Start-Up Companies and Venture Capital

Spring 2022

  • Brian JM Quinn (Boston College Law School)

This online casebook is intended to be used as a supplement to the course Start-Up Companies and Venture Capital at Boston College Law School. You may print this or read it online. Please refer to the syllabus for assignments.

 

The materials that follow provide some of the most relevant caselaw for start-up lawyers in the context of venture financings. At the most general level, the most important caselaw for start-ups and venture-backed firms reflects two basic problems that pervade disputes involving start-up businesses:

First, convertible preferred stock, the currency of venture financing, is a creature of contract. Preferred stock has only those attributes and rights conferred on it by way of negotiation and evidenced in the certificate of incorporation. Investors should not look to the courts to resolve ambiguities over the rights of preferred stock in their favor. A court will not rescue lazy drafting. 

Second, when founders and investors sit on the board of directors, they must deal with the start-up corporation at arm's length. Founders and investors get into trouble when the confuse their position and put their own parochial interests ahead of those of the corporation. This is a common problem in small businesses. Indeed, most of the veil piercing litigation you may have studied in your basic corporate law class involved this kind of confusion. However, role confusion is also common in start-up and venture backed businesses, but for different reasons. Founders may have difficulty adapting to the addition of outside investors in what was previously a small, likely informal, organization. At later stages of the venture-backed company's life, investors may put their own interests in seeking a viable exit over their duties to the company as a whole. 

While these two basic problems are the most common challenges facing start-up businesses, the start-up faces a myriad of other corporate law challenges. Your knowledge of the corporate law as well as securities law will come in handy as you navigate the world of start-up and venture-backed companies.

 

7 Term Sheets: Exits & Liquidity 7 Term Sheets: Exits & Liquidity

7.1 DGCL Sec. 160 - Corporation’s powers respecting ownership, voting, etc., of its own stock 7.1 DGCL Sec. 160 - Corporation’s powers respecting ownership, voting, etc., of its own stock

(a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares; provided, however, that no corporation shall:

(1) Purchase or redeem its own shares of capital stock for cash or other property when the capital of the corporation is impaired or when such purchase or redemption would cause any impairment of the capital of the corporation, except that a corporation other than a nonstock corporation may purchase or redeem out of capital any of its own shares which are entitled upon any distribution of its assets, whether by dividend or in liquidation, to a preference over another class or series of its stock, or, if no shares entitled to such a preference are outstanding, any of its own shares, if such shares will be retired upon their acquisition and the capital of the corporation reduced in accordance with §§ 243 and 244 of this title. Nothing in this subsection shall invalidate or otherwise affect a note, debenture or other obligation of a corporation given by it as consideration for its acquisition by purchase, redemption or exchange of its shares of stock if at the time such note, debenture or obligation was delivered by the corporation its capital was not then impaired or did not thereby become impaired;

(2) Purchase, for more than the price at which they may then be redeemed, any of its shares which are redeemable at the option of the corporation; or

(3) a. In the case of a corporation other than a nonstock corporation, redeem any of its shares, unless their redemption is authorized by § 151(b) of this title and then only in accordance with such section and the certificate of incorporation, or

b. In the case of a nonstock corporation, redeem any of its membership interests, unless their redemption is authorized by the certificate of incorporation and then only in accordance with the certificate of incorporation.

(b) Nothing in this section limits or affects a corporation’s right to resell any of its shares theretofore purchased or redeemed out of surplus and which have not been retired, for such consideration as shall be fixed by the board of directors.

(c) Shares of its own capital stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes. Nothing in this section shall be construed as limiting the right of any corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.

(d) Shares which have been called for redemption shall not be deemed to be outstanding shares for the purpose of voting or determining the total number of shares entitled to vote on any matter on and after the date on which notice of redemption has been sent to holders thereof and a sum sufficient to redeem such shares has been irrevocably deposited or set aside to pay the redemption price to the holders of the shares upon surrender of certificates therefor.

7.2 Redemption Rights 7.2 Redemption Rights

Venture funds are focuesd on exit strategies. The successful investment will exit with either a merger/sale or an IPO. When firms are unable to achieve a traditional exit, venture funds are left with illiquid positions. Given the time-limited nature of most venture funds, having an illiquid investment with no reasonable prospect of an exit is less than ideal. To mitigate that risk, investors will often negotiate redemption rights. The redemption right is a requirement that in the absence of a liquidation event like an IPO or merger, that the investor will have the right to call on the board to redeem the investor's stock at an agreed upon price. If nothing else, the redemption right gives investors some degree of downside protection in a failed investment. 

It is important to remember that the interests of the board/corporation and the investors do not always align. An investor seeking to redeem a redemption right in a failed investment is just one such time when interests are misaligned. 

7.2.1 Frederick Hsu Living Trust v. ODN Holding Corp 7.2.1 Frederick Hsu Living Trust v. ODN Holding Corp

 

2017 WL 1437308

Court of Chancery of Delaware.

The FREDERICK HSU LIVING TRUST, Plaintiff,

v.

ODN HOLDING CORPORATION, et al

C.A. No. 12108–VCL

 

Decided: April 24, 2017

MEMORANDUM OPINION

LASTER, Vice Chancellor

*1 In 2008, funds sponsored by the venture capital firm Oak Hill Capital Partners1 invested $150 million in Oversee.net, a California corporation. To facilitate the investment, the parties formed ODN Holding Corporation (the “Company”) as a holding company for Oversee.net. In return for its cash, Oak Hill received shares of Series A Preferred Stock (the “Preferred Stock”) from the Company. Oak Hill had the right to require the Company to redeem its Preferred Stock in 2013.

 In 2009, Oak Hill became the Company’s controlling stockholder. Initially, little changed. The Company continued to expand through acquisitions and reinvested its capital for growth. Then, in 2011, the Company switched into liquidation mode. It stopped investing for growth, sold two of its four lines of business, and hoarded the resulting cash. When Oak Hill exercised its redemption right in 2013, the Company used as much of its cash as possible for redemptions. When that wasn’t enough to redeem the Preferred Stock in full, the Company sold its third line of business and used the resulting cash for more redemptions. The process turned a once-promising company into a shell of its former self.

 Frederick Hsu—one of the Company’s founders—brought this action against Oak Hill, the Company’s board of directors (the “Board”), and certain of the Company’s officers. His complaint asserts claims sounding in both law and equity. At law, the complaint contends that the redemptions violated statutory limitations and common law doctrine because the Company lacked sufficient funds legally available to make the redemptions. In equity, the complaint contends that the individual defendants and Oak Hill breached their duty of loyalty by seeking in bad faith to benefit Oak Hill by maximizing the value of Oak Hill’s redemption right, rather than by striving to maximize the value of the corporation over the long-term for the benefit of the undifferentiated equity. The Complaint asserts fallback counts against Oak Hill for aiding and abetting breaches of duty by the other defendants, against the directors for waste, and against Oak Hill and the officers for unjust enrichment.

 The Complaint fails to state a claim for an unlawful redemption. Because of the capital-generating actions that the individual defendants took, the Company had sufficient funds legally available to make them.

 The Complaint states a claim for breach of the duty of loyalty against Oak Hill and all but one of the individual defendants. The Complaint’s detailed factual allegations support a reasonable inference that the individual defendants acted in bad faith to benefit Oak Hill by maximizing the value of its contractual redemption right, and the actions of Oak Hill’s representatives are attributable to Oak Hill. The allegations support a reasonable inference that the entire fairness standard will apply and that the defendants will be unable to show that their course of conduct was entirely fair. The motions to dismiss the fiduciary duty claims are granted in one respect: defendant Kamran Pourzanjani is dismissed because it is not reasonably conceivable that he will not be entitled to exculpation. …

I. FACTUAL BACKGROUND

A. A Growing Company

Hsu and Lawrence Ng co-founded Oversee.net in 2000. Under their stewardship, Oversee became a “leading provider of technology-based marketing solutions to online publishers and advertisers worldwide.” … Oversee grew internally by developing its own products and externally through acquisitions. …

 B. Oak Hill Invests $150 Million.

In February 2008, Oak Hill invested $150 million in Oversee. The parties formed a new Delaware corporation—the Company—to facilitate the transaction. Oversee became its wholly owned subsidiary. In return for its cash, Oak Hill received 53,380,783 shares of Preferred Stock.

 The terms of the Preferred Stock gave Oak Hill the ability to exercise a mandatory redemption right beginning five years after its investment. The pertinent language stated:

At any time after February 12, 2013, upon the written request of the holders of at least a majority of the then outstanding shares of [Preferred Stock], the [Company] shall redeem, out of funds legally available therefor, all of the outstanding shares of [Preferred Stock] which have not been converted into Common Stock pursuant to Section 4 hereof (the “Redemption Date”). The Redemption Date shall be determined in good faith by the Board and such Redemption Date shall be at least thirty (30) days, but not more than sixty (60) days, after the receipt by the [Company] of such written request. The [Company] shall redeem the shares of [Preferred Stock] by paying in cash an amount equal to the Original Issue Price for such [Preferred Stock], plus an amount equal to all declared and unpaid dividends thereon (as adjusted for stock splits, stock dividends and the like, the “Redemption Price”). If the funds legally available for redemption of the [Preferred Stock] shall be insufficient to permit the payment to such holders of the full respective Redemption Price, the Corporation shall effect such redemption pro rata among the holders of the [Preferred Stock].

*4 If the Company did not have sufficient funds to redeem the Preferred Stock, then the terms of the Preferred Stock contemplated ongoing redemptions as funds became available. The pertinent language stated:

If the funds of the [Company] legally available for redemption of shares of [Preferred Stock] on any Redemption Date are insufficient to redeem the total number of shares of [Preferred Stock] to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon their holdings of [Preferred Stock]. The shares of [Preferred Stock] not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the [Company] are legally available for the redemption of shares of [Preferred Stock] such funds will immediately be used to redeem the balance of the shares which the [Company] has become obliged to redeem on any Redemption Date, but which it has not redeemed.

In 2009, the Company and Oak Hill modified these provisions. The amendments sought to impose on the Company a contractual obligation to raise capital for additional redemptions:

If the funds of the [Company] legally available for redemption of shares of [Preferred Stock] on any Redemption Date are insufficient to redeem the total number of shares of [Preferred Stock] to be redeemed on such date: (i) those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares ... , and (ii) the [Company] thereafter shall take all reasonable actions (as determined by the [Company’s] Board of Directors in good faith and consistent with its fiduciary duties) to generate, as promptly as practicable, sufficient legally available funds to redeem all outstanding shares of [Preferred Stock], including by way of incurrence of indebtedness, issuance of equity, sale of assets, effecting a [merger or sale of assets] or otherwise ... At any time thereafter when additional funds of the [Company] are legally available for the redemption of shares of [Preferred Stock] such funds will immediately be used to redeem the balance of the shares which the [Company] has become obliged to redeem ....

The provision thus recognized that any actions to generate additional funds to redeem shares would be “determined by the [Company’s] Board of Directors in good faith and consistent with its fiduciary duties.”

This decision refers to Oak Hill’s right to cause the Company to redeem the Preferred Stock as the “Redemption Right.” It refers to the provisions that governed the redemption of the Preferred Stock collectively as the “Redemption Provisions.”

C. Oak Hill Becomes The Company’s Controlling Stockholder.

Oak Hill started as a minority investor. The Preferred Stock did not carry a majority of the Company’s voting power, and Oak Hill only had the right to fill two seats on a seven-member Board. The Company’s certificate of incorporation called for (i) two seats elected by the holders of the Preferred Stock voting as a separate class, (ii) three seats elected by the holders of the common stock voting as a separate class, and (iii) two seats elected by the holders of common stock and the Preferred Stock voting together. Oak Hill filled its two positions with Robert Morse, the Oak Hill partner who sponsored the investment, and William Pade, another Oak Hill partner.

*5 In 2009, Oak Hill paid $24 million to purchase enough shares of common stock from Ng to give Oak Hill control over a majority of the Company’s voting power. After Oak Hill acquired mathematical control, the Board was enlarged to eight members, and a third Oak Hill representative—David Scott—became a director. Scott was an Oak Hill vice president. This decision refers to Morse, Pade, and Scott as the “Oak Hill Directors.”

The other five Board members were Jeffrey Kupietzky, Ng, Allen Morgan, Scott Jarus, and Kamran Pourzanjani. Kupietzky served as the Company’s President and Chief Executive Officer. The others were non-management directors, but the Complaint strives to paint them in hues of gray. The Complaint alleges that Ng now felt indebted to Oak Hill for paying him $24 million to purchase a substantial block of his otherwise illiquid common stock. The Complaint observes that Morgan worked for fifteen years as a corporate attorney with Wilson Sonsini Goodrich & Rosati, LLP, Oak Hill’s current and long-time counsel. Morgan also served alongside Pade on the board of another company, and the two men had an ongoing social relationship through their sons, who were friends. The Complaint alleges that Morgan, Jarus, and Pourzanjani served regularly on boards of Silicon Valley companies, and this made them want to remain on good terms with Oak Hill because of its outsized influence within the highly networked Silicon Valley community.

Oak Hill’s acquisition of majority control did not immediately result in any change in the Company’s business strategy. For the next two years, the Company continued to focus on growth. Its pursuit of this strategy included the following acquisitions:

• In December 2009, the Company paid $4 million for New Venture Corporation, LLC, a company whose credit card website could be used to generate leads for the Vertical Markets business.

• In April 2010, the Company paid $2.7 million for T2Media, a company whose travel websites could be used to generate leads for the Vertical Markets business.

• In November 2010, the Company paid $17 million for Shopwiki Corporation, a company in the vertical markets space.

D. Oak Hill Changes The Company’s Strategy.

The Complaint alleges that at some point during 2011, Oak Hill concluded that “exercising its contractual redemption right in February 2013 was the most effective way to achieve the return of its capital.” Compl. ¶ 35. The Complaint alleges that beginning in 2011, Oak Hill caused the Company to alter its business plan by no longer focusing on growth, whether internally or by acquisition, and instead seeking to accumulate cash that could be used for redemptions.

Consistent with a directional reset, the Company changed its management team in mid–2011. In June 2011, defendant Scott Morrow became co-President alongside Kupietzky. In August 2011, Kupietzky left the Company. Defendant Debra Domeyer, who had been serving as the Company’s Chief Technology Officer, became co-President with Morrow. In December 2011, one of the Company’s outside directors—Pourzanjani—left the Board. His seat remained vacant.

Also consistent with a directional reset, the Company did not make any acquisitions during 2011. By the end of the year, the Company’s cash reserves had nearly doubled, from $13.2 million at the end of 2010 to $23.7 million at the end of 2011.

Most significantly, the Company spent the second part of 2011 preparing to sell two of its four lines of business: the Domain Aftermarket Services business and the Domain Registrar Services business. The Company completed the sale in January 2012 for total proceeds of $15.4 million. The Company had paid more than $46.5 million in 2007 to purchase two of the companies that comprised just part of the divested lines of business. Five years later, the Company sold the two lines of business in their entirety for a third of the price. The sale of the two lines of business had a dramatic effect on the Company’s revenue-generating capacity. Total annual revenue dropped from $141 million in 2011 to $89 million in 2012. …

F. The Committee

In August 2012, with the Redemption Right looming, the Board formed a special committee (the “Committee”) charged with evaluating the Company’s alternatives for raising capital for redemptions and to negotiate with Oak Hill over the terms of any redemptions. The resolution creating the Committee provided that the Board would not approve any transaction relating to the Redemption Right without a prior favorable recommendation from the Committee. The resolution provided that the Committee’s authority would terminate when Oak Hill exercised the Redemption Right.

 The members of the Committee were Morgan and Jarus. The Committee held its first meeting on August 28, 2012. Morgan disclosed his social relationship with Pade. He did not disclose his service with Pade on another board or his relationship with Oak Hill through his work at Wilson Sonsini.

 G. The Officers’ Recommendation

In September 2012, the Committee tasked Domeyer, Murray, and Greene—the three officers with bonuses tied to redemptions—with creating a proposal for Oak Hill. The officers determined that the Company only needed a cash reserve of $10 million, or one-fifth of the amount it had accumulated. This freed $40 million for other uses. The officers proposed that the Company use all of it redemptions, borrow an additional $35 million, and use all of that for redemptions as well. The total of $75 million would result in the Company redeeming half of the shares of the Preferred Stock, which had a contractual value of $150 million in the aggregate for purposes of redemptions. It also would trigger the officers’ bonuses.

 The officers worried that banks would not lend to the Company if they perceived that additional funds would be funneled to Oak Hill, so the officers proposed that the $75 million redemption be conditioned on Oak Hill not receiving any further redemptions until 2017. In October 2012, the Committee adopted the general framework of the recommendation but shortened the delay on further redemptions from 2017 until 2016.

 Oak Hill rejected the proposal. Oak Hill countered by asking that the Company agree to redeem additional shares of Preferred Stock if the Company sold assets. Oak Hill also wanted a cumulative dividend of 12% per annum paid in kind on the unredeemed shares. The terms of the Preferred Stock did not give Oak Hill the right to a cumulative dividend, before or after the exercise of the Redemption Right. The terms of the Preferred Stock also recognized that the Company only was obligated to redeem as many shares of Preferred Stock as it could out of legally available funds and after that, the Board only had to generate funds for further redemptions consistent with its fiduciary duties. During the time it took to generate additional funds, Oak Hill was not entitled to any increase in the redemption price and had no other remedies. Oak Hill’s request would cause the balance of the redemption obligation to compound at 12% per annum.

 *7 The Committee did not accept Oak Hill’s counter. In November 2012, the Committee proposed that 100% of the net cash proceeds from any divestures outside the ordinary course of business would go towards redemptions and that Oak Hill would receive a 2% cumulative payment-in-kind dividend on any shares of Preferred Stock that were not redeemed. In return for these concessions, the Committee proposed that the Company would not make any additional redemptions until 2015.

 Concurrently, Murray contacted several banks about a credit facility. Because the borrowings would be used for redemptions, only one bank would even consider a loan. That bank conditioned its proposal on Oak Hill guaranteeing repayment. Oak Hill refused. The bank then offered a two-year term loan of $15 million, conditioned on the Company not using any of the proceeds for redemptions. The inability to secure financing prevented the Company from using debt to redeem a portion of the Preferred Stock, as the officers had proposed, and thereby hit the $75 million trigger for their bonuses.

H. Oak Hill’s Demand And The Officers’ Revised Recommendation

On February 1, 2013, Pade told the Committee that Oak Hill intended to exercise the Redemption Right in full on the earliest possible date, i.e. February 13. Acknowledging that the Company did not have the funds to redeem the Preferred Stock in full, Pade proposed that the Company immediately make a redemption payment of $50 million, which he later reduced to $45 million. In return, Oak Hill would forbear on receiving further redemption payments until December 31, 2013. Under Pade’s proposal, Oak Hill would have the right to cancel the forbearance agreement unilaterally and demand additional redemptions on thirty-days’ notice.

On February 12, 2013, the Committee met to consider Pade’s demand. One obvious problem was that using $45 million for redemptions would leave the Company with only $5 million in cash, which was half of the reserve of $10 million in cash that the officers had stated was necessary to support the Company’s operations. During the period from 2007 to 2010, the Company ended each year with an average of $15.5 million in cash.

Conveniently, the officers changed their minds about how much cash the Company needed. Murray advised the Committee that she now believed $2 million in cash was sufficient. That figure permitted the Company to make the $45 million redemption payment that Oak Hill wanted.

The Committee did not seek any other changes in Oak Hill’s proposal, such as more meaningful forbearance. Under Oak Hill’s proposal, the thirty-day termination right rendered the forbearance offer largely illusory. Moreover, the offer at most contemplated forbearance of ten months. This was effectively the sleeves from Oak Hill’s vest, because (i) Oak Hill had no ability to compel the Company to make redemptions except out of legally available funds, (ii) the Board had the right to determine how to raise additional funds in a manner that complied with its fiduciary duties, and (iii) one can readily doubt whether, after a $45 million redemption, the Company would have the capacity to make any additional redemptions during the remaining nine months of the year.

But the Committee did not push back. They resolved to recommend that the Board accept Oak Hill’s terms.

