Event ... then, solely with respect to the Series A-2.2 Preferred Stock, the election of the holders of a majority of the outstanding shares of the Series A-2.2 Preferred Stock (and the holders of all other series of Preferred Stock would then vote together excluding the Series A-2.2 Preferred Stock).22
Importantly, the “provided, however” provision excepts or “carves out” only one Series — the Series A-2.2 preferred — from “automatic” or forced conversion. That is, under the “provided, however” provision, only the Series A-2.2 preferred is entitled to “opt out” of any conversion vote and thereby preserve its contractual right to a liquidation preference distribution. The Superior Court found that if a conversion immediately preceding a merger were deemed a part of a Liquidation Event (as the appellants argued), then all Series of preferred would effectively have the same “opt out”, right as the Series A-2.2. That interpretation would ignore the limited scope of the “provided, however” provision and thereby render it “superfluous.” For the reasons next discussed, we agree with the Superior Court’s reasoning and the result it reached.
B. The Conversion Was Not a Liquidation Event “Transaction”
For the appellants to prevail, the conversion must either constitute, or be a part of, a “Liquidation Event” within the meaning of the Omneon charter. Under Article 4(B)(2)(b) of the Omneon certificate, a Liquidation Event is “deemed” to occur upon: (1) an “acquisition” in which *388the acquirer23 obtains majority voting power “by means of any transaction or series of related transactions” [subsection (b)(i) ] or (2) the closing of the transfer of a majority of voting stock to an acquirer “in one transaction or a series of related transactions” [subsection (b)(ii) ]. Even under the appellants’ proffered interpretation, for the conversion to fall within the definition of Liquidation Event it must — as the Series C-l preferred shareholders argue — be part of a “series of related transactions” as described in that definition, to constitute a part of a “Liquidation Event.” That argument cannot withstand scrutiny.
Both the (b)(i) and (b)(ii) charter provisions plainly refer only to “transactions” that involve an acquirer that gains some incremental “voting power” or stock in each component transaction, and that eventually obtains (for itself or its shareholders) majority voting power at the completion of the “series.”24 The (b)(i) provision describes a person or entity’s acquisition of Omneon “by means of any transaction [or series of transactions] ... in which ” a bloc of majority voting power is transferred from Omneon’s shareholders.25 The (b)(ii) provision similarly requires a “transfer” of a majority of voting stock “to” the acquirer “in a transaction [or series of transactions].”26 The Series C-l shareholders do not claim that subsection (b)(i)’s description of an acquisition “by means of” a series of related transactions has a meaning different from subsection (b)(ii)’s reference to a voting stock transfer occurring “in ” a series of related transactions.27
A fatal flaw in the appellants’ argument is that the acquirer, Harmonic, did not acquire Omneon or any part of its stock (including voting power), let alone majority voting power, in the conversion. Indeed, Harmonic was not an Omneon preferred shareholder at the time of the conversion, and Harmonic did not participate in the conversion. “Courts will not torture contractual terms to impart ambiguity where ordinary meaning leaves no room for uncertainty.”28 Here, the plain language of the Omneon charter makes inescapable the conclusion that Harmonic’s acquisition of Omneon occurred “in,” and was “by means of,” the merger “transaction” — not “in” or “by means of’ the conversion.
Faced with the insurmountable obstacle created by the charter language, the Series C-l preferred shareholders seek refuge in a fallback position. They argue that even if the conversion did not, in and of itself, constitute a Liquidation Event, it was a part (or element) of the Liquidation *389Event, because the conversion was one of a “series of related transactions” that culminated in the merger. We disagree, because no reasonable interpretation of the Liquidation Event clause’s “series of related transactions” language can justify stretching it that far. To do so would transmute the preferred shareholders’ performance of an antecedent condition of the merger (the conversion)29 into a Liquidation Event transaction where Harmonic acquired Omneon (the merger itself). Although those two events were “related” sequentially and factually, they cannot be fused together so as to become “related” legally, and thereby made part of the same Liquidation Event “series.” Any such construction would do violence to the plain language and the underlying intent of clauses b(i) and b(ii), both of which envision aggregating only transactions that transfer voting power from Omneon’s shareholders to a third party. Harmonic played no role, and it received no voting power, in the conversion. The only actors who played any role in the conversion were the preferred shareholders, a majority of whom approved it.
Our analysis of this issue is informed by Bank of New York Mellon Trust Co. v. Liberty Media Corp.30 In that case, we (and both parties to that dispute) described the contractual phrase “series of transactions” as intended to prevent “accomplishing piecemeal ... what is specifically precluded if attempted as a single transaction.”31 Liberty Media involved a different legal issue — whether, on the facts of that case, a transaction could be aggregated with earlier transactions to constitute a sale of “substantially all” of a corporation’s assets within the meaning of a boilerplate indenture clause governed by New York law. Although it does not cite Liberty Media specifically, Omneon essentially argues that the “series of related transactions” language here carries the same meaning ascribed to nearly identical language32 in Liberty Media. That is, Omneon argues that “series of related transactions” is anti-circumvention language, intended to prevent Omneon and Harmonic from evading the Liquidation Event definition (and, consequently, avoiding an otherwise mandated liquidation preference payment), such as by a “creeping” acquisition.33
We agree. Without that “series” language, the literal requirements for a Liq*390uidation Event to occur could easily be circumvented by, for example, acquiring majority voting stock in two discrete share purchases — a 49% stake in the first transaction followed by a 2% position in a second transaction. Unless the two purchases are considered together as one, neither “transaction,” viewed in isolation, would qualify as a Liquidation Event. We conclude that here, Omneon’s Liquidation Event clause employs the “series” language for an anti-circumvention purpose. The Series C-l preferred shareholders have proposed no reasonable alternative reading of “series of related transactions,” nor do they claim that Omneon or Harmonic inequitably employed the conversion to evade the occurrence of (and the legal consequences flowing from) a Liquidation Event.34
C. Only the Series A-2.2 Was Entitled to “Opt Out” of the Conversion
The “provided, however” provision confirms the validity of the foregoing analysis, by giving effect to “all terms” of the Om-neon charter, as our rules of contract construction require.35 The “provided, however” provision expressly gave the Series A-2.2 preferred the exclusive right to “opt out” of a conversion that is either (i) “conditioned upon,” or (ii) that “follows” the “consummation of a Liquidation Event.”36 No other Series of preferred was given that right. It is undisputed that the merger, standing alone, was a Liquidation Event under the charter definition.37 It is also undisputed that the conversion was a (waivable) condition of the merger, having been so described in the Harmonic-Om-neon merger agreement.38 Moreover, Om-neon has represented, and the Series C-l preferred shareholders have not disputed, that the merger was also a condition of the conversion. Therefore, the conversion was “conditioned upon” a Liquidation Event (the merger) — a circumstance that triggered the Series A-2.2 preferred’s right to “opt out” of the conversion.
The Superior Court determined, and we agree, that the “provided, however” provision would be “superfluous” if the Series C-l preferred shareholders were entitled to the same “opt out” right as the Series A-2.2 under the Liquidation Event clause.39 The drafters of these provisions plainly considered the possibility that a conversion might be integral to, and precede, a Liquidation Event — but that those two transactions would nonetheless constitute legally separate events (“transactions”). Here, all but two of the relevant Series of preferred had the requisite eco*391nomic motivation (the merger premium) to approve the conversion. That is, the Harmonic merger gave all but two of the nine Series of preferred an incentive to convert — an incentive made possible only because of the preexisting “automatic” conversion charter mechanism.40 Only the Series A-2.2 preferred bargained for the right to avoid that automatic conversion possibility and thereby protect its entitlement to receive a liquidation preference payout, even if the other Series decided (by majority vote) to forego it. The Series C-l preferred did not bargain for or obtain that contractual “opt out” right. They cannot now obtain from the courts a right that they failed to achieve at the bargaining table.