I. The March Redemption

On February 13, 2013, Oak Hill exercised the Redemption Right in full and on the earliest possible date. In accordance with Generally Accepted Accounting Principles (“GAAP”), the Company reclassified Oak Hill’s Preferred Stock as a current liability on its balance sheet in the amount of $150 million. The Committee’s authority terminated with the exercise of the Redemption Right.

*8 On February 27, 2013, the Board met to consider Oak Hill’s demand for redemption. The Board concluded that the Company had sufficient surplus to redeem $45 million of Preferred Stock, as required by Section 160 of the Delaware General Corporation Law (the “DGCL”). 8 Del. C. § 160. In making this determination, the Board did not treat the Preferred Stock as a current liability of $150 million, as it appeared on the Company’s balance sheet. Had the Board done so, the Company would have had a deficit of $60 million and could not have redeemed any Preferred Stock.

 Domeyer, Morgan, Jarus, and Ng voted to approve the redemption. The Oak Hill Directors abstained. On March 18, 2013, the Company paid Oak Hill $45 million to redeem shares of Preferred Stock (the “March Redemption”). Although Kupietzky was no longer employed by the Company, his employment agreement called for him to receive a bonus if shares of Preferred Stock were redeemed. He received $632,813, or approximately 1.4% of the redemption amount. Murray, Greene, and Domeyer did not receive a bonus, because their agreements required a redemption of at least $75 million to trigger their payments.

 Hsu learned of the March Redemption on May 23, 2013, when Greene e-mailed him the Company’s audited financial statements for 2012. Hsu was shocked. He e-mailed Greene:

Well this is a surprise. Our “growth company” emptying its coffers to Oak Hill through redemption? How is this supposed to instill shareholder confidence? On April 5th I asked you if there were any material corporate transactions and to get this to me within a reasonable 5–7 days. How is it this is the first time I’m hearing of this?

Greene replied: “I believe you have been aware of the redemption right since Oak [Hill] made their investment back in 2008.... In February they provided a redemption notice pursuant to the charter and the company complied with its obligation to redeem the shares that it could.” Greene’s reply obscured the lengthy background leading up to the formal exercise of the Redemption Right.

 In September 2013, Morse left Oak Hill and resigned from the Board. This left Pade and Scott as the Oak Hill representatives. Morse’s seat was left vacant.

 J. The September Redemption.

In February 2014, Domeyer advised the Board that a strategic acquirer had expressed interest in purchasing the Domain Monetization business. After selling two lines of business in January 2012, the Company had two lines left. The Domain Monetization business was the Company’s primary source of revenue.

 Recognizing that any cash generated by the sale could be used for redemptions, and perceiving that this could create a conflict for the Oak Hill Directors, the Board reconstituted the Committee to oversee the negotiations. Its members again were Morgan and Jarus. The Committee delegated the actual negotiations to Domeyer, Murray, and Greene, the three members of management with bonuses tied to achieving $75 million in redemptions.

 In April 2014, management reached an agreement to sell the Domain Monetization business for $40 million. The Committee recommended the deal to the Board, and the Board approved it on April 14.

 The sale of the Domain Monetization business closed in May 2014. The Board moved quickly to deploy the resulting cash for redemptions. On June 4, the Board acted by written consent to reconstitute the Committee a third time, once again consisting of Morgan and Jarus, and charged the Committee with overseeing the redemption process.

 The Board also decided to free up additional cash for redemptions through a restructuring. It would involve terminating certain executives, reducing the overall work force, and terminating the Company’s lease on its Los Angeles headquarters. The Board charged the Committee with implementing the restructuring.

 *9 The Committee delegated the details of both tasks to Domeyer, Murray, and Greene. In July 2014, the officers presented a plan for the restructuring. The Committee rejected it because it did not cut costs enough. The Committee told the officers to cut more.

 On August 4, 2014, the officers presented a revised plan. The Committee rejected it and told the officers to cut more.

 On August 25, 2014, the full Board received an update on the Committee’s work. The officers recommended a business plan that involved greater cost reductions and the sale of one of the three segments of the Company’s lone remaining line of business, Vertical Markets. The full Board approved the new business plan with Pade, Scott, Domeyer, Morgan, and Jarus voting in favor. Ng abstained.

 On August 29, 2014, the Committee determined that in light of the new business plan, the Company could make a redemption payment of $40 million to Oak Hill. The Committee resolved to ask Oak Hill to extend the forbearance agreement until March 31, 2015. One can readily question whether this term provided any benefit to the Company, because after a $40 million redemption, it was doubtful that the Company would have the capacity to redeem any additional shares during the next seven months.

 The full Board met on September 2, 2014. The Board determined that the Company had sufficient surplus to make a redemption payment of $40 million. As before, the Board did not treat Oak Hill’s remaining Preferred Stock as a current liability of $105 million, as it appeared on the Company’s balance sheet. The Board approved the redemption payment on the terms recommended by the Committee, and the Company made the redemption (the “September Redemption”).

 The Company previously had redeemed $45 million in Preferred Stock through the March Redemption. The September Redemption brought the total to $85 million. That amount exceeded the $75 million redemption trigger for the officers’ bonuses. Domeyer, Murray, and Greene each received a bonus of $587,184.

 K. One More Divestiture

The sale of the Domain Monetization business left the Company with only its Vertical Markets line of business. It had three segments: Retail, Travel, and Consumer Finance. Retail generated nearly half of the Company’s remaining revenue. The “crown jewel” of Retail was Shopwiki. In 2010, the Company acquired Shopwiki for $17 million. In December 2014, the Company sold Shopwiki for $600,000.

 The sale of Shopwiki capped a remarkable period during which the Company sold three of its four lines of business in their entirety and divested the principal economic driver of the fourth line of business. The sales had a dramatic effect on the Company’s cash-generating capacity. In 2011, before the divestitures, the Company generated annual revenue of $141 million. In 2015, after the divestitures, the Company generated annual revenue of $11 million, a decline of 92%.

 On October 19, 2015, Ng left the Board. His seat remained vacant. The current Board comprises Pade, Scott, Domeyer, Morgan, and Jarus.

 II. RULE 12(b)(6) ANALYSIS

…

A. The Unlawful Redemption Claim

Count V of the Complaint asserts that the defendants engaged in redemptions that violated Section 160 of the DGCL and principles of Delaware common law. This count disputes whether the Board had the legal power to cause the Company to engage in the redemptions. It therefore constitutes a challenge at law under Professor Berle’s “twice tested” framework. This count does not state a claim on which relief could be granted.

 Section 160 of the DGCL provides as follows.

(a) Every corporation may purchase, redeem, receive, take or otherwise acquire ... its own shares; provided, however, that no corporation shall:

(1) Purchase or redeem its own shares of capital stock for cash or other property when the capital of the corporation is impaired or when such purchase or redemption would cause any impairment of the capital of the corporation, except that a corporation ... may purchase or redeem out of capital any of its own shares which are entitled upon any distribution of its assets, whether by dividend or in liquidation, to a preference over another class or series of its stock ... if such shares will be retired upon their acquisition and the capital of the corporation reduced in accordance with §§ 243 and 244 of this title.

8 Del. C. § 160(a)(1). “A repurchase impairs capital if the funds used in the repurchase exceed the amount of the corporation’s ‘surplus,’ defined by 8 Del. C. § 154 to mean the excess of net assets over the par value of the corporation’s issued stock.” Klang v. Smith’s Food & Drug Ctrs., Inc., 702 A.2d 150, 153 (Del. 1997). “Net assets means the amount by which total assets exceed total liabilities.” 8 Del. C. § 154. Under Section 160(a)(1), therefore, unless a corporation redeems preferred shares and retires them upon redemption to reduce its capital, “a corporation may use only its surplus for the purchase of shares of its own capital stock.” In re Int’l Radiator Co., 92 A. 255, 256 (Del. Ch. 1914).

 The Redemption Provisions additionally limit the Company to making redemptions out of “funds legally available.” This phrase is not synonymous with “surplus.” “Outside of the DGCL, a wide range of statutes and legal doctrines could restrict a corporation’s ability to use funds, rendering them not ‘legally available.’ ” SV Inv. P’rs, LLC v. Thoughtworks, Inc., 7 A.3d 973, 985 (Del. Ch. 2010), aff’d, 37 A.3d 205 (Del. 2011). Among these, Delaware common law “has long restricted a corporation from redeeming its shares when the corporation is insolvent or would be rendered insolvent by the redemption.” Id. (collecting cases). Consequently, “[a] corporation easily could have ‘funds’ and yet find that they were not ‘legally available’ ... A corporation also could lack ‘funds,’ yet have the legal capacity to pay dividends or make redemptions because it had a large surplus.” Id.

 1. The Preferred Stock As A Current Liability

The Complaint asserts that the Company lacked sufficient surplus to engage in the March and September Redemptions because the Preferred Stock should have been treated as a current liability for purposes of calculating the Company’s net assets. After Oak Hill exercised its Redemption Right, the Company recorded the Preferred Stock on its balance sheet as a current liability with a value of $150 million. The Complaint alleges that if the Preferred Stock had been treated as a current liability for purposes of calculating surplus, consistent with the Company’s balance sheet, then the Company would have had a negative surplus when it engaged in the March and September Redemptions. Under that scenario, the redemptions would violate Section 160.

*12 The Company was correct when it did not treat the Preferred Stock as a current liability. Delaware courts have held consistently that preferred stock is equity, not debt. “The fundamental reason that ... preferred shares are equity is that they provide no guaranteed right of payment.” “[T]he holder of preferred stock is not a creditor of the corporation. Such a holder has no legal right to annual payments of interest, as long term creditors will have, and most importantly has no maturity date with its prospect of capital repayment or remedies for default.” HB Korenvaes, 1993 WL 205040, at *5.

 The existence of a mandatory redemption right, even one that has ripened, does not convert the holder of preferred stock into a creditor. “A redemption right does not give the holder the absolute, unfettered ability to force the corporation to redeem shares under any circumstances.” Carsanaro, 65 A.3d at 644. “Authority spanning three different centuries adverts to and enforces limitations on the ability of preferred stockholders to force redemption.” Thoughtworks, 7 A.3d at 990.

 The Preferred Stock in this case is no different. The Redemption Right that Oak Hill exercised was subject to statutory, common law, and contractual limitations. By statute, any redemptions were subject to the requirements of Section 160 of the DGCL. As a matter of common law, any redemptions were subject to limitations that included the restriction on redemptions “when the corporation is ... or would be rendered insolvent.” Thoughtworks, 7 A.3d at 985. By contract, under the terms of the Preferred Stock itself, any redemptions only could be made out of “funds legally available,” and the Board only had an obligation to generate funds for redemptions through “reasonable actions (as determined by the [Company’s] Board of Directors in good faith and consistent with its fiduciary duties) ....” Given these restrictions, the Board was not required to treat the Preferred Stock’s redemption claim as a current liability when determining surplus.

 *13 The fact that the Company reclassified the Preferred Stock as a liability on its balance sheet in accordance with GAAP does not dictate a different conclusion. This court addressed that issue in Harbinger, where the plaintiff argued that because the company treated the plaintiff’s preferred stock as a liability on its balance sheet, the plaintiff was a “creditor” with standing to bring a fraudulent conveyance claim. 906 A.2d at 222. The Harbinger decision rejected the argument that the treatment of the preferred stock on the balance sheet converted an equity claim into a debt claim, noting that Delaware courts have long drawn “clear lines ... between equity and debt holders,” and that “it is not the role of [the Financial Accounting Standards Board, which promulgates GAAP rules] to enact such significant changes in Delaware law.” Id. at 226–27.

 Relatedly, the plaintiff contends that the Preferred Stock should be treated as a liability for purposes of the redemptions because the Company acted “as if the redemption obligation was a legally enforceable debt.” Dkt. 51 at 88. Like the plaintiff in Harbinger, the plaintiff here relies on an opinion by the Circuit Court of Maryland, Costa Brava Partnership II v. Telos Corp., 2006 WL 1313985 (Md. Cir. Ct. Mar. 30, 2006). The Harbinger decision did not regard Costa Brava as persuasive. First, in Costa Brava, the company’s own certificate of incorporation characterized the preferred stock as “indebtedness.”6 Here, the Company’s certificate of incorporation identifies the Preferred Stock as a “class[ ] of capital stock.” Dkt. 36, Ex. B. art. IV. Second, Costa Brava blurred the “clear lines Delaware courts have always drawn between equity and debt holders.” Harbinger, 906 A.2d at 226. In doing so, Costa Brava ran contrary to the weight of Delaware precedent.

 The Complaint’s effort to treat the Preferred Stock as a de facto debt obligation also broadens the legal inquiry beyond what that step of the analysis contemplates. “Testing whether a transaction complies with the applicable business entity statute or the organizational documents of the entity is a different inquiry than determining whether those in control of the entity have exercised their powers in compliance with their fiduciary duties.” In re Kinder Morgan, Inc. Corp. Reorganization Litig., 2014 WL 5667334, at *8 (Del. Ch. Nov. 5, 2014), aff’d sub nom. Haynes v. Kinder Morgan G.P., Inc., 136 A.2d 76 (Del. 2016). When interpreting another aspect of Section 160 of the DGCL, Chancellor Allen offered the following comments.

As a general matter, those who must shape their conduct to conform to the dictates of statutory law should be able to satisfy such requirements by satisfying the literal demands of the law rather than being required to guess about the nature and extent of some broader or different restriction at the risk of an ex post facto determination of error. The utility of a literal approach to statutory construction is particularly apparent in the interpretation of the requirements of our corporation law—where both the statute itself and most transactions governed by it are carefully planned and result from a thoughtful and highly rational process.

14 Thus, Delaware courts, when called upon to construe the technical and carefully drafted provisions of our statutory corporation law, do so with a sensitivity to the importance of the predictability of that law. That sensitivity causes our law, in that setting, to reflect an enhanced respect for the literal statutory language.

Speiser v. Baker, 525 A.2d 1001, 1008 (Del. Ch. 1987) (Allen, C.), appeal refused, 525 A.2d 582 (Del. 1987) 

Section 160(a)(1) takes a snapshot of a corporation’s financial condition at the time of the redemption and requires that the corporation have sufficient surplus at that time. Section 160 does not examine the steps that the corporation or its fiduciaries took to achieve the surplus. Whether the corporation and its fiduciaries acted properly in that regard is the domain of equity. The Complaint’s allegations that the Company treated Oak Hill as a de facto creditor is an equitable claim which asserts that the Company’s fiduciaries disloyally sought to maximize the value of Oak Hill’s contractual right at the expense of the Company’s residual claimants. Those allegations will be examined within the second part of Professor Berle’s twice-tested framework.

 The contention that the Company violated Section 160 of the DGCL because the Preferred Stock was a current liability or was treated as such does not state a claim on which relief can be granted. This aspect of the Complaint is dismissed.

 2. The Redemptions As Risking Insolvency

The Complaint separately alleges that the March and September Redemptions violated Delaware common law because they “lessened the security of creditors and impaired the Company’s ability to continue as a going concern.” Compl. ¶ 147. As noted, Delaware common law prohibits redemptions that render a corporation insolvent. “A corporation may be insolvent under Delaware law either when its liabilities exceed its assets or when it is unable to pay its debts as they come due.” Thoughtworks, 7 A.3d at 987.

 The limitation on redemptions that render a company insolvent goes beyond redemptions that result in immediate insolvency. “[A] redemption may destroy a corporation’s ability to continue as a going concern, without immediately rendering it insolvent.” TCV VI, L.P. v. TradingScreen, Inc., 2015 WL 1598045, at *7 n.41 (Del. Ch. Feb. 26, 2015). The appropriate test is therefore whether a redemption left a corporation without “sufficient resources to operate for the foreseeable future.”7

 *15 The Complaint does not allege facts supporting a reasonable inference that the redemptions rendered the Company insolvent or left the Company without sufficient resources to operate for the foreseeable future. After the September Redemption, the Company had $23 million in net assets. The Complaint therefore fails to allege that the Company was balance-sheet insolvent. The Complaint comes closer in alleging cash-flow insolvency, because in 2015 the Company had a net loss of $500,000. But losing money is different from not being able to pay bills as they become due. With $23 million in net assets, the Company could weather a loss in a given year. To plead insolvency under the cash-flow test, the Complaint must allege more.

 The Complaint also does not support a reasonable inference that the redemptions left the Company without sufficient resources to operate for the foreseeable future. Largely because the Company spent the preceding two years selling off its main lines of business, the Company did not need the same level of resources to operate. The Complaint describes an entity that was a shadow of its former self, with one partial line of business where it used to have four. The Company generated less revenue; it also had fewer employees and a smaller operational footprint. Given the Company’s reduced state, the Complaint does not support a reasonable inference that the Company could not continue to operate. Whether Oak Hill and the individual defendants acted loyally by stockpiling cash, selling off businesses, and using the proceeds to make redemptions is an issue that will be evaluated in equity, not at law.

 The contention that the redemptions violated the common law by rendering the Company insolvent or at material risk of becoming insolvent does not state a claim on which relief can be granted. This aspect of the Complaint is dismissed.

 

 B. The Claim For Breach Of Fiduciary Duty Against The Directors

Count I of the Complaint alleges that the directors breached their fiduciary duties by “abandoning the Company’s growth strategy which was benefitting its common stockholders in favor of selling off whole business lines and hoarding cash in order to provide the maximum amount Oak Hill could extract non-ratably from the Company by exercising its redemption right.” Compl. ¶ 124. Analyzing this claim requires working through the standard of conduct, applying a standard of review, and then determining whether the defendants have properly invoked any immunities or defenses, such as exculpation.

“When determining whether directors have breached their fiduciary duties, Delaware corporate law distinguishes between the standard of conduct and the standard of review.”8 “The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct.” Trados II, 73 A.3d at 35–36. For the reasons that follow, the Complaint adequately pleads conduct that implicates the duty of loyalty, the standard of review for evaluating whether a breach occurred is the entire fairness test, and the Complaint sufficiently pleads that the actions taken by the defendant directors were unfair. With one exception, the Complaint therefore states a non-exculpated claim against each of the director defendants. The exception is Pourzanjani, who is dismissed because it is not reasonably conceivable at this stage that he will not be entitled to exculpation.