D. The C-l Preferred Held Common Stock At the Time of the “Liquidation Event”
Finally, and to reiterate, under the charter, Omneon’s preferred shareholders were entitled to their liquidation preference “[i]n the event of” — not before — “any ... liquidation ... of the Company.”41 Here, only the merger constituted a cognizable Liquidation Event under the charter definition, and the merger occurred after the conversion. To be entitled to their liquidation preference payment, the preferred shareholders would have to have been preferred shareholders at the time of the merger. They were not. Because the conversion validly converted the Series C-1 preferred into common shares before the Liquidation Event (the merger), the Series C-l shareholders were no longer entitled to any liquidation preference at the time the merger took place.
CONCLUSION
For the reasons stated above, the judgment of the Superior Court is affirmed.
. The appellants are two affiliated investment partnerships organized under Dutch law ("Alta Berkeley”), plus a corporation organized under Portuguese law (“Kiwi”).
. Article 4(B)(2)(b) of the Certificate of Incorporation of Omneon, Inc., State of Delaware, Division of Corporations (as restated Dec. 5, 2007).
. Id. at Article 4(B)(2)(a).
. Id. at Article 4(B)(2)(a)(i). Four of the nine Series of preferred were not entitled to any liquidation preference payment.
. Id. The value of the merger consideration, consisting of roughly 60% cash and 40% Harmonic stock, was estimated at $11.10 per share by the Superior Court. If the liquidation payment was required, the Series C-l preferred shareholders would have been entitled to a distribution of $28.78 per share. Because those Series C-l preferred shareholders owned 311,970 shares, according to their complaint, the liquidation payment exceeded by over $5.5 million the value of the merger consideration they received.
.The merger agreement contemplated that a second merger with another Harmonic acquisition vehicle would occur thereafter. For reasons not relevant to this appeal, that second merger did not occur.
. By agreeing to the conversion, the preferred shareholders would forego their contractual right to any liquidation preference payout that would otherwise be triggered by the merger.
. After the Omneon-Harmonic merger agreement was signed in May 2010, but before the merger was consummated, Harmonic sought approval from the California Department of Corporations to issue and sell securities required to complete the Omneon merger. Alta Berkeley objected to the fairness of the proposed transaction, arguing that it was owed its liquidation preference payout. A fairness hearing was held by the California Department officials on July 19, 2010. Ultimately, those officials approved the transaction on the ground that, under Omneon’s charter, only the Series 2.2 shareholders were entitled to receive a liquidation payout. California officials later issued a permit to Harmonic to issue the securities to be used as part of the merger consideration.
. Article 4(B)(2)(b) of the Certificate of Incorporation of Omneon, Inc., State of Delaware, Division of Corporations (as restated Dec. 5, 2007).
. Id. at Article 4(B)(2)(a).
. Id. at Article 4(B)(3)(b). See infra notes 35-40 and accompanying text.
. 8 Del. C. § 151(a) (“Every corporation may issue 1 or more classes of stock ... [with such] ... preferences ... as shall be stated ... in the certificate of incorporation or of any amendment thereto [or by board resolution if expressly allowed by the charter]”) (italics added); Elliott Assoc., L.P. v. Avatex Corp., 715 A.2d 843, 853 n. 46 (Del.1998) ("Stock preferences must ... be clearly expressed and will not be presumed.”) (citation omitted).
. Airgas, Inc. v. Air Prod. and Chem., Inc., 8 A.3d 1182, 1188 (Del.2010) (citing Centaur Partners, IV v. Nat'l Intergroup, Inc., 582 A.2d 923, 928 (Del.1990)).
. Airgas, 8 A.3d at 1188.
. City Investing Co. Liq. Trust v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del.1993) ("If a writing is plain and clear on its face, i.e., its language conveys an unmistakable meaning, the writing itself is the sole source for gaining an understanding of intent.”) (citation omitted).
. E.I. du Pont de Nemours & Co. v. Allstate Ins. Co., 693 A.2d 1059, 1061 (Del.1997).
. GMG Cap. Invest., LLC v. Athenian Venture Part. I, L.P., 36 A.3d 780 (Del.2012). See also Rhone-Poulenc Basic Chem. Co. v. Am. Motor. Ins. Co., 616 A.2d 1192, 1196 (Del.1992) ("[A] contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.”) (citation omitted).
. Elliott Assoc., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del.1998).
. Article 4(B)(2)(a)(i) of the Certificate of Incorporation of Omneon, Inc., State of Delaware, Division of Corporations (as restated Dec. 5, 2007).
.Four Series had no liquidation preference right at all.
. Italics added.
. Italics added.
. In this Opinion, general references to an "acquirer” are intended to refer to an acquiring corporation, its shareholders or related subsidiaries, entities and affiliates.
. Id. We note that subsection (b)(i) uses the phrase "voting power,” whereas subsection (b)(ii) refers to "outstanding voting stock.” Whatever possible difference exists between these terms is not before us in, nor relevant to, this appeal.
. Id. (italics added). The phrase "by means of” is an idiomatic expression in which the word "means” refers to "an action or system by which a result is achieved.” American Heritage Dictionary (defining "by means of” as "with the use of; owing to”); Oxford Dictionaries (defining "means” as "an action or system by which a result is achieved; a method”).
. Article 4(B)(2)(b) of the Certificate of Incorporation of Omneon, Inc., State of Delaware, Division of Corporations (as restated Dec. 5, 2007) (italics added).
. Id. (italics added).
. Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.1992).
. Among the other “conditions” expressly detailed in the merger agreement were: (i) stockholder approval; (ii) that all "representations and warranties” made remained materially true on the closing date; (iii) the execution of certain waivers regarding "parachute payments”; (iv) the termination of certain Omneon contracts; and (v) retention of a pre-specified number of Omneon employees. Agreement and Plan of Reorganization, By and Among Harmonic Inc., Orinda Acquisition Corp., Orinda Acquisition, LLC, Omneon, Inc., and Shareholder Representative Services LCC, as representative (May 6, 2010).
. 29 A.3d 225 (Del.2011).
. Id. at 241-42 (citation and italics omitted).
. The phrase here includes the word "related,” whereas in Liberty Media it did not. Id. at 229.
. Specifically, Omneon posits that the "series of related transactions” language is intended to "captur[e] a group of transactions which, individually, do not result in the change of 50% of Omneon's stock, but which do effect such a change when considered together.” The merger, Omneon notes, "by itself suffices to trigger a Liquidation Event,” and thus the conversion "was not ... a part of the Liquidation Event." Cf. Liberty Media, 29 A.3d at 241 (stating that both parties acknowledged "that the ‘series of transactions’ language in [an] Indenture [was intended to guard against] the risks posed by the ‘piecemeal’ disposition of assets through 'a series of transactions.' ”).
. Article 4(B)(2)(b) of the Certificate of Incorporation of Omneon, Inc., State of Delaware, Division of Corporations (as restated Dec. 5, 2007). Nor is it obvious how they could have, because only the preferred shareholders (and neither Omneon, nor Harmonic) were entitled to a vote on the conversion.
. Elliott Assoc., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del.1998).
. Article 4(B)(3)(b) of the Certificate of Incorporation of Omneon, Inc., State of Delaware, Division of Corporations (as restated Dec. 5, 2007).
. Id. at Article 4(B)(2)(b).