 1. The Standard of Conduct

*16 Delaware corporate law starts from the bedrock principle that “[t]he business and affairs of every corporation ... shall be managed by or under the direction of a board of directors.” 8 Del. C. § 141(a). “A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation.”9 “The existence and exercise of [the board’s authority under Section 141(a)] carries with it certain fundamental fiduciary obligations to the corporation and its shareholders.” Aronson, 473 A.2d at 811. …

[U]nder Delaware law, for directors to act loyally to advance the best interests of the corporation means that they must seek “to promote the value of the corporation for the benefit of its stockholders.”15 In a world with many types of stock—preferred stock, tracking stock, common stock with special rights, common stock with diminished rights (such as non-voting common stock), plain vanilla common stock, etc.—and many types of stockholders—record and beneficial holders, long-term holders, short-term traders, activists, momentum investors, noise traders, etc.—the question naturally arises: which stockholders? The answer is the stockholders in the aggregate in their capacity as residual claimants, which means the undifferentiated equity as a collective, without regard to any special rights.16

 …

 It also bears emphasizing that a duty to maximize long-term value does not always mean acting to ensure the corporation’s perpetual existence. A fiduciary might readily determine that a near-term sale or other shorter-horizon initiative, such as declaring a dividend, is value-maximizing even when judged against the long-term. A trade bidder with access to synergies, for example, may offer a price for a corporation beyond what its standalone value could support. Or fiduciaries might conclude that continuing to manage the corporation for the long-term would be value destroying because of external market forces or other factors. The directors who managed the proverbial maker of horse-and-buggy whips would have acted loyally by selling to a competitor before the new-fangled horseless carriage caught on. Writing as a Vice Chancellor, Chief Justice Strine provided an example in the extreme case of insolvency, explaining that the value-maximization mandate may require directors to favor liquidation over continuing the business:

The maximization of the economic value of the firm might ... require the directors to undertake the course of action that best preserves value in a situation when the procession of the firm as a going concern would be value-destroying. In other words, the efficient liquidation of an insolvent firm might well be the method by which the firm’s value is enhanced. ...21

*20 The same is true for a solvent corporation. “[D]irectors, generally, are obliged to chart a course for a corporation which is in its best interests without regard to a fixed investment horizon.”22 What the fiduciary principle requires in every scenario is that directors strive to maximize value for the benefit of the residual claimants.23

 *21 Directors must exercise independent fiduciary judgment when considering how best to maximize stockholder value. “That duty may not be delegated to stockholders.” Time, 571 A.2d at 1154. Diverse and atomistic stockholders “may have idiosyncratic reasons for preferring decisions that misallocate capital.” Trados II, 73 A.3d at 38. More pertinent to the current case, “a particular class or series of stock may hold contractual rights against the corporation and desire outcomes that maximize the value of those rights.”24

 “A board does not owe fiduciary duties to preferred stockholders when considering whether or not to take corporate action that might trigger or circumvent the preferred stockholders’ contractual rights.”25 As a general matter, “the rights and preferences of preferred stock are contractual in nature.”26 “Preferred stockholders are owed fiduciary duties only when they do not invoke their special contractual rights and rely on a right shared equally with the common stock.”27 Under those circumstances, “the existence of such right and the correlative duty may be measured by equitable as well as legal standards.”28 For example, just as common stockholders can challenge a disproportionate allocation of merger consideration,29 so too can preferred stockholders who do not possess and are not limited by a contractual entitlement.30

*22 Because the fiduciary principle does not protect special preferenceor rights, the fiduciary-based standard of conduct requires that decision makers focus on promoting the value of the undifferentiated equity in the aggregate. Given this obligation, “it is the duty of directors to pursue the best interests of the corporation and its common stockholders, if that can be done faithfully with the contractual promises owed to the preferred.” …

Consequently, it generally “will be the duty of the board, where discretionary judgment is to be exercised, to prefer the interests of common stock—as the good faith judgment of the board sees them to be—to the interests created by the special rights, preferences, etc., of preferred stock.” Equity–Linked Invs., L.P. v. Adams, 705 A.2d 1040, 1042 (Del. Ch. 1997) (Allen, C.). “[I]n circumstances where the interests of the common stockholders diverge from those of the preferred stockholders, it is possible that a director could breach her duty by improperly favoring the interests of the preferred stockholders over those of the common stockholders.”31 “This principle is not unique to preferred stock; it applies equally to other holders of contract rights against the corporation.”32

 2. The Continuing Operation Of The Fiduciary Standard Of Conduct In The Context Of A Corporate Contractual Obligation

*23 The defendants argue that the fiduciary duty standard of conduct does not apply in this case because the Redemption Provisions imposed a clear contractual obligation on the Company. As they see it, the Company was bound by the Redemption Provisions, so the Company’s directors did not have any decision to make about whether or not to comply with the Redemption Right. Because they had no room to exercise discretion, the fiduciary standard of conduct could not apply. If the contractual obligation was triggered, then the corporation had an obligation to fulfill its contractual commitment. See Dkt. 59 at 2.

It is true that the fiduciary status of directors does not give them Houdini-like powers to escape from valid contracts.33 … Only if the directors breached their fiduciary duties when entering into a contract does it become possible to invalidate it on fiduciary grounds.36

 *24 But the fact that a corporation is bound by its valid contractual obligations does not mean that a board does not owe fiduciary duties when considering how to handle those contractual obligations; it rather means that the directors must evaluate the corporation’s alternatives in a world where the contract is binding. Even with an iron-clad contractual obligation, there remains room for fiduciary discretion because of the doctrine of efficient breach.37 Under that doctrine, a party to a contract may decide that its most advantageous course is to breach and pay damages. Just like any other decision maker, a board of directors may choose to breach if the benefits (broadly conceived) exceed the costs (again broadly conceived). See Orban v. Field, 1997 WL 153831, at *9 (Del. Ch. Apr. 1, 1997) (Allen, C.) (“Certainly in some circumstances a board may elect (subject to the corporation’s answering in contract damages) to repudiate a contractual obligation where to do so provides a net benefit to the corporation.”). A corollary of this principle is that directors who choose to comply with a contract when it would be value-maximizing (broadly conceived) to breach could be subject, in theory, to a claim for breach of duty. For a contract with a third party, the business judgment rule typically will govern and prevent such a claim from getting beyond the pleading stage, but the fiduciary standard of conduct remains operative and the underlying legal theory therefore exists. See Hokanson, 2008 WL 5169633, at *8 (dismissing claim for breach of fiduciary duty where “there is no indication that if the directors had refused to allow Exactech to exercise the Buyout Option unless it paid a higher price, the plaintiffs would have been any better off”).

 In this case, the plaintiff is not relying on efficient breach, but rather on the application of the fiduciary standard of conduct to decisions that affect the scope of a contractual obligation. The Complaint asserts that the Board acted disloyally by selling businesses to raise cash to satisfy a future redemption obligation before there was any contractual obligation to redeem the Preferred Stock. The Complaint contends that if the Board had retained those businesses, they would have generated greater long-term value for the benefit of the undifferentiated equity. The plaintiff correctly observes that if the Company lacked either surplus or legally available funds when the Redemption Provisions otherwise came into play, then the Company would not have been able or obligated to redeem the Preferred Stock. At that point, the Board could have continued to manage the Company for the benefit of the undifferentiated equity without having to make a massive redemption payment. In substance, the Complaint alleges that before the Redemption Provisions came into effect, the Board breached its duty of loyalty by managing the Company to maximize the value of the Redemption Right, rather than managing the Company to maximize the value of the undifferentiated equity. The existence and binding nature of the Redemption Right does not foreclose the fiduciary standard of conduct from operating in this context.

 *25 Indeed, in this case, the plaintiff’s theory has even greater salience because the Redemption Provisions recognize that if the Company does not have sufficient legally available funds to redeem the Preferred Stock, then the Board’s obligation to raise funds to support a redemption is constrained by its fiduciary obligation to the undifferentiated equity. In pertinent part, the Redemption Provisions state:

If the funds of the [Company] legally available for redemption of shares of [Preferred Stock] on any Redemption Date are insufficient to redeem the total number of shares of [Preferred Stock] ... (ii) the [Company] thereafter shall take all reasonable actions (as determined by the [Company’s] Board of Directors in good faith and consistent with its fiduciary duties ) to generate, as promptly as practicable, sufficient legally available funds to redeem all outstanding shares of [Preferred Stock], including by way of incurrence of indebtedness, issuance of equity, sale of assets, effecting a [merger or sale of assets] or otherwise ....

Dkt. 36, Ex. C. (emphasis added). After the Redemption Right ripened, if the Board had sold businesses to raise funds to redeem the Preferred Stock in a manner that compromised the Company’s ability to generate long-term value for the benefit of the undifferentiated equity, then the Redemption Provisions themselves recognize that a plaintiff could assert a claim for breach of fiduciary duty. A comparable legal framework applies to actions that the Board took before the Redemption Right ripened.

 What Oak Hill possessed and could enforce was a contractual right to require the Company to redeem the Preferred Stock to the extent the Company had surplus and legally available funds. What the Redemption Provisions do not foreclose is a claim by the undifferentiated equity that the directors breached their fiduciary duties when generating surplus and legally available funds. Consequently, there is room for a fiduciary duty theory on the facts of this case.

 3. The Standard of Review

 In this case, a total of nine directors served on the Board during the time period covered by the Complaint: Morse, Pade, Scott, Domeyer, Kupietzky, Morgan, Ng, Jarus, and Pourzanjani. During this period, the number of directors fluctuated between five and eight. For entire fairness to apply, the Complaint must call into question the interests of either three or four directors, depending on the composition of the Board. The Complaint’s allegations adequately call into question the interests of seven directors. This section therefore does not separately analyze the interests of Kupietzky, who left the Company in August 2011, or Pourzanjani, who left the Company in December 2011.

 a. The Oak Hill Directors

Morse and Pade were principals of Oak Hill, and Scott was a vice president at Oak Hill. In those capacities, they owed fiduciary duties to Oak Hill. The Complaint’s core theory is that Oak Hill wanted the Company to engage in a de facto liquidation to raise cash that Oak Hill could extract preferentially through its Redemption Right. For purposes of evaluating that theory, Morse, Pade, and Scott cannot count as independent or disinterested directors because each faced the dual fiduciary problem that the Delaware Supreme Court identified in Weinberger.

 *28 In the landmark Weinberger decision, the Delaware Supreme Court held that there is “no dilution” of the duty of loyalty when a director “holds dual or multiple” fiduciary obligations. “If the interests of the beneficiaries to whom the dual fiduciary owes duties are aligned, then there is no conflict.” But if the interests of the beneficiaries diverge, the fiduciary faces an inherent conflict of interest. “There is no ‘safe harbor’ for such divided loyalties in Delaware.”.

 The Complaint’s allegations support a reasonable inference that at some point in 2011, Oak Hill’s interests as a venture capitalist holding the Preferred Stock diverged from the interests of the Company and its common stockholders. Venture capitalists tend to seek high returns over a short period of time, typically a “ten-fold return of capital over a five-year period.” Manuel A. Utset, Reciprocal Fairness, Strategic Behavior & Venture Survival: A Theory of Venture Capital–Financed Firms, 2002 Wis. L. Rev. 45, 60. To achieve these returns, venture capitalist try to focus resources on their likely winners while cutting their losses on likely losers. In particular,

VC firms strive to avoid a so-called “sideways situation,” also known as a “zombie company” or “the living dead,” in which the entity is profitable and requires ongoing VC monitoring, but where the growth opportunities and prospects for exit are not high enough to generate an attractive internal rate of return. These companies are routinely liquidated, usually via trade sales, by venture capitalists hoping to turn to more promising ventures.

Trados II, 73 A.3d at 51 (internal citations and quotations omitted). These preferences interact with the return profile of preferred stock, which “carries special rights that create specific economic incentives that differ from those of common stock.” Id. at 48. “Because of the preferred shareholders’ liquidation preferences, they sometimes gain less from increases in firm value than they lose from decreases in firm value. This effect may cause a board dominated by preferred shareholders to choose lower-risk, lower-value investment strategies over higher-risk, higher-value investment strategies.”50 The distorting effects of the preferred stock’s special rights “are most likely to arise when, as is often the case, the firm is neither a complete failure nor a stunning success.” Trados II, 73 A.3d at 49. The business model of VC firms and the return profile of preferred stock thus combine to generate interests that can diverge substantially from the interests of the undifferentiated equity in the aggregate. Id. at 50–51.

 The Complaint supports a reasonable inference that by 2011, Oak Hill feared the Company would become a sideways situation and wanted to get its capital back as soon as possible. The Company’s revenue had declined to $141 million, down from over $200 million in the year before Oak Hill invested. Compl. ¶¶ 28, 43. The Company was generating net income and would have had the potential to redeem small blocks of the Preferred Stock over time. Compare Thoughtworks, 7 A.3d at 980–81. But while that option was superior for the common stockholders, it was suboptimal for Oak Hill. The Complaint supports a reasonable inference that Oak Hill sought to use the Redemption Right to get back as much of its capital as possible. Oak Hill therefore used its influence as a controlling stockholder to cause the directors to pursue a de facto liquidation of the Company. That would generate a pool of otherwise unavailable cash which Oak Hill then could extract through redemption payments.51

 *29 The Complaint supports a reasonable inference that beginning in 2011, the Oak Hill Directors sought to serve Oak Hill’s interests, rather than the interests of the Company. The allegations of the Complaint indicate that the Oak Hill Directors focused on the Redemption Right, and they identify a series of actions that benefited Oak Hill by creating a pool of cash that would maximize the value of the Redemption Right:

• In 2011, the Company stopped making acquisitions or investing in growth and began stockpiling cash. By the end of the year, its cash reserves had nearly doubled, from $13.2 million at the end of 2010 to $23.7 million at the end of 2011. The accumulation of cash benefitted Oak Hill by providing funds that could be used for redemptions.

• In June 2011, the Oak Hill Directors participated in a change of management. Kupietzky left, and Domeyer emerged as the new CEO. In December, an outside director (Pourzanjani) resigned. At this stage of the proceedings, the plaintiff is entitled to the reasonable inference that these changes were linked to a new business strategy that sought to maximize the value of the Redemption Right.

• During the second half of 2011, the Company prepared to sell two of its four businesses. In January 2012, the Oak Hill Directors joined the rest of the Board in approving the sale for total proceeds of $15.4 million. This was less than a third of what the Company had paid to buy just two of the companies that comprised part of the divested businesses. The Company’s annual revenue dropped from $141 million pre-sale to $89 million post-sale, suggesting a multiple of sales price to revenue of 0.3. The timing and terms support a reasonable inference that the Company sold the lines of business to generate cash for redemptions.

• In May 2012, Pade voted with Ng as the two members of the Compensation Committee to give Domeyer, Murray, and Greene bonuses that would be triggered if the Company redeemed at least $75 million of Preferred Stock. The terms and timing support a reasonable inference that Pade and Ng were seeking to incentivize management to pursue redemptions for Oak Hill’s benefit.

• During 2012, the Company continued to stockpile cash. By the end of the year, the Company’s cash reserves had doubled a second time, reaching $50 million.

• In August 2012, the Oak Hill Directors joined with the other members of the Board in forming the Committee to evaluate the Company’s alternatives for raising capital and to negotiate with Oak Hill over the terms of any redemption. The plaintiff is entitled to the reasonable inference that the Oak Hill Directors had been focused on the Redemption Right and planning for its exercise before this point. That is what sophisticated repeat players do.

• Pade bargained aggressively with the Committee over the Redemption Right, including demanding a 12% cumulative paid-in-kind dividend on any unredeemed shares and offering an illusory forbearance agreement. At the earliest possible date, Oak Hill exercised the Redemption Right for the full amount. These positions reinforce the inference that Oak Hill wanted to get as much capital out via its Redemption Right and to do so as soon as possible.

Given this series of events, it is reasonable to infer that Oak Hill wanted to maximize the value of its contractual Redemption Right and that the Oak Hill Directors pursued Oak Hill’s interests.

 The Complaint supports a reasonable inference that this pattern continued after the March Redemption. In early 2014, the Company negotiated to sell one of its two remaining lines of business. Recognizing that any cash generated by the sale could be used to redeem the Preferred Stock, and correctly perceiving that this could create a conflict for the Oak Hill Directors, the Board charged the Committee with overseeing the negotiations. Once a deal had been reached, the Board charged the Committee with determining how much of the proceeds to use for redemptions and with implementing a broad restructuring initiative that would free up more cash for redemptions. In August 2014, the full Board adopted a business plan that contemplated further staff reductions and the sale of one segment of the Company’s lone remaining line of business, Vertical Markets. The Oak Hill Directors participated in each of these decisions. Based on the sharply curtailed business plan, the Board approved the September Redemption.

 *30 Four months later, the Company sold Shopwiki for $600,000. In 2010, the Company had acquired Shopwiki for $17 million, and it was the Company’s principal remaining source of revenue. The sale capped a remarkable two years during which the Company sold assets that generated 92% of its revenue and used the resulting cash, along with cash generated from operations, to redeem shares of Preferred Stock.

 One reasonable explanation for the change in business strategy and large-scale divestitures is that the Company sought to generate cash to facilitate upcoming redemptions that it otherwise would not be able (or required) to make. The Oak Hill Directors were dual fiduciaries who owed duties both to Oak Hill and the Company. The Complaint’s allegations support a reasonable inference that the Oak Hill Directors furthered Oak Hill’s interests. The three Oak Hill Directors cannot be considered disinterested or independent for purposes of determining the standard of review.

 b. Domeyer

Domeyer served on the Board during the period when the Company took steps to maximize the value of the Redemption Right. Domeyer was not independent because she was a highly compensated senior officer in a Company controlled by Oak Hill. “Under the great weight of Delaware precedent, senior corporate officers generally lack independence for purposes of evaluating matters that implicate the interests of the controller.”52 The fact that officers derive their principal income from their employment “powerfully strengthens the inference” that they cannot act independently from the controlling stockholder. Domeyer derived her principal income from her employment. Compl. ¶ 17.

 Domeyer also was interested in the steps taken to achieve the redemptions. Under Delaware law, a director is considered interested “when he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders.” Rales, 634 A.2d at 936. “Delaware courts apply a subjective ‘actual person’ standard to determine whether a ‘given’ director was likely to be affected in the same or similar circumstances.” McMullin, 765 A.2d at 923. “The benefit received by the director and not shared with stockholders must be of a sufficiently material importance, in the context of the director’s economic circumstances, as to have made it improbable that the director could perform her fiduciary duties ... without being influenced by her overriding personal interest.” Trados I, 2009 WL 2225958, at *6 (internal quotation omitted).

 Domeyer entered into a bonus agreement with the Company that contemplated a special payment for achieving $75 million in redemptions of the Preferred Stock. None of the common stockholders enjoyed the prospect of a similar payout. Domeyer thus stood to receive a personal financial benefit not equally shared by the stockholders.

 The Complaint’s allegations support a reasonable inference that the magnitude of the benefit was material to Domeyer—and intentionally so. For achieving the a total of $85 million in redemptions, Domeyer received a bonus of $587,184. This figure is sufficiently large to support an inference of materiality at the pleading stage,53 particularly when the purpose of the bonus appears to have been to incentivize Domeyer to pursue redemptions that would benefit Oak Hill.

 c. The Outside Directors

*31 The Complaint adequately alleges that Ng, Morgan, and Jarus acted disloyally for the bad faith purpose of maximizing the value of Oak Hill’s Redemption Right by generating funds for redemptions that otherwise would not have been available, rather than by seeking to maximize the value of the Company for the benefit of its residual claimants. This is not the only possible inference, but it is a reasonable inference at this stage.

Taken as a whole, the allegations of the Complaint identify a constellation of actions, all of which favored the interests of Oak Hill by maximizing the value of its Redemption Right. First, the Company departed starkly from its historic business strategy. Until 2011, the Company emphasized long-term growth through reinvestment and acquisitions. The Company did not accumulate or sit on large stockpiles of cash. This only changed as Oak Hill’s redemption right approached. The temporal relationship supports an inference that the directors’ business decisions were motivated by the Redemption Right.

 Second, the magnitude of the Company’s divestitures suggests an intentional effort to create a pool of capital that Oak Hill could tap. Between 2012 and 2014, the Company sold three of its four lines of business and the “crown jewel” of its only remaining line of business. Several of these sales took place at prices far below what the Company had paid to acquire the assets and at times when management believed conditions were unfavorable. A reasonable inference at this stage is that the directors sought to generate cash for upcoming redemptions, even if that course was unfavorable to the Company’s long-term prospects and the interests of its undifferentiated equity.

 Third, Ng, Morgan, and Jarus took specific actions that helped Oak Hill. In May 2012, Ng joined Pade in approving bonus arrangements for the three senior officers. The agreements gave the officers a financial incentive to pursue redemptions.

 During the second half of 2012, Morgan and Jarus negotiated with Oak Hill over the terms of a redemption. Based on the allegations of the Complaint, however, the positions they took favored Oak Hill and did little if anything for the Company. For example, the Committee proposed that Oak Hill receive a 2% cumulative paid-in-kind dividend on unredeemed shares in exchange for a forbearance right that Oak Hill could terminate on thirty-days’ notice, under circumstances where Oak Hill had no effective means of enforcing the Redemption Right if the Company did not have legally available funds, and when it was highly unlikely that the Company could generate additional funds for redemptions during the forbearance period. Although the evidence at a later stage may suggest something different, it appears at the pleadings stage that the Committee offered a material benefit to Oak Hill (the 2% cumulative dividend) for little if anything in return.

 Morgan and Jarus reinforced the impression that they were acting for the benefit of Oak Hill after Oak Hill exercised the Redemption Right. Oak Hill demanded a redemption payment of $45 million. Management had opined previously that the Company needed a cash reserve of $10 million, which would not permit a $45 million redemption. Morgan and Jarus asked management to re-assess the reserve. After management conveniently reduced the reserve to $2 million, Morgan and Jarus endorsed making the full $45 million redemption on the terms requested by Oak Hill.

 *32 Morgan and Jarus again favored Oak Hill after the sale of the Domain Monetization business in May 2014. They took charge of both determining the terms for a further redemption and implementing a restructuring initiative that would make additional funds available for redemptions. Morgan and Jarus twice rejected management’s business plans, insisting each time that management make deeper cuts that would free up more funds for Oak Hill. Morgan and Jarus then voted as part of the Board to approve a business plan that contemplated deeper staff cuts and the sale of one segment of the Company’s lone remaining line of business. Based on the business plan, Morgan and Jarus recommended a redemption payment of $40 million to Oak Hill.

By taking these actions, Morgan and Jarus effectively treated Oak Hill as a creditor with an enforceable lien on the corporation’s assets. “But the holder of preferred stock is not a creditor of the corporation. Such a holder has no legal right to annual payment of interest, as long term creditors will have, and most importantly has no maturity date with its prospect of capital repayment or remedies for default.” HB Korenvaes, 1993 WL 205040, at *5; accord Harbinger, 906 A.2d at 225 (“The holder of preferred stock is not a creditor of the corporation, and therefore does not have access to the remedies available to a creditor in addition to those generally available as a stockholder.”). “A redemption right does not give the holder the absolute, unfettered ability to force the corporation to redeem shares under any such circumstances.” Carsanaro, 65 A.3d at 644. “Mandatory redemption rights provide limited protection and function imperfectly, particularly when a corporation is struggling financially.” Thoughtworks, 7 A.3d at 992. The Redemption Provisions did not require that the Company effectively liquidate itself. That Morgan and Jarus repeatedly took steps to benefit Oak Hill as if it were a secured creditor supports a reasonable inference that they acted to maximize the value of Oak Hill’s Redemption Right rather than the long-term value of the Company for the benefit of the undifferentiated equity.

Although this course of conduct by itself is sufficient to call into question the motives of the outside directors, it is critical to remember that they acted in the shadow of a controlling stockholder, and that Morgan and Ng had additional reasons to favor Oak Hill’s interests. A controlling stockholder transaction “of course is the context in which the greatest risk of undetectable bias may be present.” Kahn v. Tremont Corp., 1996 WL 145452, at *7 (Del. Ch. Mar. 21, 1996) (Allen, C.), rev’d on other grounds, 694 A.2d 422 (Del. 1997). Although in theory a special committee of independent directors “is best positioned to extract a price at the highest possible level because it does not suffer from the collective action problem of disaggregated stockholders,” the men and women who populate the committees are rarely individuals “whose own financial futures depend importantly on getting the best price and, history shows, [they] are sometimes timid, inept, or ..., well, let’s just say worse.” In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 619 (Del. Ch. 2005) (Strine, V.C.). Particularly when a controller is present, there is the risk that “that the outside directors might be more independent in appearance than in substance.” Id.; accord Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (and Europe) Face, 30 Del. J. Corp. L. 673, 678 (2005) (explaining that when a controller is present, there is “an obvious fear that even putatively independent directors may owe or feel a more-than-wholesome allegiance to the interests of the controller, rather than to the corporation and its [minority] stockholders”).

 *33 Within this context, Morgan and Ng’s links to Oak Hill take on greater color. Morgan worked for fifteen years as a corporate attorney with the law firm that acts as Oak Hill’s long-time outside counsel, he served with Pade on another Board, and his son and Pade’s son were friends. In 2011, Ng received $24 million when Oak Hill purchased a block of his otherwise illiquid stock. This decision need not consider whether these facts would be sufficient standing alone to call into question either director’s motives. Considered together with the other allegations of the Complaint, these facts support the inference that the outside directors cannot be considered disinterested or independent for purposes of determining the standard of review.

 4. The Effect Of The Committee On The Standard Of Review

Based on the foregoing, the Complaint has called into question the disinterestedness, independence, or proper motivation of seven directors. The Company therefore lacked a disinterested or independent board majority, so the standard of review becomes entire fairness. Ordinarily, when the facts of a case would call for entire fairness review, a board of directors can seek to obtain a more deferential standard of review by deploying protective devices, such as an independent committee or a majority-of-the-minority vote. In this case, the Board formed the Committee. But because of the nature of the allegations in this case, the use of the Committee does not alter the standard of review.

If a board of directors lacks an independent and disinterested majority, then the standard of review can de-escalate from entire fairness if the board exercised its authority under Section 141(c) to empower a committee of independent and disinterested directors to make the relevant decision. If the board delegates its full power to address an issue to a committee, then the judicial analysis focuses on the committee. A decision made by a disinterested, independent, and informed majority of the committee receives business judgment deference.

By contrast, if a company also has a controlling stockholder, then the use of a committee alone is not sufficient because of the controller’s influence over the members of the committee, which it can remove using its stockholder-level authority. The controller also has special negotiating advantages, such as the ability to obtain information about the controlled company through its agents and employees on the board or simply through its status as a dominant stockholder, the opportunity to time any transactional proposal advantageously, and the power to use its stockholder voting power or other rights to veto transactional alternatives to the controller’s chosen transaction.

*34 This case falls in between a situation involving only board-level conflicts and a case involving a controlling stockholder that stands on both sides of the transaction. Oak Hill negotiated the redemptions directly opposite the Company, but in the shadow of the pre-existing Redemption Right. Oak Hill also was the intended beneficiary of the Board’s decisions to accumulate cash and divest assets. In this context, Oak Hill could and did use its power as a controller. Oak Hill used its influence at the Board-level by having the Oak Hill Directors participate in key votes. The Oak Hill directors appear to have participated in the management changes that took effect in mid–2011, as well as the change in business strategy that took place during that year. Through Pade, Oak Hill participated in the May 2012 decision to incentivize management to pursue redemptions by providing them with bonus arrangements. The Oak Hill Directors also participated in the Board decision in August 2014 to adopt a business plan that contemplated further staff reductions and the sale of one segment of the Company’s lone remaining line of business. The implementation of this business plan led to the $40 million September Redemption. Oak Hill also appears to have influenced the timing of the sales that generated the pool of cash for redemptions.

 Given these facts and the hybrid nature of the transactions at issue, the presence of a committee alone is not sufficient to lower the standard of review from entire fairness. Rather, as in a case involving classic self-dealing, the twin procedural protections of both an independent committee and a majority-of-the-minority vote would be required to restore the business judgment rule. Kahn v. M&F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014).

 When, as here, only one of these protective devices is used, then the most that can be achieved is to shift the burden of proof under the entire fairness standard from the defendants to the plaintiffs. …

 In this case, this decision already has concluded that it is reasonably conceivable that Morgan and Jarus acted in bad faith to maximize the value of Oak Hill’s Redemption Right, rather than in good faith to maximize the value of the Company for the benefit of the residual claimants. The Complaint therefore supports a reasonable inference that the Committee was not effective, and its use has no effect on the standard of review.

 5. Applying The Entire Fairness Standard At The Pleading Stage

When entire fairness applies, the defendant fiduciaries have the burden “to demonstrate that the challenged act or transaction was entirely fair to the corporation and its shareholders.” Disney II, 906 A.2d at 52. Fair dealing “embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.” Weinberger, 457 A.2d at 711. Fair price “relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock.” Id. Although the two aspects may be examined separately, “the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness.” Id. But “perfection is not possible, or expected ....” Id. at 709 n.7. In this case, the Complaint supports a reasonable inference that the defendants’ actions were not fair to the undifferentiated equity.

*35 In terms of fair price, the Company radically altered its business strategy in the shadow of Oak Hill’s Redemption Right. The Company reversed a long-time business plan that focused on achieving growth for the long term both internally and through acquisitions, and it began instead to stockpile cash. Beginning in 2012, the Company divested its major assets at prices substantially below what it had paid to acquire them. In January 2012, the Company sold two of its four business lines for $15.4 million, having paid $46.5 million to acquire only some of the assets in 2007. Those businesses contributed nearly half of the Company’s revenue. In December 2014, the Company similarly sold Shopwiki, the crown jewel of its then-lone remaining line of business, for only $600,000. The Company had acquired the business in 2010 for $17 million.

 The defendants might ultimately prove that these prices were fair. But at the pleading stage, the Complaint’s allegations give rise to a reasonable inference that the Company failed to obtain fair prices in these transactions. Equally importantly, the Complaint supports a reasonable inference that it was not fair to the undifferentiated equity to stockpile the cash from the Company’s operations and these transactions so that it would be available for redemptions. Before the Redemption Right ripened, the Company did not reinvest its accumulated cash. It held the cash until March 2013, when it used $45 million to redeem shares of Preferred Stock. The Complaint supports a reasonable inference that fiduciaries acting loyally would have continued to manage the Company for the long term, rather than stockpiling cash so that Oak Hill could sweep it up. The Complaint supports a reasonable inference that the directors unnecessarily diverted value to Oak Hill that otherwise would have accrued to the undifferentiated equity.

 Although the Preferred Stock had a $150 million liquidation preference and carried a right to mandatory redemption at that price, Oak Hill did not have the ability to force the Company to make redemptions beyond the funds that were legally available. Oak Hill’s Preferred Stock also did not carry a cumulative dividend. Preferred stock often carries a cumulative dividend which steadily increases the liquidation preference. See Trados II, 73 A.3d at 48. When present, a cumulative dividend reduces the prospect that a corporation will generate value for the undifferentiated equity, because the company not only must continue as a going concern but also generate “a sufficient return to escape the gravitational pull of the large liquidation preference and cumulative dividend.” Id. at 77. In such a situation, the common stock may be functionally worthless, because the company can never realistically generate a sufficient return to pay off the preferred stockholders and yield value for the common. Id.

 The Preferred Stock in this case did not pay a cumulative dividend. Dkt. 36, Ex. B at 4. Once the Redemption Right ripened, the Company had an obligation to use its legally available funds to redeem shares over time up to a total amount of $150 million, but the amount of the redemption obligation would not increase. To the contrary, because the Company would be redeeming the preferred over time with future dollars, the present value of the obligation would diminish. Over a long-term time horizon, the Company conceivably could have grown its business, gradually redeemed all of the Preferred Stock, and then generated returns for its common stockholders. The Preferred Stock was effectively trapped capital, and the Company could have used that capital for the benefit of the residual claimants. That type of scenario obviously was not appealing to Oak Hill, which understandably wanted as much of its capital back, as soon as possible, so it could redeploy its capital in higher-returning investments. But what was beneficial to Oak Hill and what was fair to the Company and its common stockholders are two different things. The latter is measured by what faithful fiduciaries could have achieved in light of Oak Hill’s relatively weak contractual position.

 *36 Instead of using the leverage that the Company had over Oak Hill for the benefit of the Company and its residual claimants, the directors engaged in hasty divestitures at seemingly fire-sale prices that virtually wiped out the Company’s ability to generate income. Before the divestitures, the Company’s four business lines generated $144 million in revenue. After the divestitures, the Company had one remaining line of business that generated $11 million in annual revenue and a net loss of $500,000. The allegations of the Complaint support a reasonable inference that dismembering the Company to maximize the value the Redemption Right did not yield a fair price for the undifferentiated equity.

 The Complaint’s allegations similarly support a reasonable inference that the defendants’ conduct fell short in terms of fair dealing. When directors act in bad faith, it is “extraordinarily difficult for the defendant directors to prove that the transaction was entirely fair to the corporation because it would be difficult to demonstrate fair process.” Disney I, 907 A.2d at 749 n.422. As explained above, it is reasonably conceivable that the directors acted in bad faith by effectively liquidating the company to maximize the value of Oak Hill’s Preferred Stock.

 The Complaint also alleges specific facts suggesting that particular aspects of the process were unfair. The Board used bonuses to incentivize management to favor a sale, which effectively converted them “from holders of equity interests aligned with the common stock to claimants whose return profile and incentives closely resembled those of the preferred.” Trados II, 73 A.3d at 61. The Complaint also alleges that the Company sold assets during periods that management considered unfavorable, which conceivably contributed to those assets being sold for seemingly low prices.

 It bears emphasizing that this is a pleading-stage decision. It is possible that the directors approved the challenged course of action because they believed in good faith that it was in the best interest of the undifferentiated equity. Even though Oak Hill lacked a cumulative dividend, it is possible that they concluded that the Company’s value would never exceed Oak Hill’s $150 million liquidation preference, perhaps because the Company had no meaningful prospect as a going concern. Under those circumstances, the outside directors might reasonably conclude that gradually liquidating the business was value-maximizing, since it delivered value to the fulcrum security in the capital structure while taking nothing away from the worthless common stock.55 At the motion to dismiss stage, however, the plaintiff receives the benefit of all reasonable inferences. For the reasons explained at length above, it can be reasonably inferred that the directors acted to maximize the value of Oak Hill’s Preferred Stock rather than seeking to promote the long-term value of the Company for the benefit of the undifferentiated equity, and that the resulting transactions were unfair to the Company’s common stockholders. …

  7. The Abstention Defense

*38 The Oak Hill Directors argue that they cannot be liable because they recused themselves from voting on the specific decisions that the Board made to redeem Oak Hill’s shares and, according to them, did not improperly influence their fellow directors. This argument fails at the pleading stage.

 “Delaware law clearly prescribes that a director who plays no role in the process of deciding whether to approve a challenged transaction cannot be held liable on a claim that the board’s decision to approve that transaction was wrongful.” In re Tri–Star Pictures, Inc., Litig., 1995 WL 106520, at *2 (Del. Ch. Mar. 9, 1995). But this is “not an invariable rule.” Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 753 (Del. Ch. 2007).

One might, for example, imagine a scenario in which certain members of the board of directors conspire with others to formulate a transaction that is later claimed to be wrongful. As part of the conspiracy, those directors then deliberately absent themselves from the directors’ meeting at which the proposal is to be voted upon, specifically to shield themselves from any exposure to liability. In such circumstances it is highly unlikely that those directors’ “nonvote” would be accorded exculpatory significance.

Tri–Star Pictures, 1995 WL 106520, at *3. An absent director also might be held liable if the director “play[ed] a role in the negotiation, structuring, or approval of the proposal.” Valeant, 921 A.2d at 753. “Similarly, an absent director ... who knowingly accepts a personal benefit flowing from a self-interested transaction and refuses to return it upon demand, can be thought to have ratified the action taken by the board in his absence and, thus, share in the full liability of his fellow directors.” Id. at 753–54. Or a court might hold a director liable, even if the director abstained from the formal vote to approve the transaction, if the director was “closely involved with the challenged [transaction] from the very beginning” and the transaction was rendered unfair “based, in large part,” on the director’s involvement. Gesoff, 902 A.2d at 1166 n.202.

 In this case, the Complaint supports a reasonable inference that the Oak Hill Directors could be held liable even though they abstained from the formal votes on the March and September Redemptions. All of the Oak Hill Directors were involved in many of the decisions that give rise to the Complaint, including (i) the decision in 2011 to abandon the Company’s traditional business plan and begin accumulating cash and selling off assets, (ii) the decision in 2012 to sell two of the Company’s lines of business, and (iii) the decision in 2014 to engage in a restructuring that would free up additional funds for redemptions. Pade additionally was involved in tying the officers’ bonuses to redemptions. It is also reasonably conceivable in light of the allegations of the Complaint as a whole that the Oak Hill Directors engaged in behind-the-scenes communications with their fellow directors, including Morgan, on critical matters.

 At this stage, the Complaint supports a reasonable inference that the Oak Hill Directors each participated sufficiently in the events giving rise to the case to be liable for breaching their duty of loyalty. The fact that they abstained from two discrete votes does not provide grounds for a pleading-stage dismissal.

 

7.2.2 SV Investment Partners, LLC v. Thoughtworks, Inc. 7.2.2 SV Investment Partners, LLC v. Thoughtworks, Inc.

Delaware Court of Chancery
7 A.3d 973
C.A. No. 2724-VCL
2010-11-10

SV INVESTMENT PARTNERS, LLC, Schroder Ventures U.S. Fund L.P. 1, Schroder Ventures U.S. Fund L.P. 2, Sitco Nominees, Ltd. VC 04001, and SV (Nominees) Limited, Plaintiffs, v. THOUGHTWORKS, INC.

C.A. No. 2724-VCL.

Court of Chancery of Delaware.

Submitted: Sept. 8, 2010.

Decided: Nov. 10, 2010.

See also 902 A.2d 745.

*976Martin S. Lessner, Danielle Gibbs, Tammy L. Mercer, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; Daniel M. Abuhoff, Justin P. Smith, Eliza Sporn Fromberg, Debevoise & Plimpton LLP, New York, New York; Attorneys for Plaintiffs.

Kenneth J. Nachbar, Jeffrey R. Wolters, Megan Ward Cascio, Christine Dealy Haynes, Eric S. Wilensky, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Attorneys for Defendant.

OPINION

LASTER, Vice Chancellor.

The plaintiffs are a group of affiliated investment funds and their advisor, SV Investment Partners, LLC (collectively, “SVIP”). In 2000, they purchased over 94% of the Series A Preferred Stock (the “Preferred Stock”) issued by the defendant ThoughtWorks, Inc. (“Thought-Works” or the “Company”). The amended and restated certificate of incorporation of ThoughtWorks dated April 5, 2000 (the “Charter”) granted the holders of the Preferred Stock the right to have then stock redeemed “for cash out of any funds legally available therefor” beginning five years after issuance. SVIP first exercised its redemption right in 2005.

ThoughtWorks does not have and cannot obtain the cash to redeem the Preferred Stock in full. Instead, each quarter, its board of directors (the “Board”) carefully evaluates the Company’s finances to determine (i) whether ThoughtWorks has surplus from which a redemption could be made, (ii) whether ThoughtWorks has or could readily obtain cash for a redemption, and (iii) whether a redemption would endanger the Company’s ability to continue as a going concern. Over sixteen quarters, the Board has redeemed Preferred Stock on eight separate occasions. A total of 222,802 shares have been redeemed with a total value of $4.1 million.

SVIP objects to the Board’s periodic approach. According to SVIP, the term “funds legally available” simply means “surplus.” SVIP presented an expert at trial who opined that ThoughtWorks has surplus of $68 — $137 million. SVIP argues that while ThoughtWorks may not have cash or the ability to get it, it nevertheless has “funds legally available” and must redeem the Preferred Stock. Because ThoughtWorks has failed to do so, SVIP believes itself entitled to a judgment for the aggregate redemption price. As of April 5, 2010, that amount was $66,906,539.

SVIP’s theory breaks down because the phrase “funds legally available” is not equivalent to “surplus.” A corporation can have “funds” and lack “sui*plus,” or have “surplus” and lack “funds.” The binding constraint on ThoughtWorks’ ability to redeem the Preferred Stock is a lack of funds and the concomitant risk that a significant redemption will render the Company insolvent. An unbroken line of deci-sional authority dating back to the late nineteenth century prohibits a corporation from redeeming shares when the payment would render the corporation insolvent. Even assuming that SVIP were correct and ThoughtWorks could be deemed to have “surplus,” SVIP has not shown that ThoughtWorks has “funds legally available.” Judgment is therefore entered in favor of ThoughtWorks and against SVIP.

I. FACTUAL BACKGROUND

The following factual findings have been made after a two-day trial. I also have relied on the factual findings made in a prior decision involving the parties, which are res judicata. See ThoughtWorks, Inc. v. SV Inv. P’rs, LLC, 902 A.2d 745 (Del.*977Ch.2006) (the “Working Capital Decision”).

A. The “Brand Of Outstanding Talent”

Roy Singham founded ThoughtWorks in 1993. The Company describes itself as an information technology professional services firm that develops and delivers custom business software applications and provides related consulting services. Headquartered in Chicago, ThoughtWorks provides services to clients throughout the United States and, through subsidiaries, in various parts of the world. Singham owns approximately 94% of ThoughtWorks’ common stock.

Singham created ThoughtWorks to establish “a prestige brand of outstanding talent” in the software consulting industry. To achieve this goal, he fostered a “secret sauce culture” that would appeal to the very best software developers, who, in his estimation, are ten to twenty times more productive than average software developers. ThoughtWorks places tremendous emphasis on recruiting elite professionals and providing them with challenging and intellectually stimulating work. The Company’s employees, known as “Thought-Workers,” are its most valuable asset.

The nature of ThoughtWorks’ business makes for volatile cash flows. Thought-Works’ engagements are typically short-term. Although some clients have engaged ThoughtWorks on multiple occasions over the years, each engagement typically lasts three to six months, does not automatically renew, and is subject to cancellation on as little as fifteen-days’ notice. ThoughtWorkers arrive at the scene, solve the problem, and move on. As a result, ThoughtWorks’ ability to forecast cash flows accurately is limited, and ThoughtWorks consistently failed to meet its forecasts every year through 2008.