. Art. VII (entitled "Conditions to the merger"). Agreement and Plan of Reorganization, By and Among Harmonic Inc., Orinda Acquisition Corp., Orinda Acquisition, LLC, Om-neon, Inc., and Shareholder Representative Services LCC, as representative (May 6, 2010).
. Specifically, the Superior Court observed that the provided, however clause "sets the Series A2.2 preferred shareholders [sic] apart from all other preferred shareholders ... [and any] other reading of that provision would ... leave the Series A-2.2 Preferred Stockholders [sic] to scratch its head and wonder exactly what it had bargained for.”
. Even before the merger agreement and voting “lockups” were entered into, the Series C-l shareholders held their preferred shares subject to, at any time, an "automatic" conversion by vote of a simple majority of the preferred shareholders.
. Article 4(B)(2)(a) of the Certificate of Incorporation of Omneon, Inc., State of Delaware, Division of Corporations (as restated Dec. 5, 2007) (italics added).
5.3 Anti-Dilution Protection 5.3 Anti-Dilution Protection
Anti-dilution provisions provide series investors downside protection in the event a subsequent financing round is priced at less than the current round. In the absence of anti-dilution protections, series investors would be diluted in subsequent down rounds. Anti-dilution protections adjust the conversion feature of preferred stock in order to assure that any dilution that might occur is either borne entirely, or at least in part, by the common stockholders and not by the preferred stockholders.
Like other aspects of preferred stock rights, anti-dilution protections are heavily negotiated and courts will not seek to rescue preferred stockholders from their own inartful drafting.
5.3.1 Broad-based Anti-dilution protection 5.3.1 Broad-based Anti-dilution protection
Series investors understand that future investments are going be dilutive. For the most part, series investors are not opposed to future dilutive investments. Why is that? Well, if, as they hope, the future investments are at higher valuations, current investors will have a smaller, but larger, piece of the economic pie. the increase in value is usually enough to assuage concerns of future investments that are dilutive with respect to control. However, if future investments are a lower valuations than the current valuation (e.g. "down-rounds"), series investors are less sanguine. Future lower valuations lead to stock issuances that are not only dilutive of control, but also of the economics - a smaller piece of a smaller pie. No one is happy about that. Consequently, series investors will rely on anti-dilution protections to ensure that in the event of future dilutive financings attributable to lower valuations that common stockholders (founders) bear most of the cost of the dilution rather than the series investors.
Series investors do this by adjusting the conversion ratio from 1:1 to a rate that reduces the amount of dilution they have to accept with a subsequent down round financing such that the current series investors are able to convert their series shares to common stock at the same price as future down-round investors. This "full ratchet" forces all of the adverse consequences of down-round dilution onto common stockholders.
The full ratchet is obviously extremely investor friendly. Rather than rely on that approach the vast majority of financings rely on a broad-based weighted average anti-dilution provision that permits series investors to reprice their conversion rates in the event of a down round so that the costs of a dilution are shared between the common stockholders and the series investors and not all placed on the heads of either group.
Below, you will find sample language for a broad-based weighted average formula that is commonly used to protect series investors from the adverse consequences of a dilutive down-round.
(i) If at any time or from time to time on or after the Original Issue Date the Company issues or sells Additional Shares of Common Stock less than the then effective Series Preferred Conversion Price (a “Qualifying Dilutive Issuance”), then the then existing applicable Series Preferred Conversion Price shall be reduced to a price determined by multiplying the applicable Series Preferred Conversion Price in effect immediately prior to such issuance or sale by a fraction equal to:
(A) the numerator of which shall be (1) the number of shares of Common Stock deemed outstanding (as determined below) immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the Aggregate Consideration (as defined below) received or deemed received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such then-existing Series Preferred Conversion Price, and
(B) the denominator of which shall be (1) the number of shares of Common Stock deemed outstanding immediately prior to such issue or sale plus (2) the total number of Additional Shares of Common Stock so issued.
For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock outstanding, (B) the number of shares of Class B Common Stock into which the then outstanding shares of Series Preferred could be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of Common Stock which are issuable upon the exercise or conversion of all other rights, options and convertible securities outstanding on the day immediately preceding the given date.
5.3.2 Amazon.com, Inc. v. Hoffman 5.3.2 Amazon.com, Inc. v. Hoffman
Amazon.com, Inc.
v.
Hoffman, et al.
Court of Chancery of Delaware.
Letter Opinion
JOHN W. NOBLE, Vice Chancellor.
Dear Counsel:
Plaintiff Amazon.com, Inc. ("Amazon") is the only holder of Series A preferred shares of Defendant Basis Technology Corporation ("Basis"), a Delaware corporation. Amazon acquired those shares in 1999 in accordance with the Series A Preferred Stock Purchase Agreement (the "Agreement") which incorporated and implemented the Certificate of Designation (the "Designation"). By Section C(5)(c) of the Designation, Amazon had the right to convert its preferred shares into Basis common stock at a price of $2.72 per share; in 2001, the conversion rate was adjusted to $1.36 per share.
In order to protect its equity position in Basis, Amazon negotiated an anti-dilution provision. By Section C(5)(d)(i) of the Designation and in accordance with Article IV, Sections (B)(4)(a) & (B)(4)(d)(i) of Basis's Amended and Restated Certificate of Incorporation (the "Charter"), the conversion price would be adjusted in Amazon's favor if Basis issued any new stock at a price (or conversion equivalent) less than $1.36 per common share.
* * *
Amazon challenges two transactions in which Basis issued new preferred stock, convertible into common stock, for $1.39 per share, a price that Amazon concedes was above fair value. Amazon contends that the price was set to allow Basis to avoid the Amazon-protective anti-dilution feature tied to the $1.36 per share conversion price. In short, it alleges that the individual defendants—the directors of Basis—breached their fiduciary duties by engaging in a concerted effort to avoid triggering Amazon's anti-dilution rights. In addition, Amazon alleges that the defendant directors issued the additional shares without due consideration of the potential impact on Amazon's interests. This conduct, Amazon argues, also breached the Agreement's and the Charter's implied covenant of good faith and fair dealing. Amazon seeks an award of damages.
* * *
Basis, in 2004 and in 2006, issued to In-Q-Tel its Series B Preferred shares at a price only three cents above the anti-dilution trigger. First, in 2004, Basis issued 466,827 shares of Series B Preferred stock to In-Q-Tel as part of a larger transaction that included a payment by In-Q-Tel of $150,000 for "software and licensing rights to certain early stage technology" (the "2004 Transaction"). The Series B Preferred shares were issued for $1.39 per share and could be converted into common shares on a one-to-one ratio. Second, in 2006, In-Q-Tel acquired additional Series B Preferred shares, this time 804,352 of them, again for $1.39 per share (the "2006 Transaction"). Amazon, in these proceedings, challenges both the 2004 Transaction and the 2006 Transaction.
The individual defendants comprise Basis's board of directors. Carl W. Hoffman, Basis's chairman and chief executive officer, controls approximately 85% of its common stock. Steven Cohen, who owns roughly 11% of Basis's common stock, is executive vice president and vice president for product development. Amazon's Amended Complaint does not allege that either Hoffman or Cohen has any special relationship with In-Q-Tel.
* * *
Before the Court is Defendants' motion, under Court of Chancery Rule 12(b)(6), to dismiss the Verified Amended Complaint for failure to state a claim upon which relief can be granted. A motion to dismiss for failure to state a claim requires the Court to assume the truth of all well-pled allegations of the Complaint and to confer upon the plaintiff the benefit of all reasonable inferences that can be drawn from such allegations. Dismissal is inappropriate unless "it appears with a reasonable certainty that the plaintiff would not be entitled to the relief sought under any reasonable set of facts properly supported by the complaint."