Additionally, ThoughtWorks’ business tends to be hyper-cyclical. In a downturn, clients terminate ThoughtWorks’ contracts before laying off their own employees. In an upturn, clients engage ThoughtWorks before committing to new permanent hires. The business is also seasonal, largely due to ThoughtWorkers and clients taking holiday vacations. ThoughtWorks’ slow period runs from November to January, causing the first calendar quarter to be a low point for cash flow.

Because of the volatility in its business, ThoughtWorks’ management historically has tried to maintain a cash cushion that will enable the firm to ride out unexpected revenue shortfalls and seasonal lows. This is not to suggest that management has sought (much less been able) to amass a war chest. Rather, management prudently tries to keep some funds on hand so that checks don’t bounce during a dry spell.

B. SVIP Invests In ThoughtWorks.

In 1999, ThoughtWorks began to consider an initial public offering. Thought-Works retained an investment bank, S.G. Cowen Securities Corporation, for advice. Having an existing venture capital investor was thought to enhance a new issuer’s credibility. ThoughtWorks and S.G. Cow-en therefore prepared a confidential offering memorandum for a $25 million private equity investment.

SVIP received the offering memorandum and liked the ThoughtWorks opportunity. In contrast to the stereotypical dot-com concept, ThoughtWorks had a seven-year track record of revenue growth and profitability, and its customers consisted primarily of blue-chip, Fortune 1000 firms. While SVIP recognized that it was “paying a full valuation for the business,” the firm believed that the deal could “provide attractive returns on reasonably (and comparatively) conservative exit assumptions.” *978SVIP saw the “potential to achieve exceptional returns” if then-current market valuations held. As SVIP noted in its investment recommendation, ThoughtWorks “[c]ould be an early IPO in a market which has recently seen some extraordinary valuations.”

When negotiating the terms of SVIP’s investment, both SVIP and ThoughtWorks anticipated an IPO within a year or two. They also discussed redemption rights for SVIP in case no IPO materialized. The ThoughtWorks offering memorandum proposed a redemption, right after seven years, with the payments made in twelve quarterly installments. SVIP countered with a redemption right after four years, then softened that demand to redemption after five years. ThoughtWorks proposed a two-year payout period. SVIP rejected that term. The parties compromised on a redemption right after five years, subject both to the legal availability of funds and to a one-year working capital carve-out.

On April 5, 2000, SVIP invested $26.6 million in ThoughtWorks in exchange for 2,970,917 shares of the Preferred Stock. Another 167,037 shares were purchased by eighteen individuals who are not parties to this action.

C. The Pertinent Terms Of The Preferred Stock

The holders of the Preferred Stock are entitled to receive cumulative cash divi.dends at a rate of 9% per annum, compounded semi-annually and accruing semiannually in arrears. In any liquidation, dissolution, or winding up of the Company, the Preferred Stock is entitled to a liquidation preference equal to the initial .purchase price of $8.95 per share (adjusted for any stock dividends, splits, recapitaliza-tions, or consolidations) plus all accrued and unpaid dividends, plus an amount equal to what the Preferred Stock would receive in liquidation assuming it were converted into common stock and shared ratably with the common.

Critically for the current case, Article IV(B), Section 4(a) of the Charter sets out the Preferred Stock’s redemption right. It states:

On the date that is the fifth anniversary of the Closing Date ..., if, prior to such date, the Company has not issued shares of Common Stock to the public in a Qualified Public Offering ... each holder of Preferred Stock shall be entitled to require the Corporation to redeem for cash out of any funds legally available therefor and which have not been designated by the Board of Directors as necessary to fund the working capital requirements of the Corporation for the fiscal year of the Redemption Date, not less than 100% of the Preferred Stock held by each holder on that date. Re-demptions of each share of Preferred Stock made pursuant to this Section 4 shall be made at the greater- of (i) the Liquidation Price and (ii) the Fair Market Value (as determined pursuant to Section 4(e) below) of the Preferred Stock.

Charter art. IV(B), § 4(a) (the “Redemption Provision”). The Redemption Provision contains two limitations on the Company’s obligation “to redeem for cash.” First, the redemption can only be “out of any funds legally available therefor.” Second, the provision excludes funds “designated by the Board of Directors as necessary to fund the working capital requirements of the Corporation for the fiscal year of the Redemption Date.”

.Article IV also addresses what happens if “funds of the Corporation legally and otherwise available for redemption pursuant to Section 4(a)” are “insufficient to redeem all the Preferred Stock required to be redeemed.” In that event,

*979funds to the extent so available shall be used for such purpose and the Corporation shall effect such redemption pro rata according to the number of shares held by each holder of Preferred Stock. The redemption requirements provided hereby shall be continuous, so that if at any time after the Redemption Date such requirements shall not be fully discharged, without further action by any holder of Preferred Stock, funds available pursuant to Section 4(a) shall be applied therefor until such requirements are fully discharged.

Charter art. IV(B), § 4(d). The same provision states that “[f]or the purpose of determining whether funds are legally available for redemption ..., the Corporation shall value its assets at the highest amount permissible under applicable law” (the “Valuation Provision”). Id.

D. The Bubble Bursts And The IPO Is Abandoned.

On March 10, 2000, the NASDAQ peaked at 5132.52 in intraday trading, having more than doubled in the preceding year. A year later, on March 9, 2001, the NASDAQ closed at 2,052.78, down 59.8%. Three years later, on March 10, 2003, the NASDAQ closed at 1,278.37. It rapidly became clear to everyone that an IPO was no longer a realistic possibility for ThoughtWorks in the near term.

E. ThoughtWorks Explores Ways To Redeem The Preferred Stock.

In 2003, ThoughtWorks began considering internally how it might redeem the Preferred Stock. After an extensive analysis, ThoughtWorks general counsel Daniel Goodwin and CFO Eric Loughmiller concluded that ThoughtWorks likely could not pay approximately $43 million to redeem the Preferred Stock in April 2005. In October and November 2003, Singham presented the “Solving The Put Program” to the Global Operating Committee and the Board, identifying the redemption as one of ThoughtWorks’ top three priorities.

ThoughtWorks informed SVIP in the summer of 2003 that it would not be able to meet the redemption obligation. During late 2003 and 2004, ThoughtWorks and SVIP discussed possible resolutions. In January 2005, ThoughtWorks engaged an investment bank, William Blair and Company, to seek debt financing to redeem the Preferred Stock. In the hope that financing could be obtained, SVIP agreed to postpone the earliest date the redemption payment would be due until July 5, 2005.

William Blair prepared a confidential information memorandum and distributed it to forty-five potential lenders. In April 2005, William Blair presented the lending proposals from potential lenders in a joint meeting with ThoughtWorks and SVIP. The results were disappointing. Thought-Works had hoped to secure at least $30 million in debt financing, but the largest proposal was for $20 million. With no ability to pay $43 million, ThoughtWorks formally offered to redeem all of the Preferred Stock for $12.8 million. SVIP rejected the offer.

Meanwhile, by demand letters sent by the various SVIP entities on May 19 and 20, 2005, SVIP exercised its redemption rights and requested immediate and full redemption effective July 5, 2005.

F.The Working Capital Decision

On July 1, 2005, the ThoughtWorks Board held a special meeting to consider the SVIP redemption demand. The Board focused on the working capital restriction and concluded that “funds required to fund the working capital requirements of the Company [were] an amount in excess of available cash on July 5, 2005.” Because of the resulting lack of usable cash, the *980Board declined to redeem SVIP’s shares of Preferred Stock.

After SVIP disagreed with Thought-Works’ position, the Company filed a declaratory judgment action in this Court to obtain a determination that “it has the right, ongoing from year to year, to exclude necessary working capital from the funds available to pay the redemption obligation.” Working Capital Decision, 902 A.2d at 752. This Court concluded that “the working capital set-aside applied only in fiscal year 2005, and, thus, Thought-Works must now redeem SVIP’s preferred stock to the extent funds are legally available therefor.” Id. at 754 (emphasis added). The Court noted that “[t]he question whether ThoughtWorks has legally available funds under Delaware law to apply to its redemption obligation was not at issue in this action.” Id. at 754 n. 36. A final order was entered July 25, 2006.

G. No Legally Available Funds

Shortly after this Court issued its final order, SVIP again exercised its redemption right. On August 3, 2006, SVIP demanded that ThoughtWorks redeem its Preferred Stock for $45 million, representing the aggregate redemption price at the time.

In response, at a meeting on August 24, 2006, the Board analyzed the extent to which the Company had “funds legally available” to make a redemption payment. The Board obtained legal advice from Freeborn & Peters LLP and financial advice from AlixPartners LLC. A Freeborn memorandum set out the process for the Board to follow:

In declaring the amount of legally available funds for redemption, the Board must (a) not declare an amount that exceeds the corporation’s surplus as determined by the Board at the time of the redemption, (b) reassess its initial determination of surplus if the Board determines that a redemption based on that determination of surplus would impair the Company’s ability to continue as a going concern, thereby eroding the value of any assets (such as work in process and accounts receivable) that have materially lower values in liquidation than as part of a going concern, such that the value assumptions underlying the initial computation of surplus are no longer sustainable and the long term health of the Company is jeopardized, (c) exercise its affirmative duty to avoid decisions that trigger insolvency, (d) redeem for cash, (e) apply the amount declared pro rata to the Redeemed Stock, and (f) recognize the right of the Preferred Shareholders to a continuous remedy if the amount declared is not sufficient to satisfy in full the redemption obligation under the Charter.

At the August 24 meeting, the Board determined that ThoughtWorks had $500,000 of funds legally available and redeemed Preferred Stock in that amount.

In each of the subsequent sixteen quarters, the Board has followed the same process to determine the extent to which funds are legally available for redemptions. In each case, the Board has considered current financial information about the Company and consulted with its advisors. For example, in March 2010, AlixPartners advised the Board that ThoughtWorks’ “net asset value” was in the range of $6.2 to $22.3 million, and its “cash availability” — net of the previously declared but still unpaid redemptions — ranged from approximately $1 million (in the worse of two downside cases) to approximately $3 million (in the base case). After deliberating, the Board determined that the Company had no funds legally available and “declare[d] a redemption of Series A Preferred Stock in the amount of $0.00.” The *981Board departed from AlixPartners’ more bullish view after learning that a significant customer was falling behind in its payments and that the Company’s “days sales outstanding” had increased during the prior quarter.

To date, through this quarterly process, ThoughtWorks has redeemed a total of $4.1 million of Preferred Stock. That equates to 222,802 shares, of which 214,484 are held by SVIP. SVIP has declined to submit its stock certificates for payment.

H. SVIP Pursues The Current Litigation.

On February 8, 2007, SVIP filed this action. SVIP seeks a declaratory judgment as to the meaning of the phrase “funds legally available” and a monetary judgment for the lesser of (i) the full amount of ThoughtWorks’ redemption obligation and (ii) the full amount of ThoughtWorks’ “funds legally available.” The parties spent summer 2007 in settlement negotiations, including a day-long mediation in August 2007. They resumed discovery for the first half of 2008, then agreed to a series of standstills while settlement negotiations resumed. In February 2009, settlement talks broke down.

I. ThoughtWorks Seeks Financing For A Redemption.

Beginning in August 2009, Thought-Works sought third-party financing for a potential redemption. AlixPartners prepared an information memorandum that was sent to seventy financing sources. The seventeen who expressed interest and signed confidentiality agreements received additional information. Three sources provided nonbinding commitment letters. After due diligence, two lenders provided definitive term sheets.

The first binding term sheet was from an asset-based lender that focused on ThoughtWorks’ tangible collateral. Given the intangible nature of ThoughtWorks’ assets, the amount of financing from this source was limited. It also was contingent on all of the Preferred Stock being redeemed in return for the loan proceeds, which would have been significantly less than full redemption price.

The second binding term sheet was from the debt financing arm of a private equity firm and focused on ThoughtWorks’ ability to generate cash flow. On March 25, 2010, ThoughtWorks signed a commitment letter providing total debt financing of $30 million, including a $5 million revolving line of credit and $25 million (less expenses) to redeem the Preferred Stock. The commitment letter was conditioned on holders tendering all of the Preferred Stock. SVIP declined, and the commitment expired.

II. LEGAL ANALYSIS

Section 160 of the Delaware General Corporation Law (the “DGCL”) authorizes a Delaware corporation to redeem its shares, subject to statutory restrictions. It provides, in pertinent part:

(a) Every corporation may purchase, redeem, receive, take or otherwise acquire ... its own shares; provided, however, that no corporation shall:
(1) Purchase or redeem its own shares of capital stock for cash or other property when the capital of the corporation is impaired or when such purchase or redemption would cause any impairment of the capital of the corporation, except that a corporation ... may purchase or redeem out of capital any of its own shares which are entitled upon any distribution of its assets, whether by dividend or in liquidation, to a preference over another class or series of its stock ... if such shares will be retired *982upon their acquisition and the capital of the corporation reduced in accordance with §§ 243 and 244 of this title.

8 Del. C. § 160(a)(1). “A repurchase impairs capital if the funds used in the repurchase exceed the amount of the corporation’s ‘surplus,’ defined by 8 Del. C. § 154 to mean the excess of net assets over the par value of the corporation’s issued stock.” Klang v. Smith’s Food & Drug Ctrs., Inc., 702 A.2d 150, 153 (Del.1997). “Net assets means the amount by which total assets exceed total liabilities.” 8 Del. C. § 154. Under Section 160(a)(1), therefore, unless a corporation redeems shares and will retire them and reduce its capital, “a corporation may use only its surplus for the purchase of shares of its own capital stock.” In re Int'l Radiator Co., 92 A. 255, 256 (Del.Ch.1914).

Section 160’s restrictions on re-demptions are intended to protect creditors. See, e.g., Propp v. Sadacca, 175 A.2d 33, 38 (Del.Ch.1961), aff'd in part, rev’d in part sub nom. Bennett v. Propp, 187 A.2d 405 (Del.1962). The statute seeks to accomplish this goal by prohibiting transactions that would redistribute to stockholders assets that were part of what nineteenth and early twentieth century common law jurists deemed a permanent base of financing upon which creditors were presumed to rely when extending credit. See, e.g., In re Tichenor-Grand Co., 203 F. 720, 721 (S.D.N.Y.1913) (Hand, J.) (describing a redemption from capital as taking from the creditors “[t]he fund which they have the right to rely upon”); see generally Bayless Manning & James J. Hanks, Jr., Legal Capital ch. 2 (3d ed. 1990) [hereinafter “Legal Capital”] (describing the development and theoretical underpinnings of “legal capital” as protection for creditors); id. at ch. 4 (describing the regulation of distributions to shareholders under the “legal capital” scheme). As a practical matter, the test operates roughly to prohibit distributions to stockholders that would render the company balance-sheet insolvent, but instead of using insolvency as the' cut-off, the line is drawn at the amount of the corporation’s capital.

Section 160(a) permits a Delaware corporation to redeem shares of stock. For ThoughtWorks, the Redemption Provision converts that authority into a mandatory obligation by granting SVIP the power “to require [ThoughtWorks] to redeem for cash out of any funds legally available therefor ... not less than 100% of the Preferred Stock.”

ThoughtWorks does not have and cannot raise sufficient funds to redeem “100% of the Preferred Stock.” SVIP contends that under the circumstances, it is entitled to a judgment against ThoughtWorks for the full amount of the redemption price. SVIP argues that:

It is common practice to include in ... mandatory redemption provisions a phrase such as funds legally available, which simply means funds that carry no legal prohibition on their use. Under Delaware law, a corporation’s surplus is legally available for the redemption of its stock. Surplus is the amount by which a corporation’s net assets exceed its stated capital.... And here, ThoughtWorks promised in its Charter that for the purpose of calculating funds legally available for redemption it would value its assets at the highest legally permissible level.... At trial, SVIP’s expert valued ThoughtWorks’ assets to determine the amount of the company’s surplus [using the three standard business valuation methodologies].... The discounted cash flow (“DCF”) method produced the lowest figure, but even this figure resulted in surplus in excess of the amount necessary to redeem all of *983the preferred stock.... On this basis, SVIP seeks a judgment in the amount of the redemption obligation, $64,126,770.

Pl.’s Opening Br. at 1-3.

Equating “funds legally available” with “surplus” performs all of the work in SVIP’s argument. With that move, SVIP converts a provision contemplating payment “for cash” into a formula based on an incorporeal legalism. This is a fallacy:

One result of the perspective adopted by the legal capital scheme is that lawyers and judges often speak of making a distribution “out of surplus”, or of “paying out the surplus” to shareholders. There is no special harm in this manner of speaking so long as the speaker and all their listeners are fully conscious that the statement is hash. • “Surplus” and “deficit” are concepts invented by lawyers and accountants. They refer to an arithmetic balancing entry on a balance sheet, to the number that is the resultant of all the other numbers on the balance sheet and that is dictated by the basic mandate of the double entry book — keeping convention — that the left side and the right side must at all times balance. Distributions are never, and can never be, paid “out of surplus”; they are paid out of assets; surplus cannot be distributed — assets are distributed. No one ever received a package of surplus for Christmas. A distribution of assets will produce accounting entries that reduce assets and also reduce something on the right hand side of the balance sheet — often surplus — but that is quite another statement.

Legal Capital, supra, at 37-38. Rather than examining ThoughtWorks’ assets to determine whether it has “funds” that are “available” and can be used “legally” for redemptions, SVIP seeks a judgment based on an accounting convention.

A. The Plain Meaning Of “Funds Legally Available”

The plain meaning of “funds legally available” has more practical content. “A certificate of incorporation is viewed as a contract among shareholders, and general rules of contract interpretation apply to its terms.” Waggoner v. Laster, 581 A.2d 1127, 1134 (Del.1990). “Contracts are to be interpreted as written, and effect must be given to their clear and unambiguous terms.” Willie Gary LLC v. James & Jackson LLC, 2006 WL 75309, at *5 (Del.Ch. Jan. 10, 2006), aff'd, 906 A.2d 76 (Del.2006). “Contract terms themselves will be controlling when they establish the parties’ common meaning so that a reasonable person in the position of either party would have no expectations inconsistent with the contract language.” Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del.1997). “When a contract is clear on its face, the court should rely solely on the clear, literal meaning of the words contained in the contract.” Liquor Exch., Inc. v. Tsaganos, 2004 WL 2694912, at *2 (Del.Ch. Nov. 16, 2004).

Because the existence of surplus under Section 160 most commonly constrains a corporation’s ability to pay dividends or redeem stock, “funds legally available” is colloquially treated as if synonymous with “surplus.” The two concepts, however, are not equivalent. Black’s Law Dictionary defines “funds” as follows:

In the plural, this word has a variety of slightly different meanings, as follows: moneys and much more, such as notes, bills, checks, drafts, stocks and bonds, and in broader meaning may include property of every kind. Money in hand, assets, cash, money available for the payment of a debt, legacy, etc. Corporate stocks or government securities, in this sense usually spoken of as the “funds.” Assets, securities, bonds, or *984revenue of a state or government appropriated for the discharge of its debts. Generally, working capital; sometimes used to refer to cash or to cash and marketable securities.

Black’s Law Dictionary 673 (6th ed. 1990) (internal citations omitted). Non-legal dictionaries define funds (plural) as “available pecuniary resources,” Webster’s New Collegiate Dictionary 461 (1979), or “[ajvailable money; ready cash,” American Heritage College Dictionary 551 (1993). Each of these definitions focuses on cash, cash-equivalents, and other relatively liquid assets that could readily be used as a source of cash.

Black’s Law Dictionary defines “available” as “[s]uitable; useable; accessible; obtainable; present or ready for immediate use.” Id. at 135. Non-legal definitions of “available” include “present or ready for immediate use,” Webster’s, supra, at 77, and “[p]resent and ready for use; at hand; accessible,” or “[c]apable of being gotten; obtainable,” American Heritage, supra, at 94.

Black’s Law Dictionary defines “legal” as “[c]onforming to the law; according to law; required or permitted by law; not forbidden or discountenanced by law; ... lawful.” Id. at 892. Other definitions of “legal” include “conforming to or permitted by law or established rules,” Webster’s, supra, at 650, and “[i]n conformity with or permitted by law,” American Heritage, supra, at 774.

The phrase “funds legally available” therefore contemplates initially that there are “funds,” in the sense of a readily available source of cash. The funds must both be “available” in the general sense of accessible, obtainable, and present or ready for immediate use, and “legally” so, in the additional sense of accessible in conformity with and as permitted by law. The Redemption Provision renders this usage of “funds” all the more clear by speaking in terms of redemption “for cash out of funds legally available therefor.” The Redemption Provision thus directly links “funds” to the concept of “cash.”