* * *
Amazon sponsors an unusual argument: Basis's board of directors issued stock at too high of a price. This is not a claim sounding in waste; it is not the typical allegation of a sweetheart deal resulting in the cheap sale of newly issued stock to the detriment of other shareholders. Instead, Amazon tenders a more complicated argument. It contends that the issuance of Basis preferred stock to InQTel must be assessed within the context of a multi-faceted overall business relationship that involved both an equity investment by In-Q-Tel and a sale by Basis to In-Q-Tel of software licensing rights. Perhaps the concern is that although the stock was priced above $1.36 per share, the software licensing rights were sold too cheaply. In other words, part of the licensing payments were moved to payment for the stock, giving the appearance that the stock was issued for more than the parties valued it themselves.
Basis could not issue stock at less than $1.36 per share without triggering the anti-dilutive provisions of the Agreement. It satisfied the terms of the Agreement— the stock was issued above the trigger price. The parties had negotiated this trigger; the Agreement does not provide for any anti-dilution rights in the event that stock is issued for $1.36 per share or above.
Amazon alleges that the $1.39 per share price was established without sufficient process. It asserts that the defendant directors met only once with respect to the various sales but, nevertheless, came to the exact same price even though, one would assume, the economics of the industry and the fiscal situation of Basis must have changed with time. Documents produced by Basis in response to Amazon's inspection of Basis's books and records under 8 Del. C. § 220 fail to reveal any effort by the directors to inform themselves of the value (or proper issue price) of Basis stock. Legal and financial advisors did not play an active role in arriving at the issue price. Amazon also complains that no specific consideration was given to the consequences of the stock issuance on the rights of preferred shareholders. These omissions, Amazon reasons, constitute a breach of the duties of loyalty and care owed by the defendant directors.
In order to establish a breach of the duty of loyalty by an unconflicted board—one not tainted by self-interest or a lack of independence—Amazon must show that the directors "knowingly and completely failed to undertake their responsibilities . . . ." The decision to issue stock at a price higher than its fair value—as conceded by Amazon—simply does not satisfy that standard. Amazon has not explained how a director who authorized the sale of company stock for more than its fair value can be said to have acted disloyally or otherwise not in the best interests of the corporation and its various shareholders.
It is at least arguable that the absence of any real effort to determine an accurate and appropriate issuance price amounted to a violation of the defendant directors' duty of care. The Charter has a Section 102(b)(7) exculpatory clause to protect its directors against monetary liability for breach of the duty of care. In the absence of any basis to question their loyalty and good faith, they are protected by that charter provision.
Amazon notes that Hoffman owns approximately 85% of Basis's common stock and then argues that Cohen, as executive vice president, is beholden to him for his livelihood and position with the company. Thus, according to Amazon, because the two directors comprise half of Basis's board, the actions of the board cannot be considered the product of an independent and disinterested board. Amazon alleges that as the controlling shareholder, Hoffman benefited from the issuance of stock to In-Q-Tel to the detriment of Amazon. If one accepts the Amended Complaint's allegations as sufficient to call into question Cohen's independence, then Amazon may be correct in arguing that the actions of the board were not independent of Hoffman's influence and control. What Amazon cannot explain, however, is how the two transactions resulting in the issuance of additional Series B Preferred shares somehow were transactions in which Hoffman was interested or from which he drew a benefit separate and distinct from his status of a common stockholder. There is no allegation of any relationship between Hoffman and In-Q-Tel. There is no allegation that Hoffman somehow specially benefited from the sale of stock to a third party at price above its fair market value. Amazon, however, does contend that Hoffman was motivated by his status as common stockholder to treat at lease one holder of preferred shares inequitably.
Thus, the debate comes down to question of whether some fiduciary duty owed directly (and apart from any duty owed to the common shareholders) to the preferred shareholders is implicated. Putting aside the authority that preferred stockholders have no fiduciary duty claims against directors that are not also fiduciary duty claims of common stockholders, Series B Preferred stock (convertible into an equal number of common shares) was issued at a price greater than fair value. The relationship between Amazon and Basis was defined specifically in the Agreement and included a specific understanding as to the minimum price at which stock would be issued. In the 2004 Transaction and the 2006 Transaction, the Agreement's negotiated protective provisions were not implicated. This is not a case where shares were issued for less than fair value and thus, might have had a dilutive effect (but that would have been a claim shared with the common shareholders). In short, there was no breach of fiduciary duty and, to the extent that there might have been one in the nature of the duty of care, the exculpatory provision in the Charter precludes the pursuit of any such claim.
* * *
Amazon next argues that the issuance of stock at a price of $1.39 per share violated the covenant of good faith and fair dealing implicit in all Delaware contracts. The covenant of good faith applies when the "contract is truly silent with respect to the matter at hand, and only when the Court finds that the expectations of the parties were so fundamental that it is clear that they did not feel a need to negotiate about them." The contractual requirements, set forth in the Designation, negotiated by Amazon, expressly and clearly define its rights with respect to this topic. If additional shares are issued at less than $1.36 per share, the anti-dilution provisions come into play. The Agreement, of course, does not expressly address what is to happen if shares are issued at a price equal to or greater than $1.36 per share, but the only plausible inference is that the parties considered the issue and reached agreement as to what price would trigger anti-dilution protection. The specific threshold to which Amazon and Basis agreed defines the scope of the negotiated agreement; it cannot be said that "the expectations of the parties [if shares of common stock were issued for $1.36 per share or more] were so fundamental that it is clear that they did not feel a need to negotiate about them."
To the contrary, the parties' understanding was obvious as to their expectations with respect to issuance of shares at a price not less than $1.36 per share. Here, Amazon obtained the protection (i.e., the fruits of its bargain) for which it had negotiated. It sought and obtained anti-dilution protection from having shares issued below a certain price. That shares were issued above that price (and also above fair value) does not impair the shared objectives manifested in the Designation. In summary, the Amended Complaint does not state a claim for breach of the covenant of good faith and fair dealing.
* * *
For the foregoing reasons, the Amended Complaint is dismissed. Amazon is granted leave to amend to assert any claim that it may have had as a common stockholder with respect to the 2006 Transaction.
IT IS SO ORDERED.
5.3.3 Choupak v. Rivkin 5.3.3 Choupak v. Rivkin
MICHAEL CHOUPAK and SERGUEI SOFINSKI, Plaintiffs,
v.
VLADIMIR RIVKIN, Defendant.
Court of Chancery of Delaware.
LASTER, Vice Chancellor.
In early 2000, plaintiff Michael Choupak promised defendant Vladimir Rivkin that he would receive 4% of the equity of Choupak's start-up company. Later in 2000, Choupak signed a stock option agreement granting Rivkin an option for 2,000,000 shares that would vest over four years. In 2001, Choupak permitted Rivkin and other senior employees to exercise all of their options and pay the strike price with unsecured notes. Rivkin received 2,000,000 shares of common stock, equal to 4.4% of the equity.
In 2008, Rivkin needed cash, and he sold his shares for $300,000 to Choupak and another executive, plaintiff Serguei Sofinski. In 2011, Choupak sold his company to Oak Hill Capital Partners for $127,500,000 (the "Oak Hill Merger"). Rivkin wanted some of that money. He dug up his employment agreement and his original stock option agreement and noted that they referred to shares of "preferred stock" rather than "common stock." He wrote to Choupak and asserted that he had never received shares of preferred stock representing 4% of the equity. He purported to exercise his option for preferred stock and demanded that Choupak either issue him the shares or turn over 4% of the proceeds from the Oak Hill Merger. He also accused Choupak of defrauding him when purchasing his shares in 2008.
Choupak and Sofinski filed this lawsuit. They sought declarations that Rivkin received more than 4% of the equity when he was issued his shares of common stock, that Rivkin never had a right to an additional 4% of the equity in the form of shares of preferred stock, and that they validly purchased Rivkin's shares in 2008 without engaging in fraud. Rivkin responded with counterclaims and third party claims, the gist of which was that Rivkin should get his preferred stock or money damages.
This decision enters judgment against Rivkin on all counts and shifts fees against him under a contractual provision in Rivkin's employment agreement. Separately, in light of the numerous and striking problems with Rivkin's testimony, his fabrication of critical documents, and his discovery misconduct, this decision shifts fees against him under the bad faith exception to the American Rule.
I. FACTUAL BACKGROUND
Trial took place on January 21, 2015. The following facts were proven by a preponderance of the evidence.
A. Choupak Founds Intermedia.
In 1993, Michael Choupak founded Intermedia[1] to provide website hosting services to local businesses in Minneapolis. Today, Intermedia is a successful national provider of cloud-based, business-class email services.
In 1995, during the early stages of the dot-com era, Choupak moved the Company's operations to Palo Alto. Two years later, Choupak hired Sofinski, a hosting manager, and Constatin Filin, a software engineer, to help the Company transition its business from websites to email services. Cash was tight, and stock was part of Silicon Valley's culture, so Choupak promised stock options to Sofinski and Filin.
B. Rivkin Joins Intermedia.
In late 1999, Choupak met Rivkin, who was working as a real estate broker. Rivkin had recently graduated from law school, and Choupak thought he could help with various projects at Intermedia, including (i) organizing and cleaning up the corporate books and records, (ii) preparing a stock option plan, (iii) resolving a dispute with a former employee, and (iv) raising capital. Choupak hoped to delegate these tasks to Rivkin and others so he could focus on expanding Intermedia's business.
Rivkin had not yet passed the bar (he never did). He told Choupak that in California, passing the bar was not a prerequisite to practicing law in-house. That representation was inaccurate.[2]
In March 2000, Rivkin started work. In an email sent to all employees on March 13, Choupak welcomed Rivkin, stating: "I should have made this announcement two weeks ago before you had a chance to meet or speak with Gregg Eyman and Vladimir Rivkin. Both are joining Intermedia.NET this month." JX 14.
Because of Intermedia's financial limitations, Choupak and Rivkin agreed that Rivkin would work on a part-time, as-needed basis. In return for his services, Rivkin would receive 4% of the Company's equity, and his 4% interest would not be diluted by subsequent issuances. At the time, neither of them understood how anti-dilution protection worked; they just knew Rivkin would not receive less than 4% of the equity. Intermedia paid Rivkin a token salary of $1 per month, because Rivkin believed that he could obtain superior tax treatment for his equity if he received nominal cash compensation as an employee. Choupak told Rivkin that any more significant cash compensation was "a future topic to be discussed once we have the first round completed (money in the bank)." JX 38.
In July 2000, Rivkin prepared an employment agreement for himself using the Company's standard form as a template. JX 43 (the "Employment Agreement"). Rivkin backdated it to March 1, 2000, reflecting when he started at Intermedia. Rivkin added a new section to document his agreement with Choupak about equity compensation:
Employee shall receive options to purchase 4% of the company's preferred stock at a price of $00.15 per share, vested over a period of four years. The vesting shall be on monthly basis, and occur on the first of each month, starting on March 1st, 2000. Anti-Dilution shall apply until initial public offering or acquisition of the Company by another private or public entity. The provisions of the stock option agreement and stock option plan shall govern the stock option benefit(s). In case company re-incorporates, merges or uses another instrument to change corporate form, employee shall be issued equivalent percentage of stock from the new entity, resulting from the re-incorporation, merger or other change of form instrument.
JX 43 § 5(e) (emphasis added).
Section 5(e) spoke of "preferred stock" without providing any details. It did not identify a class or series of preferred stock, and there were no references to rights, powers, preferences, limitations, or other features. At the time, Intermedia was not authorized to issue preferred stock. Although Choupak later amended the Charter to authorize blank check preferred, he never designated any particular series of preferred stock, and no shares of preferred stock were ever issued. The Employment Agreement referenced a security that did not exist and failed to specify in what ways the non-existent security would be "preferred" over the common stock.
Similar problems afflicted the term "Anti-Dilution." The Employment Agreement did not include any provisions to implement that general concept. Anti-dilution comes in multiple forms, with weighted-average and full-ratchet protection being the most common. When stock option agreements, warrants, certificates of designation, and other corporate documents provide for anti-dilution protection, they establish triggering events, formulas for the calculations, and implementing procedures. With the Employment Agreement, there was no way to determine how the anti-dilution concept would operate.
The lack of detail rendered the terms "preferred stock" and "anti-dilution" ambiguous. Having considered the evidence, I find that by using these terms, Rivkin tried to document his right to receive 4% of Intermedia's equity and the fact that his ownership percentage would not drop below the 4% figure. By using the term "preferred stock," Rivkin contemplated a stock that had a preference in the form of anti-dilution protection. By using the term "Anti-Dilution," he sought to specify the nature of the preference. At trial, Rivkin could not name any other right, power, or preference that he thought the preferred stock had. Tr. 81-83.
Choupak signed the Employment Agreement without focusing on the references to preferred stock and anti-dilution. He trusted Rivkin, and he often signed documents that Rivkin presented without paying much attention. Choupak acknowledged that he remained responsible for what he had signed. ...
D. The Capitalization Table
Beginning in November 2000, Rivkin worked with Silicon Valley Law Group ("SVLG") to create and maintain a capitalization table for Intermedia (the "Cap Table"). For each employee on the list, the Cap Table identified the individual's date of hire, salary, the number of shares that the employee owned or had an option to purchase, and the exercise price for the option.
Rivkin maintained the Cap Table from 2000 to 2002. The early versions listed Rivkin's date of hire as March 1, 2000, consistent with his Employment Agreement and historical events. In later versions, Rivkin moved his date of hire back to November 20, 1999, which brought forward the vesting of his options and lowered his exercise price.
Notwithstanding Rivkin's manipulation of his hire date, every version of the Cap Table listed Rivkin as owning an option to purchase 2,000,000 shares of common stock. There is not one reference in any version of the Cap Table to Rivkin having an option to purchase preferred stock, much less an option to purchase 2,000,000 shares of preferred stock in addition to an option to purchase 2,000,000 shares of common stock.
E. Rivkin And Other Senior Employees Acquire Common Stock.
Early in 2001, Choupak decided to let his senior employees exercise all of their options. To facilitate the exercise, Choupak decided that the senior employees could pay the strike price by executing unsecured notes. On February 2, 2001, Rivkin informed SVLG of Choupak's decision and instructed the firm to prepare the necessary documents. Rivkin did not mention to SVLG that he had an option for preferred stock.
Rivkin did notice that Filin, who had started work in 1997, had an exercise price of $0.009 per share, the lowest of any employee. Rivkin told SVLG that he should have the same exercise price "due to [his] starting around that time, and not becoming `full time' until [November 20, 1999]." JX 86. Every part of that statement was false: Rivkin did not start work in 1997, he did not start full-time in November 1999, and he should not have had an exercise price of $0.009 per share.
To document the exercise, each senior employee executed a Restricted Stock Purchase Agreement (the "RSPAs"), a promissory note for the exercise price, and a security agreement which provided that the shares would revert to Intermedia if the note was not timely paid. The notes required repayment on or before February 27, 2003.