A corporation easily could have “funds” and yet find that they were not “legally available.” See Klang, 702 A.2d at 154 (noting that balance sheet showed negative net worth, which prevented distribution of cash via self-tender prior to revaluation of assets); Morris v. Standard Gas & Elec. Co., 63 A.2d 577, 580-81 (Del.Ch.1949) (noting that balance sheet showed surplus of $25 million, which was insufficient for dividend of $88 million without revaluation of assets). A corporation also could lack “funds,” yet have the legal capacity to pay dividends or make redemptions because it had a large surplus. Under those circumstances, a corporation could still redeem shares in exchange for other corporate property. See Alcott v. Hyman, 208 A.2d 501, 508 (Del.1965) (explaining that Section 160 authorizes “a corporation to use its property for the purchase of its own capital stock if such use will not impair its capital”). As an insightful monograph on legal capital explains,

Occasionally, distributions are made in kind, as by parceling out security holdings or, to recall a famous World War II instance, through the distribution of warehouse receipts for whiskey. In special circumstances, a distribution may sometimes be made by distributing fractional undivided interests in a major asset, such as an oil well working agreement.

Legal Capital, supra, at 38 (footnotes omitted); see Donald Kehl, Corporate Dividends 170-74 (1941) (providing examples of non-cash distributions).

Even within the narrow confines of the DGCL, the terms are not co-extensive. Section 160 authorizes shares to be re*985deemed out of capital “if such shares will be retired upon their acquisition and the capital of the corporation reduced in accordance with §§ 243 and 244.” 8 Del. C. § 160(a). Under those circumstances, “legally available funds” extends beyond surplus to “capital.” Section 170(a) authorizes dividends, which generally can be paid only out of surplus, to be paid alternatively “out of ... net profits for the fiscal year in which the dividend is declared and/or [sic] the preceding fiscal year.” 8 Del. C. § 170(a). In that case, “legally available funds” extends to “net profits.”

Outside the DGCL, a wide range of statutes and legal doctrines could restrict a corporation’s ability to use funds, rendering them not “legally available.” The Bank Holding Company Act of 1956, 12 U.S.C. § 1841, et seq., requires bank holding companies to maintain certain capital requirements, and a subject company would need to take those restrictions into account. Federal employment taxes collected from employees are held in trust for the federal government,1 as are sales and use taxes collected by corporations for eventual payment to state governments.2 Funds subject to these and other types of restrictions would not be “legally available,” whether or not the company had “surplus” under the DGCL. See, e.g., Hurley v. Boston R. Hldg. Co., 315 Mass. 591, 54 N.E.2d 183, 198 (1944) (noting that corporation did not have funds legally available to redeem preferred stock because its only property was stock of a railroad which, by statute under Massachusetts law at the time, could not be sold without express legislative consent).

Most significantly for the current case, the common law has long restricted a corporation from redeeming its shares when the corporation is insolvent or would be rendered insolvent by the redemption.3 *986Black-letter law recognizes that “the shareholder’s right to compel a redemption is subordinate to the rights of creditors.” 11 Fletcher’s Cyclopedia of the Law of Private Corporations § 5310 (perm. ed.).

As against creditors of the corporation, preferred shareholders have no greater rights than common shareholders. They have no preference over them, either in respect to dividends or capital, and have no lien upon the property of the corporation to their prejudice, except where the statute provides otherwise. On the contrary, their rights, both in respect to dividends and capital are subordinate to the rights of such creditors, and consequently they are not entitled to any part of the corporate assets until the corporate debts are fully paid. Nor can the corporation give them any preference, either in respect to the payment of principal or dividends, which will be superior to the rights of creditors, unless by virtue of express statutory authority.

Id. § 5297 (footnotes omitted). Learned commentators similarly explain that the redemption right of a preferred stockholder cannot impair the rights of creditors and therefore cannot be exercised when the corporation is insolvent or would be rendered insolvent by the payment.4

*987Delaware follows these principles. Since at least 1914, this Court has recognized that, in addition to the strictures of Section 160, “[t]he undoubted weight of authority” teaches that a “corporation cannot purchase its own shares of stock when the purchase diminishes the ability of the company to pay its debts, or lessens the security of its creditors.” Int’l Radiator, 92 A. at 255. In Farland v. Wills, 1975 WL 1960 (Del.Ch. Nov. 12, 1975), this Court enjoined payments by a corporation to its sole stockholder, including a repurchase of stock. The Court held that it was not necessary “to conclude preliminarily that there was an actual impairment of capital” under Section 160 of the DGCL. Id. at *6. Rather, the Court enjoined the repurchase on the legal principle that “[a] corporation should not be able to become a purchaser of its own stock when it results in a fraud upon the rights of or injury to the creditors.” Id.

A corporation may be insolvent under Delaware law either when its liabilities exceed its assets, or when it is unable to pay its debts as they come due. See, e.g., N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 2006 WL 2588971, at *10 (Del.Ch. Sept. 1, 2006), aff'd, 930 A.2d 92 (Del.2007); Prod. Res. Gp., L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 782 (Del.Ch.2004). Although a corporation cannot be balance-sheet insolvent and meet the requirements of Section 160, a corporation can nominally have surplus from which redemptions theoretically could be made and yet be unable to pay its debts as they come due. The common law prohibition on redemptions when a corporation is or would be rendered insolvent restricts a corporation’s ability to redeem shares under those circumstances, giving rise to yet another situation in which “funds legally available” differs from “surplus.” See In re Color Tile, Inc., 2000 WL 152129, at *5 (D.Del. Feb. 9, 2000) (holding that complaint alleging a Delaware corporation had incurred “debts beyond its ability to pay” validly pled that the corporation “lacked legally available funds at the time of the dividend declaration”).

The Valuation Provision does not override these distinctions. It simply requires that when determining whether funds are legally available, ThoughtWorks must “value its assets at the highest amount permissible under applicable law.” The provision recognizes that there could be situations, as in Klang and Morris, when Thought-Works could have “funds” on hand and yet could not satisfy applicable legal requirements, most obviously Section 160 of the DGCL. Under those circumstances, the Valuation Provision requires that Thought-Works re-value its assets “at the highest amount permissible under applicable law” in order to free “funds” for redemptions to the maximal extent permitted by law. The Valuation Provision does not create an obligation to redeem shares when no “funds” exist. Nor can the Valuation Provision trump other legal impediments to the use of funds for redemption, such as cash-flow *988insolvency, that cannot be addressed by re-valuing assets.

SVIP’s claim depends on “funds legally available” being equivalent to “surplus.” Because the two concepts differ, SVIP’s claim fails as a matter of law. SVIP’s claim also fails because it supposes that the existence of “surplus” is sufficient to establish conclusively a corporation’s obligation to redeem shares, regardless of whether the corporation actually has funds from which the redemption can be made. “Funds legally available” means something different. It contemplates “funds” (in the sense of cash) that are “available” (in the sense of on hand or readily accessible through sales or borrowing) and can be deployed “legally” for redemptions without violating Section 160 or other statutory or common law restrictions, including the requirement that the corporation be able to continue as a going concern and not be rendered insolvent by the distribution.

B. The Amount Of Funds Legally Available

The Redemption Provision obligates ThoughtWorks to redeem the Preferred Stock only to the extent it has funds legally available. If ThoughtWorks lacks sufficient funds to redeem 100% of the Preferred Stock, then “funds to the extent so available shall be used for such purpose and [ThoughtWorks] shall effect such redemption pro rata according to the number of shares held by each holder of Preferred Stock.” Charter art. IV(B), § 4(d). The Charter further provides that “[t]he redemption requirements provided hereby shall be continuous, so that if at any time after the Redemption Date such requirements shall not be fully discharged, without further action by any holder of Preferred Stock, funds available pursuant to Section 4(a) shall be applied therefor until such requirements are fully discharged.” Id.

Under Delaware law, when directors have engaged deliberatively in the judgment-laden exercise of determining whether funds are legally available, a dispute over that issue does not devolve into a mini-appraisal. Rather, the plaintiff must prove that in determining the amount of funds legally available, the board acted in bad faith, relied on methods and data that were unreliable, or made a determination so far off the mark as to constitute actual or constructive fraud. Klang, 702 A.2d at 156; accord Morris, 63 A.2d at 584-85.

The Valuation Provision requires that ThoughtWorks “value its assets at the highest amount permissible under applicable law.” This language does not eliminate the need for judgment when determining “funds legally available.” Judgment is inherently part of the valuation process, particularly when the necessary decisions encompass the corporation’s ability to continue as a going concern. Nor does the Valuation Provision require this Court to mark ThoughtWorks’ assets at the highest number a valuation expert can put on the Company while keeping a straight face. In Klang, the Delaware Supreme Court held that a corporation has the power to revalue its assets, rather than relying on book value, to show surplus for the purpose of making stock re-demptions. 702 A.2d at 154. The Delaware Supreme Court did not invite practitioners of the valuation arts to calculate speculative figures. The Court rather stated: “Regardless of what a balance sheet that has not been updated may show, an actual, though unrealized, appreciation reflects real economic value that the corporation may boi"row against or that creditors may claim or *989levy wpon.” Id. (emphasis added). A projection-driven discounted cash flow analysis may not reflect “real economic value” or bear any relationship to what a corporation might borrow or its creditors recover.

SVIP failed to prove at trial that the Board ever (i) acted in bad faith in determining whether ThoughtWorks had legally available funds, (ii) relied on methods and data that were unreliable, or (iii) made determinations so far off the mark as to constitute actual or constructive fraud. Rather than litigate these issues, SVIP instructed its expert, Laura B. Stamm, to value ThoughtWorks, and she did so utilizing the discounted cash flow, comparable companies, and comparable transaction methodologies. Based on these analyses, she valued ThoughtWorks’ equity in the range of $68-$137 million. SVIP’s counsel instructed Stamm that in light of the Valuation Provision, her valuation was equivalent to “funds legally available.” She therefore opined that ThoughtWorks had sufficient “funds legally available” to redeem SVIP’s Preferred Stock.

Stamm concededly did not consider the amount of funds ThoughtWorks could use for redemptions while still continuing as a going concern. She never considered how making an eight-figure redemption payment would affect ThoughtWorks’ ability to operate and achieve the projections on which her analyses relied. She had no thoughts on how ThoughtWorks might raise the funds for such a redemption payment. Although defensible as a theoretical exercise, her opinion does not credibly address the issue of “funds legally available.” It does not reflect “real economic value” or bear any relationship to what ThoughtWorks might borrow or its creditors recover. It offers no assistance in determining whether the Board acted in bad faith, relied on methods and data that were unreliable, or made determinations so far off the mark as to constitute actual or constructive fraud.

The factual record demonstrates that the Board has acted in the utmost good faith and relied on detailed analyses developed by well-qualified experts. For sixteen straight quarters, the Board has undertaken a thorough investigation of the amount of funds legally available for redemption, and it has redeemed Preferred Stock accordingly. On each occasion, the Board has consulted with financial and legal advisors, received current information about the state of the Company’s business, and deliberated over the extent to which funds could be used to redeem the Preferred Stock without threatening the Company’s ability to continue as a going concern. The Board’s process has been impeccable, and the Board has acted responsibly to fulfill its contractual commitment to the holders of the Preferred Stock despite other compelling business uses for the Company’s cash. This is not a case where the Board has had ample cash available for redemptions and simply chose to pursue a contrary course. Cf. Mueller v. Kraeuter & Co., 131 N.J. Eq. 475, 25 A.2d 874, 877 (N.J.Ch.1942) (compelling corporation to take steps to redeem preferred stock where directors in prior years deployed funds exceeding amount of redemption obligation for purposes of expansion).

Most notably, the Board actively tested the market to determine what level of “funds” ThoughtWorks could obtain. A thorough canvass that included contacts with seventy potential funding sources generated a term sheet that would enable ThoughtWorks to borrow funds netting $23 million for redemptions, if and only if the “funds” were used to satisfy the entire obligation to the Preferred Stock. This proposal is the most credible evidence of *990the maximum funds legally available for a complete redemption of the Preferred Stock. There is no evidence that Thought-Works could obtain more funds for redemption or, importantly, that any third party would finance a partial redemption.

C. The Settled Commercial Expectations Of Investors And Issuers

SVIP’s plight is nothing new. The phrase “funds legally available” is not unique to the Charter. Those words or substantively identical variants customarily appear in charter provisions addressing dividends and redemptions.5 Were these words omitted, a comparable limitation would be implied by law.6 Authority spanning three different centuries adverts to and enforces limitations on the ability of preferred stockholders to force redemption.7 Delaware’s restriction on a corporation purchasing its stock when doing so *991would impair capital dates from 1909.8 Faced with venerable and widely recognized impediments to mandatory redemption, investors have developed other ways to protect themselves and secure exit opportunities.

Most obviously, in lieu of preferred stock, investors can purchase convertible debt or straight debt with warrant coverage. Either combination provides the same potential equity upside as preferred stock, but carries the downside protection of a debt instrument’s right to payment at a specified time, irrespective of the company’s financial condition. See 1 Joseph W. Bartlett, Equity Finance: Venture Capital, Buyouts, Restructurings and Reorganizations § 13.5, at 300 (2d ed. 1995) (explaining that a debenture with warrants “gets the holder to the same place as a convertible preferred”). SVIP’s representative, Nicholas E. Somers, was aware of the differences between debt and equity and recognized that he could have invested using debt.

Although debt offers an alternative, there are many reasons why investors and issuers might want to structure a position as equity. See generally George G. Triantis, Financial Contract Design in the World of Venture Capital, 68 U. Chi. L.Rev. 305, 311-19 (2001) (comparing venture capital preference for convertible securities, principally preferred stock, with bank paradigm of short-term secured debt). Investors who take equity stakes often insist on additional protections, such as a springing right to board control. See 8 Del. C. §§ 141(d), 151(a); Vogtman, 178 A. 99 (Del.Ch.1935); Petroleum Rights Corp. v. Midland Royalty Corp., 167 A. 835 (Del.Ch.1933). The National Venture Capital Association pointedly explains the rationale for such a provision in terms that apply to the current case:

Due to statutory restrictions, it is unlikely that the Company will be legally permitted to redeem in the very circumstances where investors most want it (the so-called' “sideways situation”), [so] investors will sometimes request that certain penalty provisions take effect where redemption has been requested but the Company’s available cash flow does not permit such redemption — e.g., the redemption amount shall be paid in the form of a one-year note to each unredeemed holder of Series A Preferred, and the holders of a majority of the Series A Preferred shall be entitled to elect a majority of the Company’s Board of Directors until such amounts are paid in full.

NVCA Model Term Sheet, supra, at 6 n. 14.

Another alternative, common in stockholders’ agreements, allows a preferred stockholder to sell its security and “drag along” the remaining stockholders. “Drag along” rights, which effectively allow a preferred stockholder to sell the entire company to a third party without *992board involvement, are quite common.9 A similar but stronger provision requires the forced sale of the company to the preferred stockholder. See, e.g., Hokanson v. Petty, 2008 WL 5169633 (Del.Ch. Dec. 10, 2008) (rejecting a fiduciary duty challenge to a merger effected pursuant to a “Buyout Option” negotiated by a preferred stockholder at the time of its investment).

The existence of these and other widely utilized alternatives demonstrates at least two things. First, sophisticated investors understand that mandatory redemption rights provide limited protection and function imperfectly, particularly when a corporation is struggling financially. If a standard mandatory redemption provision offered a clear path to a large monetary judgment and concomitant creditor remedies, then so many alternatives likely would not have evolved. My interpretation of “funds legally available” thus fulfills the settled expectations of investors and issuers as evidenced by established commercial practice.

Second, SVIP easily could have protected its investment and avoided its current fate through any number of means. SVIP decided not to, and that choice was rational at the time. SVIP bought the Preferred Stock at the height of the dot-com mania from a technology firm with an established track record, real revenues, and actual earnings — all of which compared favorably with many issuers then embarking on over-subscribed and first-day-popping IPOs. Everyone involved anticipated that ThoughtWorks soon would go public at a multi-billion dollar valuation. Instead, the bubble burst. Now, with hindsight, SVIP understandably wishes it had additional rights, but “it is not the proper role of a court to rewrite or supply omitted provisions to a written agreement.” Cincinnati SMSA Ltd. P’ship v. Cincinnati Bell Cellular Sys. Co., 708 A.2d 989, 992 (Del.1998).

III. CONCLUSION

Judgment is entered in favor of ThoughtWorks and against SVIP. ThoughtWorks will present a final order upon notice.

1

. See 26 U.S.C. § 3402(a) (obligation to withhold income taxes); 26 U.S.C. § 7501(a) (taxes withheld or collected for payment on behalf of another are a “special fund in trust for the United States”); Begier v. Internal Revenue Serv., 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) (holding that funds withheld for employees' income taxes and collected for excise taxes were held in trust for the IRS, and thus not property of the corporation even though commingled with general operating accounts).

2

. See, e.g., N.Y. Tax Law § 1132(a)(1) (McKinney’s 2010) (requiring person collecting sales tax to do so "as trustee for and on account of the state”); 67B Am.Jur.2d Sales and Use Taxes § 192 (2010) (“[A] retail merchant ... has a duty to remit use taxes and holds those taxes in trust for the state and is personally liable for the payment of those taxes to the state.”).

3

. See, e.g., Vanden Bosch v. Michigan Trust Co., 35 F.2d 643, 644-45 (6th Cir.1929) (rejecting preferred stockholder’s claim that, when redemption right matured, she became a creditor to the extent of the redemption right; rather, her right remained inferior to that of the corporation’s creditors); Clapp v. Peterson, 104 Ill. 26, 30 (Ill.1882) (holding that validity of redemption depends on the “condition that the rights of creditors are not affected”); Cring v. Sheller Wood Rim Mfg. Co., 98 Ind.App. 310, 183 N.E. 674, 678 (1932) (en banc) ("[A] preferred stockholder whose stock has matured is entitled to have the same redeemed pursuant to the terms of the instrument, unless the redemption of such stock cannot be done without prejudice to the rights of the creditors of the corporation....”); Rider v. John G. Delker & Sons Co., 145 Ky. 634, 140 S.W. 1011, 1012 (1911) ("It is only in cases where the corporation is solvent and the rights of creditors will not be injuriously affected thereby that agreements as to preferences among [stockholders] may be enforced.”); Hurley v. Boston R. Hldg. Co., 315 Mass. 591, 54 N.E.2d 183, 198 (1944) ("It is an implied limitation upon the contract for the redemption of ‘preferred stock' ... that such contract for redemption cannot be enforced if the effect is to render the corporation insolvent”); McIntyre v. E. Bement's Sons, 146 Mich. 74, 109 N.W. 45, 47 (1906) ("[T]he promise of ... a corporation to buy its own stock, if under any circumstances *986valid, must be considered as made, and accepted with the understanding that the shareholder may not, in face of insolvency of the company, change his relation from that of shareholder to that of creditor, escaping the responsibilities of the one and receiving the benefits of the other. To this rule there appears to be no exception.”); Mueller v. Kraeuter & Co., 131 N.J. Eq. 475, 25 A.2d 874, 875 (N.J.Ch.1942) ("[T]he company’s agreement to redeem its stock is subject to the implied limitation that it cannot be enforced at a time when the corporation is insolvent or when redemption would render the corporation insolvent.”); Topken, Loring & Schwartz, Inc. v. Schwartz, 249 N.Y. 206, 163 N.E. 735, 736 (1928) ("[I]t has generally been held that no corporation can purchase its stock with its capital to the injury of its creditors.... [A]ny agreement to purchase stock from a stockholder, which may result in the impairment of capital, will not be enforced, or will be considered illegal if the rights of creditors are affected.”); Richardson v. Vt. & Mass. R.R. Co., 44 Vt. 613, 622 (Vt.1872) (explaining that legal ability to pay a dividend (and by implication to redeem shares) "must consist of a fund adequate, not only for the payment of the claims of the plaintiffs in the cause, but for the payment of all other stockholders having like claims; and must be a surplus fund over and above what is requisite for the payment of the current expenses of the business, for discharging its duties to creditors, and over and above what reasonable prudence would require to be kept in the treasury to meet the accidents, risks, and contingencies incident to the business”); Koeppler v. Crocker Chair Co., 200 Wis. 476, 228 N.W. 130, 131 (1929) ("Agreements of a corporation to repurchase its own stock are valid, and will be enforced if made in good faith and without intent to injure creditors and they do not in fact have such effect.”).