The RSPAs were given effective dates of February 27, 2001. The recitals to each agreement referenced the employee's original hiring date and an oral agreement to grant stock options as of that date. Except for Rivkin's RSPA, the recitals accurately reflected the hiring dates on the Cap Table. Rivkin's RSPA referenced a fictitious hiring date of November 20, 1997. JX 92. That date was false: Rivkin was not an Intermedia employee in 1997. He picked that date to give himself the lowest possible exercise price. Thanks to the lower exercise price, Rivkin executed a note for $18,000, rather than a note for $300,000 at his actual exercise price of $0.15 per share.
On February 27, 2001, Rivkin received a certificate for 2,000,000 shares of Intermedia common stock. The shares represented 4.4% of Intermedia's outstanding equity, more than the 4% Choupak had promised him.
Even though Choupak permitted Intermedia's senior employees to exercise all of their options and pay with an unsecured note, Rivkin did not attempt to exercise an option for 2,000,000 shares of preferred stock. At trial, Rivkin could not explain why, assuming he also held the Preferred Stock Option for another 4% of the equity, he would not have exercised it at the same time on the favorable terms Choupak was offering.
F. Rivkin Loses Interest In Intermedia But Remains Friends With Choupak.
By late 2001, after the dot-com bubble burst, Rivkin lost interest in Intermedia. He had always worked from home, but he visited the office frequently to meet with Choupak and have him sign documents. With the prospect of equity-based riches receding, Rivkin's visits became rare. Eventually he stopped showing up, choosing to concentrate on the real estate business that he owned with his father.
Although Rivkin was no longer working for Intermedia, he and Choupak remained friends. They met for meals and vacationed together. Rivkin also continued to draw his $1 per month salary. No one noticed that automated payment until 2009, when William Gomes, the Company's CFO, learned of it and stopped it.
G. Rivkin Sells His Common Stock To Choupak And Sofinski.
In 2008, the real estate crash put Rivkin under financial duress. His home was in foreclosure, and several of his real estate properties were underwater. To generate cash, Rivkin asked Choupak to consider buying his 2,000,000 shares of common stock. But Rivkin discovered a problem: he had not repaid his promissory note by February 27, 2003, so his shares had reverted to Intermedia. Rivkin explained the problem to Choupak and noted that Intermedia's other senior employees likely faced the same difficulty. To remedy the issue, Choupak signed new stock purchase agreements that superseded the RSPAs. The replacement agreements included substitute promissory notes that were not due until May 1, 2009. The new documents were backdated with an effective date of May 1, 2001, but Choupak signed them in July 2008.
Rivkin's new stock purchase agreement changed the date on which he purportedly started at Intermedia and received an oral promise of options. The original RSPA recited the date of that event as November 20, 1997. His replacement agreement said it occurred on December 15, 1997. The dates in the replacement agreements for the other employees matched their RSPAs. The discrepancy in Rivkin's agreements resulted from his practice of manufacturing fictitious dates for ahistorical events.
With the replacement agreement in place, Rivkin sold his Intermedia common stock to Choupak and Sofinski for $300,000. Choupak purchased 1,500,000 shares, and Sofinski purchased 500,000. The value Rivkin received was actually $318,000, because Choupak never insisted that Rivkin pay off his $18,000 note. The value Rivkin received was arguably $600,000, because Rivkin's note should have been for $300,000.
The parties documented the transaction in a written stock transfer agreement. JX 132 (the "Stock Transfer Agreement"). Rivkin executed an affidavit of lost stock certificate. The affidavit was false: Rivkin still had his stock certificate, which he produced in this litigation.
H. The Oak Hill Merger
In 2010, Oak Hill and Choupak had preliminary discussions about Intermedia. In March 2011, the discussions resumed. On May 5, Intermedia and Oak Hill entered into a merger agreement. JX 149 (the "Merger Agreement").
The Merger Agreement reflected that Intermedia only issued common stock. In Section 4.5(a), Intermedia represented that as of the date of the Merger Agreement,
(i) 45,002,972 shares of Common Stock are issued and outstanding and held by Company Stockholders as reflected in Section 4.5(a) of the Disclosure Schedule, (ii) 14,528 shares of Common Stock have been issued and are held in the treasury of the Company, and (iii) the Company has not issued any preferred stock. . . .
Id. § 4.5(a). Schedule 4.5(a) did not identify Rivkin as a stockholder and did not list anyone as holding preferred stock. See id. at Sched. 4.5(a).
The Merger Agreement likewise reflected that Intermedia had not issued any options to purchase preferred stock. In Section 4.5(c), Intermedia represented that
[e]xcept pursuant to the Stock Option Plan or as listed in Section 4.5(c) of the Disclosure Schedule, neither the Company nor any Company Subsidiary nor Choupak is bound by or subject to any (i) preemptive or outstanding rights, subscriptions, options, warrants, conversion, put, call exchange or other rights, agreements, commitments, arrangements or understandings of any kind pursuant to which the Company or any Company Subsidiary, contingently or otherwise, is or may become obligated to offer, issue, sell, purchase, return or redeem, or cause to be offered, issued sold, purchased, returned or redeemed, any Company Securities. . . .
Id. § 4.5(c). The defined term "Stock Option Plan" did not refer to the 2000 Plan but to a later 2008 Equity Incentive Plan. Id. at 17. The defined term "Company Securities" meant "any interests in share capital or other ownership interests in, or securities of, the Company or any Company Subsidiary," encompassing preferred stock. Id. at 6. Schedule 4.5(c) did not list Rivkin as having any outstanding options, nor anyone as having options to purchase preferred stock. See id. at Sched. 4.5(c).
Consistent with these representations, the sections of the Merger Agreement that specified the treatment of outstanding shares and options at closing only addressed common stock and options for common stock. Id. § 2.8(a) & (b). They did not mention preferred stock or options to purchase preferred stock.
On May 31, 2011, the Oak Hill Merger closed. The total merger consideration was $127,500,000, subject to holdbacks to secure indemnification obligations. Choupak, Sofinski, Filin, Max Skibinsky, and Vladimir Tsirushkin, who were the Company's remaining stockholders, received cash for their shares.
I. Rivkin Purports To Exercise The Preferred Stock Option.
Rivkin heard about the Oak Hill Merger from another former Intermedia employee. He realized that if he had not sold his shares, he might have received as much as $5,100,000. He wanted more than the $300,000 he accepted in 2008. To help him get it, Rivkin hired his first attorney, Richard White.
By letter dated July 6, 2011, White informed Intermedia that Rivkin wished to exercise the Preferred Stock Option. The letter stated:
Our firm represents Vladimir Rivkin, a long-time employee of Intermedia.NET, Inc. I enclose copies of Mr. Rivkin's Employment Agreement entered into as of March 1, 2000 ("Employment Agreement") and Mr. Rivkin's Intermedia.NET, Inc. Executive Stock Option Agreement ("Option Agreement") effective as of March 1, 2000. Now that it appears that Intermedia.NET, Inc. is about to be, or recently has been, acquired by Oak Hill Capital Partners, Mr. Rivkin wishes to exercise his options to acquire shares that represent a four percent (4%) undiluted ownership of Intermedia.NET, Inc., or its successor, as is appropriate, as set forth in paragraph 5(e) of the Employment Agreement and paragraph 3 of the Option Agreement. I propose meeting within the next two weeks to discuss implementation of the Method of Exercise under paragraph 8 of the Option Agreement.
JX 151.
On July 8, 2011, Rivkin sent a formal stock option exercise notice to Gomes. JX 153 (the "2011 Exercise Notice"). The 2011 Exercise Notice was identical to the form of exercise notice for the 2000 Plan, except that Rivkin revised it to refer to shares of preferred stock rather than common stock.
White sent a copy of the 2011 Exercise Notice, along with other documents and correspondence, to U.S Bank, which was the escrow agent for the Oak Hill Merger. White's cover letter stated: "As we understand your bank is holding $10,000,000 of the sales proceeds, by this letter we seek a hold on further distributions until Mr. Rivkin's shares are issued." JX 151. Given its text, White's letter was not just a figurative hold up, but a literal one as well.
By letter dated July 27, 2011, White provided Intermedia's counsel with additional information about Rivkin's position. He asserted that
Vladimir does possess other claims. Vladimir contends that he was defrauded by Michael Choupak and Sergey Soffinsky [sic] when selling his 2,000,000 shares of common stock. Vladimir feels that the value, direction and overall available information were misrepresented to him and concealed from him in order to obtain his 2,000,000 shares for pennies on the dollar.
JX 156.
The fact that Rivkin had received 2,000,000 shares of common stock and sold them to Choupak and Sofinski presented a factual problem for Rivkin's attempt to exercise the Preferred Stock Option. Rivkin claimed Choupak had promised him at least 4% of Intermedia's equity, but he had received 4.4% of Intermedia's equity in the form of the 2,000,000 shares of common stock. The answer lay in claiming that he had two grants, one for common and one for preferred. But somehow he had to explain when and why he received two grants amounting to 8% of the equity.
By letter dated August 30, 2011, White provided "the relevant timeline":
• 11/20/97 — Vladimir enters into an oral agreement with Michael Choupak to work for Intermedia in exchange for options to purchase 2,000,000 shares of common stock at $.009 per share. Shares have a four-year vesting.
* * *
• 11/20/99 — Vladimir is issued 2,000,000 options for common stock under the Stock Option Agreement, copy previously provided.
• 3/01/2000 — Vladimir's stock will be fully vested on 11/20/01, four years after 11/20/97. Michael Choupak asks Vladimir to stay on in the same capacity. They negotiate and execute an Employment Agreement, copy previously provided. Vladimir is to receive options for four percent of the company's preferred stock to be purchased at $00.15 per share, with anti-dilution provision in effect. Vladimir's compensation is to be at $12.00 per year, for purposes of tracking his vesting.
* * *
• 02/27/01 — Vladimir executes a stock purchase agreement converting the options for the common stock to shares and receives 2,000,000 common shares, as compensation for his work between 1997 and 2000. He pays for the stock with a promissory note.
• 03/10/01 — Approximately around this time, Vladimir speaks with Michael about the other options. Michael gives him minutes of a Board of Directors meeting which shows additional common stock options authorized to others. Vladimir asks him about the preferred stock options, and Michael tells Vladimir that the documentation is forthcoming.
• 4/2001 — Approximately around this time, Vladimir executes the executive stock option agreement for 2 million preferred shares with anti-dilution, and he is provided a copy of the option plan. This is his compensation for work 2001 [sic] going forward.
JX 158 (the "2011 Timeline").
Virtually every element of the 2011 Timeline was false or misleading. Three aspects warrant emphasis. First, Rivkin did not claim to have executed the Preferred Stock Option before 2011. As White confirmed in a subsequent letter, Rivkin claimed to have exercised the Preferred Stock Option "on July 12, 2011." JX 159.
Second, Rivkin built the 2011 Timeline around documents that he had backdated, treating the backdated dates as if they were real. For example, he selected November 20, 1997, as the date of the original oral agreement on the theory that he started working at Intermedia then. That was the date that appeared in Rivkin's first RSPA. It conflicted with his actual date of hire of March 1, 2000, as reflected in his Employment Agreement. It conflicted with the date of hire of March 1, 2000, that appeared in the early versions of the Cap Table. It conflicted with the different backdated date of hire of December 15, 1997, that Rivkin used in his replacement RSPA.
Rivkin made up his story about working at Intermedia from 1997 to 2000. From 1995 to 1999, Rivkin was a student in the night program at the Lincoln Law School of San Jose, California. In 1997, when Choupak supposedly hired him, he was only half-way through his degree. When asked about his duties during this period, Rivkin described his activities in 2000 and 2001. Rivkin also claimed to have negotiated a lease for the Company's new office space, but Intermedia occupied the same office space from 1995 to 2002, and the annual lease renewed automatically during that time. There are no contemporaneous documents reflecting work by Rivkin from 1997 to 1999, only the agreements he backdated. Rivkin did not begin working at Intermedia until 2000.
Third, Rivkin indeed claimed that Choupak promised him a total of 8% of the equity in the form of two grants, not one. He supposedly received 4% for his work between 1997 and 2000, conveyed through an oral promise in 1997, then memorialized in a written agreement in 1999. He supposedly received another 4% of the Company for his for work from 2001 going forward, memorialized in the Preferred Stock Option.
As noted, Rivkin did not start working at Intermedia until 2000, and he did not receive any promise of equity before then. He did not have any formal agreement for his options until 2000, and he did not receive shares until 2001. The claimed written stock option agreement from 1999 did not exist. White had not "previously provided" a copy to Intermedia, as he claimed in his letter. JX 158. Nor did Rivkin produce a copy in discovery, eventually taking the position that he turned in the agreement in 2001 when he received his shares of common stock.
Rivkin's marital records bore out the absence of any separate grant of common stock in 1997. Rivkin was married on November 4, 2000, separated on September 24, 2003, and obtained a decree of divorce effective April 9, 2004. Before getting married, Rivkin and his bride entered into a pre-nuptial agreement dated October 30, 2000. Exhibits to the pre-nuptial agreement listed their separate and marital property, including Rivkin's equity ownership in a number of entities. Rivkin listed "options to purchase 2% common stock, and 2% preferred stock" in Intermedia. JX 196. Although it is unclear why Rivkin thought Choupak's promise of a 4% of the equity was divvied up in this manner, the listing demonstrated that Rivkin believed he was entitled to 4%, not 8%.
After the marriage, Rivkin and his bride entered into a marital agreement with an effective date of October 17, 2002. Exhibits to the marital agreement listed their separate property. Rivkin identified the following asset as his separate property: "Intermedia.Net, a Minnesota Corporation. Husband's interest includes 2% preferred stock, 2% common stock over a 4 year vesting period." Id. By this time, Rivkin had been issued 2,000,000 shares of common stock, so the description was inaccurate, but it again demonstrated his belief that he was entitled to 4%, not 8%.
In one of the stranger moments at trial, Rivkin was impeached about whether the woman referenced in the agreements was his first or second wife. Rivkin had not produced his divorce records during discovery. Suspecting what they might show, Choupak's counsel questioned Rivkin about his marriages during his deposition. Rivkin testified he married for the first time in 2000 and for a second time in 2010. When Choupak's counsel obtained Rivkin's divorce records, they discovered an earlier divorce. When asked about it during trial, Rivkin testified that "it wasn't like an actual divorce," that he and his first wife "didn't even live together but for more than two or three months," and that he "really, in [his] mind, didn't consider this a real marriage." Tr. 61, 64. The public records show that Rivkin married his first wife on December 3, 1994 (it was a real marriage). They separated on December 14, 1996 (two years later, not two or three months later). They entered into a marital settlement agreement on July 15, 1997, and they obtained "an actual divorce" in the form of a judicial decree on July 29, 1998.
The earlier divorce decree confirmed that Rivkin did not receive a grant of options in 1997. In the stipulation for the July 1998 divorce decree, Rivkin and his first wife acknowledged that they "were both fully aware of the extent of all of the assets and debts during marriage and are sure that everything has been disclosed and distributed in the stipulated Judgment Of Dissolution Of Marriage. . . ." JX 195. If Rivkin possessed an option to purchase shares of Intermedia common stock in 1997, then he should have disclosed it. He did not. Rivkin listed his separate property from before and during the marriage, and he identified equity ownership interests, but he did not list an option to purchase Intermedia common stock. ...