4

. See, e.g., Henry Winthrop Ballantine, Ballantine on Corporations 510 (rev. ed. 1946) ("As a general rule, however, an apparently definite promise [to redeem preferred stock] is subject to an implied legal restriction that it is not enforceable against the corporation if it will endanger the collection of the corporate debts, as where the corporation is insolvent at the time when [redemption] falls due or even if it has not become insolvent until the time when the [redemption] obligation is to be enforced.”); 2 Charles Fisk Beach, Jr., Commentaries on the Law of Private Corporations § 506 (1891) ("The stockholder must come after the creditor.... [E]quity will not interfere when by so doing an injustice would be wrought upon corporate creditors and the other stockholders, by taking money from the treasury without which the enterprise would be crippled.”); 5 Seymour D. Thompson & Joseph W. Thompson, Commentaries on the Law of Corporations § 3607 (1927) ("The corporation can not, as against its creditors, secure the retirement of preferred stock by appropriating assets to that purpose which would, otherwise, be available to the creditors.”); Richard M. Buxbaum, Preferred Stock-Law and Draftsmanship, 42 Cal. L.Rev. *987243, 264 (1954) (“[A] contract of compulsory redemption is interpreted to require redemption ‘if the company is not insolvent or will not thereby become insolvent' (or harm creditors or impair capital).” (footnotes omitted)); I. Maurice Wormser, The Power of a Corporation to Acquire Its Own Stock, 24 Yale L.J. 177, 183, 185-86 (1915) ("The general American rule, in support of which is the decided weight of authority, affirms that a corporation has implied power to take its own shares, provided it does so in good faith and without any injury to its creditors or stockholders.... [S]uppose the contract of purchase is made when the corporation is solvent, but the payment of the purchase price for the shares would cause insolvency. This transaction also should be condemned; and the contract regarded as unenforceable since fraudulent to creditors.”).

5

. See, e.g., 3 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations Form 5.4, § 2(A) (3d ed. 2009) (preferred shareholders "shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash” (emphasis added)); Joseph W. Bartlett et al., Advanced Private Equity Term Sheets and Series A Documents § 3.07, at 3-180 (2009) ("If, on March 31, 200—, any shares of Series A Preferred Stock shall be then outstanding, the Company shall offer to redeem (unless otherwise prevented by law) all (but not less than all) such outstanding shares at an amount per share equal to $10 plus an amount equal to accrued but unpaid dividends, if any, to the date of redemption on such share.” (emphasis added, blank in original)); National Venture Capital Association Model Term Sheet, at 6, available at http://www.nvca.org/index.phpPoption= com_docman&task=doc_downIoad&gid= 75&Itemid (last visited Nov. 4, 2010) [hereinafter NVCA Model Term Sheet] ("The Series A Preferred shall be redeemable from funds legally available for distribution at the option of holders of at least [_]% of the Series A Preferred commencing any time after [_] at a price equal to the Original Purchase Price [plus all accrued but unpaid dividends].” (emphasis added, brackets in original)).

6

. In re Culbertson s, 54 F.2d 753, 757 (9th Cir.1932) ("Th[e] statutory condition imposed upon the right or privilege of calling in or redeeming preferred stock, although not expressed in the retirement provisions of any of the certificates here involved, is, upon a familiar legal principle, to be read into those provisions.”); see Harbinger Cap. P’rs Master Fund I, Ltd. v. Granite Broad. Corp., 906 A.2d 218, 230 (Del.Ch.2006) (noting that because of legal restrictions, preferred shares "provide no guaranteed right of payment”); HB Korenvaes Invs., L.P. v. Marriott Corp., 1993 WL 205040, at *5 (Del.Ch. June 9, 1993) (Allen, C.) (explaining that in light of legal limitations on a corporation’s ability to make distributions to equity, preferred stock lacks rights enjoyed by creditors, like an unconditional right to periodic payments in the form of interest, and an unconditional right to capital repayment with concomitant remedies for default); see also Vogtman v. Merchants' Mortgage & Credit Co., 178 A. 99, 101 (Del.Ch.1935) ("It must be assumed that when dividends are mentioned in the charter in the present connection, the word is meant to refer to dividends allowed and permitted by the law.”); cf. Moore v. Am. Fin. & Secs. Co., 73 A.2d 47, 48 (Del.Ch.1950) (Seitz, V.C.) (holding that security was equity rather than debt where, among other things, payment was only required "when and if the profits of the company warrant such payments”).

7

. See Balotti & Finkelstein, supra, § 5.9, at 5-18 (2010) (describing limitations on redemption); 1 David A. Drexler et al., Delaware Corporation Law and Practice § 19.01, at 19-2 to-3 (2010) (same); 1 Edward P. Welch et al., Folk on the Delaware General Corporation Law § 160.3, at GCL-V-124 to-127 (2010) (same); Note, Redemption of Prefened Shares, 83 U. Pa. L.Rev. 888, 893-94 (1935) (discussing ability of preferred shares to force redemption); P.H. Vartanian, Annotation, Validity and Effect of Agreement by a Corporation Contemporaneously with Issue or Sale of Stock, to Repurchase or Redeem the Stock or to Cancel the Subscription Therefor and Refund Consideration Paid, 101 A.L.R. 154 (1936 & Supp.) (collecting cases); see also notes 3 & 4, supra (citing additional authorities).

8

. After the 1909 revision, the DGCL stated: "Every corporation organized under this Act shall have the power to purchase, hold, sell and transfer shares of its own capital stock; Provided that no such corporation shall use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of the capital of the corporation....” 25 Del. Laws ch. 154, § 1 (1909). Delaware has prohibited corporations from paying dividends except from surplus since the passage of the original act in 1899. 21 Del. Laws ch. 273, § 18 (1899) ("No corporation created under the provisions of this Act, nor the directors thereof, shall make dividends except from the surplus or net profits arising from its business, nor divide, withdraw, or in any way pay to the stockholders, or any of them, any part of its capital stock, or reduce its capital stock, except according to this Act.... ”).

9

. See, e.g., Joseph W. Bartlett, Equity Finance: Venture Capital, Buyouts, Restructurings and Reorganizations § 10.15 (2010); Practicing Law Institute, Drag-Along Rights, 4 No. 39 PLI Pocket MBA 1 (Oct. 18, 2006); Eric A. Koester, Venture Capital Term Sheet: Drag Along Rights (2008) http://www.awo.com/ legal-guides/ugc/venture-capital-term-sheet-drag-along-rights (last visited Nov. 4, 2010); see also Cooley Godward LLP Quarterly Report, Private Company Financings 3 (Nov. 2004), available at http://www.cooley.com/ files/tbl_s5SiteRepository/FileUpload21/380/ PrivCo_112204.pdf (showing frequency of drag along rights).

7.2.3 Harbinger Capital Partners Master Fund I, Ltd. v. Granite Broadcasting Corp. 7.2.3 Harbinger Capital Partners Master Fund I, Ltd. v. Granite Broadcasting Corp.

Delaware Court of Chancery
906 A.2d 218
C.A. No. 2205-N
2006-06-29

HARBINGER CAPITAL PARTNERS MASTER FUND I, LTD., Plaintiff, v. GRANITE BROADCASTING CORPORATION, DS Audible San Francisco, LLC, and DS Audible Detroit, LLC, Defendants.

C.A. No. 2205-N.

Court of Chancery of Delaware, New Castle County.

Submitted: June 26, 2006.

Decided: June 29, 2006.

*220Kevin G. Abrams, Matthew F. Davis, Abrams & Laster, L.L.P., Wilmington, DE; Jeffrey B. Storer, Randall W. Bod-ner, Holly J. Caldwell, Ropes & Gray, L.L.P., Boston, MA, for the Plaintiff.

Peter J. Walsh, Jr., Kevin R. Shannon, Timothy R. Dudderar, Potter Anderson & Corroon, L.L.P., Wilmington, DE; Stephen M. Baldini, Ira S. Dizengoff, Jamison A. Diehl, Akin Gump Strauss Hauer & Feld, L.L.P., New York City, for Defendant Granite Broadcasting Corporation.

Christian D. Wright, Young Conaway, Stargatt & Taylor, Wilmington, DE, for Defendants DS Audible San Francisco, LLC, and DS Audible Detroit, LLC.

OPINION

LAMB, Vice Chancellor.

A holder of mandatorily redeemable preferred stock sues to enjoin certain sales of assets that, allegedly, both violate the terms of an indenture governing senior notes issued by the corporation and constitute transfers in fraud of the corporation’s current and future creditors. The corporation moves to dismiss on the ground that the plaintiff is not a creditor and, thus, lacks standing to bring the claims asserted. While acknowledging that the weight of authority supports dismissal on this ground, the preferred stockholder argues that a recent change in GAAP accounting rules supports a finding that it has standing to proceed as a creditor under the applicable fraudulent conveyance laws. In support of this argument, it points to the fact that the corporation’s own financial statements now treat the preferred stock at issue as debt, in accordance with FAS150. Thus, the question is posed whether the financial accounting treatment of this issue of redeemable preferred stock as debt, rather than equity or something between debt and equity, is a sufficient reason to confer standing on a holder of such stock to sue the corporation in the capacity of a creditor. Because the court’s review of the terms of the redeemable preferred stock at issue reveals that the redemption feature has not and never will *221give rise to a right to payment against the corporation, the court concludes that the plaintiff stockholder lacks standing to maintain this suit as a creditor.

I.

A. Parties

The defendant in this case, Granite Broadcasting Corp., is a Delaware corporation with its principal place of business in New York. Granite is a broadcasting holding company which owns or operates eleven television stations in the United States, largely centered in the Midwest and in New York state. The plaintiff, Harbinger Capital Partners Master Fund I, Ltd., is a fund organized under the laws of the Cayman Islands. Harbinger is the beneficial owner of approximately 38.6% ($77 million of liquidation preference) of Granite’s 12%% Cumulative Exchangeable Preferred Stock. A brief explanation here of the terms of those shares is necessary to understand this case.

The preferred stock has a stated coupon, denominated as a dividend.1 Under the certificate of designation, which requires the corporation to “redeem, to the extent of funds legally available therefore” all shares at a fixed price plus accumulated dividends on April 1, 2009,2 a dividend is effectively payable on that redemption date if the corporation has sufficient legally available funds to make payment. The certificate of designation further explains the consequences if Granite defaults on either its obligation to pay the cumulative dividend, or to redeem the shares. In sum, such a default would constitute a “Voting Rights Triggering Event,” entitling the holders of the preferred shares to elect the lesser of two directors or that number of directors constituting 25% of the members of the Board of Directors.3 That voting remedy is described as “the exclusive remedy at law or in equity of the holders of the Exchangeable Preferred Stock for any Voting Rights Triggering Event.” 4

Further, the certificate provides for certain additional contractual protections for preferred stockholders. For example, the certificate imposes limitations on the amount of debt undertaken by the corporation, imposes restrictions on distributions by and to subsidiaries or affiliates of the corporation, and restricts certain kinds of mergers, consolidations, and sales of assets.5 Moreover, Granite has the exclusive right to redeem the shares prior to 2009 at its option, so long as various conditions are met.6 Additionally, Granite has the exclusive right to exchange these shares for the corporation’s exchange debentures, dependent on certain conditions.7 Although the indenture governing those currently nonexistent notes appears to have been drafted, the terms of that instrument are not in the record.

B. Facts

This case arises from the fact that Granite is currently in financial difficulty. Indeed, on June 30, 2006, it will be in default on its 9%% Senior Secured Notes (“Notes”). In view of these financial difficulties, which the complaint acknowledges, on September 8, 2005 Granite entered into an agreement to sell two television stations *222in San Francisco and Detroit to AM Media Holdings, LLC for an aggregate consideration of $180 million. This proposal collapsed when the WB Network refused to extend the stations’ respective network affiliation agreements. Consequently, the complaint alleges that Granite immediately began to seek new buyers for the two stations. On May 1, 2006, the same day the agreements with AM Media were terminated, Granite entered into an agreement to sell the assets comprising the San Francisco station to DS Audible San Francisco, LLC, and an agreement to sell the assets comprising the Detroit station to DS Audible Detroit, LLC, for an aggregate consideration of $150 million. Both agreements are contingent on the closing of the other.

In brief, the plaintiffs believe that these transactions are troubling for several reasons. First, the sales include two separate 5-year non-competition agreements, one with respect to each station, that restrict Granite’s ability to re-enter either the San Francisco or Detroit markets. Harbinger believes that the fact that Granite is paid exactly the same amount for each agreement, despite the disparity in the sale price of the two stations, suggests that the non-competes are a “transparent ... attempt to avoid Granite’s restrictions under the Senior Note Indenture in a manner harmful to creditors.”8 Second, Harbinger points out that the circumstances of the sale suggest a sort of duress, insofar as the new DS Audible buyers are backed by D.B. Zwirn, an important financing source for Granite. Together, these facts are alleged to show that the sales violate the Indenture agreement governing the Notes, only temporarily delaying Granite’s inevitable bankruptcy at the expense of the company’s present and future creditors.

In addition to violating the Notes indenture, under which Harbinger advances no claim, Harbinger believes that the proposed sales violate the fraudulent conveyance acts as they exist in New York, Michigan, and California, and therefore should be enjoined. The plaintiff also requests other forms of equitable and legal relief.

II.

Granite has moved to dismiss the complaint on the grounds of standing, arguing that whatever the possible claims a creditor might have under the fraudulent conveyance statutes, Harbinger lacks the ability to bring those claims because, as a holder of preferred stock, exchangeable solely at the discretion of the company, it cannot possibly be considered a creditor under the relevant law. Rather, Harbinger is nothing but an equity holder with an interest in Granite, an interest which is cognizable in bankruptcy, and for which Harbinger might have valid fiduciary duty claims.

The plaintiff responds to this motion to dismiss by arguing that the kind of redeemable stock it holds is actually a claim on the corporation, and therefore Harbinger is effectively a Granite creditor. This contention is based mostly on the fact that, since 2008, the Financial Accounting Standards Board (“FASB”) has required that mandatorily redeemable stock be treated as long-term debt for financial statement purposes. Therefore, Harbinger argues, even if FASB regulations are not determinative factors for this court, FASB’s well thought out and deliberate decision to change the accounting treatment of such shares should at least raise an issue of fact for the court as to whether the preferred shares should be treated as debt or equity. *223Therefore, in Harbinger’s view, its complaint cannot be dismissed at this stage.

III.

In order to dismiss a claim under Court of Chancery Rule 12(b)(6), a court “must determine with reasonable certainty that, under any set of facts that could be proven to support the claims asserted, the plaintiffs would not be entitled to relief.”9 A court must accept as true all well pleaded factual allegations in the complaint and all reasonable inferences to be drawn from those facts. But a court need not “blindly accept as true all allegations, nor must it draw all inferences from them in plaintiffs’ favor unless they are reasonable inferences.” 10

It is relevant to note that this case has come before the court on a highly expedited basis. Oral argument was held on June 26, 2006. Granite has represented to the court that, in order to meet its obligations under its debentures, it has a “drop dead” date of June 30, 2006, at which time the Notes trustee may accelerate repayment. In view of that exigency, the court necessarily issues its opinion in abbreviated format.

IV.

The complaint alleges that the proposed transactions at issue violate the fraudulent conveyance law under any of three possible applicable statutes: namely, the fraudulent conveyance laws of New York, California, and Michigan. The defendants make no argument as to which of these relatively similar uniform acts control, and nothing in the court’s review of the precedent suggests that the result of this case would be any different under any of these statutes. Nonetheless, the court agrees with the plaintiff that the most reasonable law to apply under Delaware choice of law principles is that of New York, where the challenged closings are to occur, all parties have their principal places of business, and which is designated as the governing law by the purchase and sale agreements for the conveyances at issue.11

Thus, under the New York fraudulent conveyance statute, which is modeled on the Uniform Fraudulent Conveyance Act (“UFCA”), a creditor has the right to prevent or, if necessary, avoid a transfer made with the intent “to hinder, delay, or defraud either present or future creditors.” 12 Because the defendants have not challenged on this motion to dismiss the sufficiency of the complaint, the only question at this stage is whether the plaintiff is a “creditor” under the UFCA and thus whether it has standing to bring this case.13 The New York statute, accordingly, defines a “creditor” as any “person having any claim, whether matured or un-matured, liquidated or unliquidated, absolute, fixed, or contingent.”14 If the plaintiff has such a claim against Granite, it is a creditor, and has standing to pursue its fraudulent conveyance allegations.15

*224Turning to that key question, the cases presented to the court appear almost unanimous in support of the conclusion that the preferred shares in this case are not debt, but equity, and therefore that Harbinger lacks standing to bring any claims as a creditor.16 First, as the court observed during argument, a holder of preferred shares of a Delaware corporation has two foundational remedies on which to rely. Most obviously, our courts look to the certificate of designation to determine a preferred stockholder’s rights. As Chancellor Allen held in HB Korenvaes Investments, L.P. v. Marriott Corporation: 17

Rights of preferred stock are primarily but not exclusively contractual in nature. The special rights, limitations, etc., of preferred stock are created by the corporate charter or a certificate of designations which acts as an amendment to a certificate of incorporation. Thus, to a very large extent, to ask what are the rights of the preferred stock is to ask what are the rights and obligations created contractually by the certificate of incorporation.18

Additionally, although “in most instances ... this contractual level of analysis will exhaust the judicial review of corporate action challenged as a wrong to preferred stock,”19 there are some circumstances where an aggrieved preferred stockholder also has a right to pursue its claims on fiduciary duty grounds. Our courts have given examples of such prospective claims,20 but one might generally say, as this court held in Jedwab v. MGM Grand Hotels, Inc.,21 that preferred stockholders have access to fiduciary duty claims where the rights of common stock and preferred stock intersect.22

*225Wbat does seem clear, however, is that “the holder of preferred stock is not a creditor of the corporation,”23 and therefore does not have access to the remedies available to a creditor in addition to those generally available to a stockholder.24 Even where preferred shares in some way straddle the line between debt and equity, the cases which have grappled with that question in the context of bankruptcy law have held, almost universally, that those shares are forms of equity. In Joshua Slocum Limited v. Boyle,25 for example, a bankruptcy court was faced with the claim that two classes of mandatorily redeemable preferred shares should be counted as debt on the debtor’s balance sheet because, in the Trustee’s view, they had many of the characteristics of a debt.26 The court rejected that argument, noting that “the rights of shareholders to recover dividends or to redeem their stock is dependent on the financial solvency of the corporation,” and is therefore not a fixed liability the way a “claim” necessarily must be.27 Indeed, the court noted, it is the creditors who have the right to challenge as a fraudulent transfer the wrongful redemption of preferred shares when the corporation is insolvent.28 Other courts, relying on Slocum, have come to the same conclusion.29 Thus, the touchstone of “equity” under these cases is whether the security holder has a legally enforceable right to payment.

The plaintiffs argument, importantly, is based on its belief that these cases no longer control. Indeed, the plaintiff believes that a change in GAAP accounting rules in 2003 undermines the cases that have found mandatorily redeemable preferred shares to be equity, and essentially *226decides this case in its favor.30 • This change, promulgated by FASB under the name FAS150, requires companies issuing mandatorily redeemable financial instruments to report those shares as a liability rather than as equity. In FASB’s opinion, this change was required to respond to “concerns expressed by preparers, auditors, regulators, and other users of financial statements about [the] issuers’ classification in the statement of financial position of certain financial instruments that have characteristics of both liabilities and equity, but that have been presented either entirely as equity or between the liabilities section and the equity section of the statement of financial position.”31 Thus, Harbinger argues, the line of cases emanating from Slocum, to the extent that they ever controlled the question in this case, are no longer good law. Rather, because the court in Slocum placed “weight” on the corporation’s treatment of the securities as equity, a treatment that has necessarily changed since FAS150, Slocum actually supports its own position that the preferred stock in question is a debt instrument, and thus gives rise to remedies under New York’s fraudulent conveyance statute. This is confirmed, in Harbinger’s view, by the fact that Granite has now changed its accounting practice in accordance with FAS150, and accounts for the preferred shares as debt. Thus, it argues, as a Maryland court held in Costa Brava Partnership II v. Telos Corporation,32 where the question at issue was whether a preferred stockholder had standing to bring a fraudulent transfer claim under the relevant Maryland statute, the issuer’s “own conduct seems to indicate that [the preferred stock] are debt.”33

But FAS150 is not so determinative as the plaintiff asserts. To believe that it decides the case would grant FASB, which is neither lawmaker nor judge, the power to fundamentally alter the law’s understanding of the role of preferred shares. Thus, if the plaintiff is correct, the remedies of a preferred stockholder of a Delaware corporation are no longer contract and (sometimes) fiduciary duty. Because the court would be required by FAS150 to treat preferred stock as debt, preferred stockholders would have lost the latter right entirely, and gained creditors’ remedies instead. It is not credible to say, as the plaintiffs counsel urged at oral argument, that a preferred stockholder in that context would still hold rights to sue for breach of fiduciary duty in an appropriate case. That result would allow the same entity to sue in two different capacities on the basis of precisely the same instrument and the same operative facts, and thus would conflate the clear lines Delaware courts have always drawn between equity and debt holders.