II. LEGAL ANALYSIS
The disputes in this case were predominantly factual. In light of the foregoing factual findings, the legal analysis is relatively straightforward. In the complaint, Choupak and Sofinksi sought declaratory judgments that would negate the claims that Rivkin subsequently asserted. For simplicity, this decision analyzes the legal issues using the framework of Rivkin's remaining counterclaims.
A. The Counterclaim For Breach Of Contract
Rivkin's principal counterclaim was for breach of the Employment Agreement. He contended that the Employment Agreement granted him an option to purchase shares of preferred stock representing 4% of the company's equity. He asserted that the Preferred Stock Option memorialized that grant. He claimed that he exercised the Preferred Stock Option and that Intermedia breached its contractual obligations by failing to issue the shares to which he was entitled.
When interpreting a contract, "the role of a court is to effectuate the parties' intent." Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006). "If a writing is plain and clear on its face, i.e., its language conveys an unmistakable meaning, the writing itself is the sole source for gaining an understanding of intent." City Investing Co. Liquidating Trust v. Cont'l Cas. Co., 624 A.2d 1191, 1198 (Del. 1993). "Contract language is not ambiguous merely because the parties dispute what it means. To be ambiguous, a disputed contract term must be fairly or reasonably susceptible to more than one meaning." Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012) (footnotes omitted). "Ambiguity does not exist where the court can determine the meaning of a contract without any other guide than a knowledge of the simple facts on which, from the nature of language in general, its meaning depends." Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992) (internal quotation marks omitted). However, "[i]f there is more than one reasonable interpretation of a disputed contract term, consideration of extrinsic evidence is required to determine the meanings the parties intended." AT&T Corp. v. Lillis, 953 A.2d 241, 253 (Del. 2008) (internal quotation omitted). "As long as the court is aware that doubts and uncertainty lurk in the meaning and application of agreed language, it will consider testimony pertaining to antecedent agreements, communications and other factors which bear on the issue." Klair v. Reese, 531 A.2d 219, 223 (Del. 1987).
As discussed in the Factual Background, the lack of detail in the Employment Agreement and Preferred Stock Option rendered the terms "preferred stock" and "anti-dilution" ambiguous. By using these terms, Rivkin tried to document the basic concept that he would receive at least 4% of Intermedia's equity. As he saw it, the term "preferred stock" meant a stock that had a preference in the form of anti-dilution protection. Choupak signed both the Employment Agreement and Preferred Stock Option, evidencing his agreement.
Rivkin received the benefit of his bargain. In 2001, Intermedia issued him 2,000,000 shares of common stock. The shares represented 4.4% of Intermedia's equity, more than the consideration he bargained for. Rivkin's also received better terms than he bargained for because his agreements called for his options to vest over four years and set the exercise price at $0.15 per share. One year later, Choupak allowed Rivkin to exercise all of his options and pay with an unsecured note. Rivkin also obtained a lower exercise price of $0.009 per share by making misrepresentations to SVLG. That lie ended up being immaterial, because Choupak never asked Rivkin to pay off his note, so Rivkin never had to pay the exercise price. He received more than his bargain, and he had no claim for breach.
Deeming the term "preferred stock" to be unambiguous leads to the same result. "At common law and in the absence of an agreement to the contrary all shares of stock are equal." Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584, 593 (Del. Ch. 1986). Under Sections 102(a)(4) and 151(a) of the Delaware General Corporation Law, any special rights, powers, preferences, or limitations must be set forth in the certificate of incorporation. Section 102(a)(4) states:
If the corporation is to be authorized to issue more than 1 class of stock, the certificate of incorporation shall set forth the total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class and shall specify each class the shares of which are to be without par value and each class the shares of which are to have par value and the par value of the shares of each such class. The certificate of incorporation shall also set forth a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, which are permitted by § 151 of this title in respect of any class or classes of stock or any series of any class of stock of the corporation and the fixing of which by the certificate of incorporation is desired, and an express grant of such authority as it may then be desired to grant to the board of directors to fix by resolution or resolutions any thereof that may be desired but which shall not be fixed by the certificate of incorporation.
8 Del. C. § 102(a)(4). Section 151(a) similarly states:
Every corporation may issue 1 or more classes of stock or 1 or more series of stock within any class thereof, any or all of which classes may be of stock with par value or stock without par value and which classes or series may have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the certificate of incorporation or of any amendment thereto, or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it by the provisions of its certificate of incorporation.
8 Del. C. § 151(a). "The mere word `preferred' unless it is supplemented by a definition of its significance conveys no special meaning." Gaskill v. Gladys Belle Oil Co., 146 A. 337, 339 (Del. Ch. 1929) (Wolcott, C.). "[U]nless preferences are clearly spelled out in the certificate of incorporation (or by a separate resolution authorized by the corporate charter) they do not exist." Shanghai Power Co. v. Del. Trust Co., 316 A.2d 589, 593 (Del. Ch. 1974), aff'd in pertinent part sub nom. Judah v. Del. Trust Co., 378 A.2d 624 (Del. 1977).[3]
Despite the reference to preferred stock that Rivkin added to his Employment Agreement, and notwithstanding his creation of the Preferred Stock Option, the Charter never designated any shares of preferred stock with rights, powers, or preferences different than common stock. The Charter authorized blank check preferred stock, but the board of directors never exercised its blank check authority. The only preference Rivkin could identify for his shares was anti-dilution protection. By issuing Rivkin sufficient shares of common stock to ensure that he received at least 4% of Intermedia's equity, the Company satisfied its contractual obligation.
Intermedia did not breach the Employment Agreement or the Preferred Stock Option. Judgment is entered in favor of Intermedia on this claim. ...
III. CONCLUSION
Judgment is entered against Rivkin and in favor of Choupak, Sofinski, and Intermedia. Rivkin is liable under the Employment Agreement for Intermedia's expenses, including attorneys' fees. Rivkin is also liable under the bad faith exception to the American Rule for all of Choupak, Sofinski, and Intermedia's expenses, including attorneys' fees. Choupak, Sofinski, and Intermedia are separately entitled to costs as prevailing parties. Counsel shall submit a Rule 88 affidavit and a bill of costs. Once the amount of expenses, including attorneys' fees, and costs has been determined, the plaintiffs will submit a form of Final Order and Judgment.
5.4 Rights of First Refusal 5.4 Rights of First Refusal
5.4.1 Latesco, LP v Wayport, Inc. 5.4.1 Latesco, LP v Wayport, Inc.
A stockholder sought to monetize a part of his illiquid, minority interest in the private company he co-founded but in which he was no longer an insider. His sales of stock were governed by an agreement that gave the corporation and certain insiders rights of first refusal. In what would become the first of two sets of transactions, the stockholder sold shares to a third party after the company and its private equity investors waived their rights of first refusal. Shortly thereafter, the stockholder entered negotiations with the same third party for a second set of sales transactions at a somewhat lower price. This time, two of the company’s private equity investors (but not the company or its directors) exercised their rights of first refusal. Complicating the issues, in the second sales transactions the stockholder was asked, and agreed, to sell more shares than originally negotiated with the third party. Later, the stockholder discovered that the company had entered into a transaction, sometime during the negotiation of the second sales transactions, whereby it sold less than 10% of its assets at what is claimed to be an advantageous price. More than a year later, the entire company was sold to a large strategic buyer for a price substantially higher than the price in either of the stockholder’s two sales transactions.