Nor would FASB’s power over Delaware law be constrained to the treatment of preferred shares. The court can imagine any number of other financial instruments whose accounting treatment might, in the future, be changed by FASB, and would *227thus require some concomitant, and major, innovation in Delaware precedent. Further, if FASB ever shifted its view again, under this theory both Delaware and New York law would have to shift with it.

It is not the role of FASB to enact such significant changes in Delaware law, or in the fraudulent conveyance law of other states. Nor does FAS150 necessarily undermine Slocum and its progeny. The Slocum court did note the corporation’s accounting treatment of the shares. But, reading the opinion as a whole, it is clear to this court that the decision in Slocum turned on the question of whether the stockholders had any guaranteed right to payment. As the Reveo court held, citing Slocum, mandatory redemption provisions of convertible preferred stock is an interest and not a claim precisely because “the rights of shareholders to redeem shares are not guaranteed.”34

Moreover, the significance of Granite’s change in accounting is itself exaggerated by the plaintiff’s argument. Prior to 2003, and FAS150, Granite treated these preferred shares as between a liability and equity for financial reporting purposes.35 This has been changed, as a result of FAS150, to its current classification as purely debt. This change in Granite’s balance sheet and income statement made no change in the terms of the certificate of designation, nor did it change, in any respect, the nature of Granite’s payment obligation to Harbinger.36 Simply put, the foundational issue of standing pursuant to a statute limiting suits to a certain kind of plaintiff is too weighty to rest on the slender reed of a corporation’s decision to marginally revise its financial reporting in order to comply with FAS150.

The plaintiffs alternative argument is procedural in nature. If FAS150 does not control the result in this case, and the court must undertake some examination of the instrument at issue to determine whether it is debt or equity, Harbinger urges that such a determination is a factual matter and cannot be made on a motion to dismiss. According to the plaintiff, this court should follow the court in Costa Bra-va, which found the preferred shares at issue to have all the characteristics of equity, but nonetheless allowed the plaintiffs claim to survive a motion to dismiss for the purpose of permitting discovery on the issue of standing, based in part on the fact that the company treated the shares as debt on its balance sheet.37

Costa Brava, of course, is not controlling in this case, as the court there was interpreting Maryland law. To the extent the case represents persuasive authority, *228the court is equally persuaded by the fact that this court has on numerous occasions been able to make determinations as to the nature of a security from the face of the certificate of designation.38 More pertinently, Harbinger’s reliance on Costa Brava ignores the apparent factual complexity of that complaint. The defendant there had actually attempted to reclassify its preferred shares as debt because the redemption date had already passed, the company was insolvent, and the first tranche of its repayment obligations were due. The company’s efforts were in vain, however, because the covenants in its credit facility forbade the acquisition of additional debt.39 In the context of the impending repayment obligation, which triggered some unspecified remedy for the preferred shares, the Costa Brava complaint appears to have essentially alleged not only that the defendant was formally treating the preferred shares as debt, but that its very conduct was an attempt to consummate in fact the exchange transaction it could not complete under its credit facility. To the extent the Maryland court analyzed the issue of whether discovery was necessary, those facts appear to have created some disputed issues which could overwhelm the equity-like attributes of the preferred security.40

Estate of Mixon v. United States,41 on which the plaintiffs also rely, clearly demonstrates the point made by the Costa Brava court. There, a federal court described 11 factors, in the context of a tax dispute, which could help a court determine whether a security was debt or equity. Most of the factors, as the court clearly held, were simply matters of law, easily discernible from the face of the instrument: these included the name given to the certificate, the presence or absence of a maturity date, the source from which the company was permitted to make repayments, among other things. The court noted that other factors such as the “intent of the parties” can sometimes be factual by nature. But as the court obviously recognized, those factors signify only where there is some reason to doubt the plain language of the instrument.

Tax disputes in this field often arise in ways that require such factual discovery. As the Mixon court explained, because of “the advantageous treatment accorded loans, stockholders of closely held corporations have preferred to begin operations with a small initial stock investment accompanied by a substantial loan of additional funds.”42 Thus, tax cases often raise the question of whether a loan, from the beginning, was a ruse. Translated into more general terms, the inclusion of subjective intent as a factor in the debt/equity calculus is merely a manifestation of the well known legal principle that the court will only look to extrinsic evidence in a *229matter of contractual interpretation when there is ambiguity. Or, as the Mixon court observed, “it is not the jury’s function to determine whether the undisputed operative facts add up to debt or equity. This is a question of law.”43 It only becomes a question of fact where, as in Mix-on, the “objective signs point in all directions,” forcing the court to look closely at the facts, including subjective intent.44 Thus, nothing in Mixon or any other cases presented to the court suggests that, in the absence of pleaded facts that raise ambiguities on the face of the certifícate of designation, a court must diverge from a purely legal determination of whether the fraudulent conveyance laws apply45

This doctrinal framework appears to be in clear accord with the law of New York.46 Particularly instructive is In re Trace International Holdings, Inc.,47 which undertook to decide whether an issue of preferred shares was equity or debt under both the fraudulent conveyance provisions of the bankruptcy code and under New York’s Uniform Fraudulent Conveyance Act.48 The Trustee’s claim would fail as a matter of law under those statutes if the issuer had issued debt and not equity, because, as the court observed, an antecedent loan could not be avoided under the fraudulent conveyance statute. In order to decide the question, which was complicated by the fact that the preferred shares at issue had been distributed pursuant to a multi-part transaction that included a loan, the court approvingly cited a Delaware federal court case with similar facts, In re Color Tile, Inc.49

In Color Tile, the court held clearly that the question of whether a security constitutes equity or debt turns on the “interpretation of the contract between the corporation and security holders.”50 That interpretation is informed, the court held, by numerous factors, many of which *230are identical to those in Mixon51 Crucially, the Color Tile court held language in the certificate of designation’s (and the private placement memorandum’s) liquidation preference which promised the preferred stockholders payment “out of the assets of the company available to its stockholders” to be a conclusive factor in its decision.52 In the court’s view, that language “dispelled” any “doubt as to the true nature of the preferred [stockjhold-ers’ interest,”53 because it showed that:

[T]he preferred [stockholders enjoy priority only with respect to the funds available to stockholders, whose interests as a class are junior to the corporation’s secured creditors in the context of liquidation. Thus, there is no certainty of payment of accrued dividends or of redemption of shares upon liquidation. Where such certainty of payment is missing, the security is equity, not debt.54

The New York court in Trace expressly relied on these holdings in making its decision. When considered among the other precedents detailed in the parties’ briefs and this opinion, what emerges is that New York law is not in any way divergent from the law of its sister states on this issue.

Examining the Granite preferred shares in this framework leads clearly to the conclusion that these shares should be treated as equity for standing purposes. The defendants have conceded that these securities are classified as debt by Granite under FAS150. But, as this court noted above, that is not determinative. Nor does the complaint plead facts that suggest the kinds of factual issues that were at play in Costa Brava and in Mixon. Rather, the terms of the certificate of designation are clear and unambiguous and the question of whether the preferred shares are debt turns on an examination of those terms. What that analysis reveals is a hybrid security which falls decisively on the side of equity as a matter of law. Of course, the certificate of designation here calls the securities at issue “shares.” But the fundamental reason that the preferred shares are equity is that they provide no guaranteed right of payment. As Harbinger has discovered, should Granite fail to perform, it has no financial rights other than a claim against the residual value of the corporation. In that sense, the fate of Harbinger’s stock is tied directly to Granite’s business fortunes, in a way that all the courts cited herein have held is peculiar to equity.

Moreover, under the certificate of designation, the shares at issue provide Harbinger no right to redeem, no current dividend payments, and no right to have a dividend declared. As the court observed in Costa Brava, “there is no relation of debtor and creditor between the corporation and preferred stockholders ... until the declaration of the dividend, when, in consequence, the obligation of debtor and creditor does arise.”55 Further, as the *231certificate of designation makes clear, the preferred stockholders here do have a range of contractual rights against certain kinds of transactions. Although Harbinger is thus powerless in the sense that it has no vote in the corporation’s management until a vote-triggering event,56 it is bound contractually to Granite in the very way that our courts have held characterizes preferred stock. And, as the Color Tile court held was so vital, the liquidation preference in this case is tied directly to those assets of the corporation available for distribution to its stockholders.57 That fact demonstrates convincingly that, before the investment at issue here went poorly, the unambiguous intent of the parties was to create an equity instrument.

Finally, the court notes that the indenture which would govern the preferred shares should they convert into debt is not in the record. If, as is likely, this indenture contains an equivalent no-action clause to that contained in the Notes indenture, it seems clear that even had Granite exercised its right to convert the preferred stock to debt, Harbinger would still lack standing to pursue a claim under to the New York fraudulent conveyance statute.58 Of course, given the unsubstantiated nature of this observation, the court does not rely on this conclusion for its opinion. This point is included only to suggest that it would be an extraordinary result to infer, on the basis of FAS150, a possible right under the fraudulent con*232veyance statutes in a circumstance when the parties themselves might have contracted otherwise with those very statutes in mind. In any event, the factual context of this case, as pleaded, does not support the plaintiffs position.

V.

For the foregoing reasons, the defendant’s motion to dismiss is GRANTED. IT IS SO ORDERED.

1

. Def.'s Opening Br. Ex. A at (c)(i).

2

. Id. at (e)(ii).

3

. Id. at (f)(iii).

4

. Id.

5

. Id. at (Z )(1) — (l )(viii).

6

. Id. at (e)(i).

7

.Id. at (g)(i).

8

. Compl. ¶ 34.

9

. Grobow v. Perot, 539 A.2d 180, 187 n. 6 (Del.1988).

10

. Id. at 187.

11

. Pl.’s Answering Br. 9 n. 6.

12

. N.Y. Debt. & Cred. Law §§ 276, 279.

13

. Def.’s Reply Br. 6 n. 3.

14

. N.Y. Debt. & Cred. Law § 270.

15

. Glotzer v. Glotzer, 111 Misc.2d 171, 443 N.Y.S.2d 812, 814 (Sup.Ct.1981) (holding that a plaintiff had standing to sue under the New York fraudulent conveyance statute because she was a bona fide creditor at the time of the conveyance).

16

. The plaintiff argues, at the threshold, that the definition of “claim” adhered to in bankruptcy cases should not be used as precedent in a fraudulent transfer case because the two statutory schemes are different, designed to serve different interests, and therefore cannot be construed together. While that is doubtless correct as a general matter, there is no operative difference in how the two statutes define the word "claim." Further, as Granite observes, the Official Comments to Section 1 of the Uniform Fraudulent Transfer Act, which is admittedly not in effect in New York, expressly describe its definition of “debt” as having been derived from Section 101(11) of the Bankruptcy Code. As to the UFCA, a court interpreting New York law has held that the fraudulent conveyance provisions of the bankruptcy code and those of the New York Debt- or and Creditor Law are “typically us[ed] interchangeably” ... and can be treated collectively. See In re AppliedTheory Corp., 323 B.R. 838, 840 (Bankr.S.D.N.Y.2005), aff'd, 330 B.R. 362, 2005 U.S. Dist. Lexis 20660 (S.D.N.Y. Sept. 21, 2005).

17

. 1993 WL 205040, 1993 Del. Ch. Lexis 90 (Del. Ch. June 9, 1993).

18

. Id. at *5, 1993 Del. Ch. Lexis 90 at *14.

19

. Id. at *5, 1993 Del. Ch. Lexis 90 at *15.

20

. Id. at *6, 1993 Del. Ch. Lexis 90 at *16-17 ("In fact, it is often not analytically helpful to ask the global question whether ... the board of directors does or does not owe fiduciary duties of loyalty to the holders of preferred stock. The question ... may be too broad to be meaningful. In some instances (for example, when the question involves adequacy of disclosures to holders of preferred who have a right to vote) such a duty will exist. In others (for example, the declaration of a dividend designed to eliminate the preferred’s right to vote) a duty to act for the good of the preferred does not. Thus, the question whether duties of loyalties are implicated by corporate action affecting preferred stock is a question that demands reference to the particularities of context to fashion a sound reply.”).

21

. 509 A.2d 584, 594 (Del.Ch. 1986).

22

. Id. at 594 ("Thus, with respect to matters relating to preferences or limitations that distinguish preferred stock from common, the duty of the corporation is essentially contractual and the scope of the duty is appropriately defined by reference to the specific words of *225the contract; where however the right asserted is not to a preference as against the common stock but rather a right shared equally with the common, the existence of such right and the scope of the correlative duty may be measured by equitable as well as legal standards.”).

23

. HB Korenvaes, 1993 WL 205040, at *5, 1993 Del. Ch. Lexis 90, at *15.

24

. See HB Korenvaes Inv., 1993 WL 257422, at *14 n. 16, 1993 Del. Ch. Lexis 105, at *43 n. 16 ("Traditionally preferred stockholders have not been treated as creditors for the amount of the liquidation preference and the preference does not count as a 'claim' for fraudulent conveyance purposes”) (internal citations omitted).

25

. 103 B.R. 610, 623 (Bankr.E.D.Pa.1989).

26

. Id.

27

. Id.

28

. Id.

29

. In re Revco D.S., Inc., 118 B.R. 468, 474-75 (Bankr.N.D.Ohio 1990) (“Generally the rights of shareholders to redeem stock are not guaranteed but are dependent on the financial solvency of the corporation. Accordingly, the mandatory redemption provision of the convertible preferred stock is an interest and not a claim as New York Life asserts. New York Life's argument that it is a subordinated creditor of both Anac and Reveo by reason of its claims for fraud in connection with the purchase of the preferred stock is unfounded and will not confer 'creditor' status on New York Life.”); Carrieri v. Jobs.com, Inc., 393 F.3d 508, 523-26 (5th Cir.2004) (holding that "stock options, or the rights to exercise the stock option, are properly classified as equity security interests, not claims” because, inter alia, there was "no ‘guaranteed’ right to payment language, at specified intervals or otherwise, in the [relevant Rights Documents]”); In re Federated Dep’t Stores, Inc., 1991 Bankr.Lexis 67, at *7-9 (Bankr.S.D.Ohio Jan. 23, 1991) (holding, in a case where the issue was "whether the mandatory redemption of the preferred stock turns the preferred stockholders’ equity interest into debt” for bankruptcy purposes, that the "mandatory redemption provision of the preferred stock is an interest and not a claim” because "stock redemption rights are contingent upon the financial health of a company.”).

30

.PL’s Answering Br. 12 (“Harbinger submits that, with the promulgation of SFAS 150 in 2003, the law of the characterization of hybrid instruments has evolved to the point where Granite's required financial statement treatment of the DEPS as a liability should be determinative of Harbinger's standing under the fraudulent conveyance laws as a matter of law.... Since Harbinger owns what SFAS 150 requires to be considered a liability for financial reporting purposes, Harbinger must have standing as a creditor under state fraudulent conveyance laws.”).

31

. PL's Answering Br. Ex. B at 6.

32

. 2006 WL 1313985 (Md.Cir.Ct. Mar. 30, 2006).

33

. Id. at *5.

34

. 118 B.R. at 474.

35

. See, e.g., Granite Broadcasting, Annual Report (Form 10-K) at 27 (Apr. 1, 2002). This treatment was in accordance with FASB's recognition that before FAS 150, "certain financial instruments that have characteristics of both liabilities and equity ... have been presented either entirely as equity or between the liabilities section and the equity section of the statement of financial position.” Def.’s Answering Br. Ex. B at 6.

36

. Indeed, as the plaintiff itself observed at argument, it might well be that Granite is not even required to report these preferred shares as liabilities, since it could be that the contingent nature of Harbinger’s eventual payment under the preferred shares renders FAS 150 inapplicable. The commentary to FAS 150, which notes that shares that "allow the issuer to extend their term, defer redemption until a specified liquidity level is reached, or have similar provisions that may delay or accelerate the timing of a required redemption” should nonetheless be booked as liabilities, does not necessarily answer the question. The provision here quite clearly does not simply delay redemption, it may eliminate it altogether.

37

.2006 WL 1313985, at *5.

38

. See, e.g., HB Korenvaes, 1993 WL 205040, at *6, 1993 Del. Ch. Lexis 90, at *18 (interpreting a certificate of designation as a matter of law); NBC Universal, Inc. v. Paxson Commc'ns Corp., 2005 WL 1038997, at *5, 2005 Del. Ch. Lexis 56, at *13 (Del. Ch. Apr. 29, 2005) (although holding in that case that a summary judgment standard was appropriate, noting that "a corporate certificate of designation is interpreted using standard rules of contract interpretation”).

39

. Telos Corp., Annual Report (Form 10-K) at 16 (May 23, 2006).

40

. As the defendant also observes, the preferred shares in Costa Brava were characterized as "indebtedness” by the company’s own charter. 2006 WL 1313985, at *5. That fact might also have animated the court's apparent belief that sufficient issues to justify discovery existed.

41

. 464 F.2d 394 (5th Cir.1972).

42

. Id. at 402.

43

. Id. at 407 (citing Tyler v. Tomlinson, 414 F.2d 844, 850 (5th Cir.1969)).

44

. Id. at 407.

45

. Indeed, in a case cited by the plaintiff, the Supreme Court of the United States had no difficulty in deciding that a hybrid instrument was a form of debt as a matter of law. Paulsen v. Comm’r of Internal Revenue, 469 U.S. 131, 105 S.Ct. 627, 83 L.Ed.2d 540 (1985). Nor did either of the two courts below in that case appear to have done anything more than closely examine the disputed instrument. Paulsen v. Comm’r, 78 T.C. 291, 1982 WL 11157 (1982) (tax court); Paulsen v. Comm’r, 716 F.2d 563 (9th Cir.1983). In contrast, trial was clearly necessary in Lane v. United States, 742 F.2d 1311 (11th Cir.1984). There, a stockholder had advanced a corporation material sums in the form of a variety of notes and checks, and claimed that those payments ought to be treated as loans for tax purposes. Because there was no highly negotiated, formal instrument at issue, as is typically the case in a matter involving preferred stock, fact finding was necessary even to discover, for example, whether any interest at all had been paid on the notes. The dispute in this case is of a markedly different tenor.

46

. The plaintiff cites as support for its position that New York law treats preferred stock as debt Smith v. Kanter, 273 A.D.2d 793, 709 N.Y.S.2d 760 (N.Y.App.Div.2000), where a verdict against a preferred stockholder on fraudulent conveyance grounds was affirmed without analysis of the issue of standing. That essentially summary affirmation is not in opposition to this court's conclusion, as the New York court could have found the plaintiff's claims to be cognizable under the debtor and creditor law for any number of reasons that make no difference to the disposition of the case sub judice.

47

. 287 B.R. 98 (Bankr.S.D.N.Y.2002).

48

. Id. at 106-107.

49

. 2000 WL 152129, 2000 U.S. Dist. Lexis 1303 (Bankr D. Del. Feb. 9, 2000).

50

. Id. at *4, 2000 U.S. Dist. Lexis 1303 at *14 (citing Wolfensohn v. Madison Fund, Inc., 253 A.2d 72, 75 (Del.1969)).

51

. These included the "name given to the instrument, the intent of the parties, the presence or absence of a fixed maturity date, the right to enforce payment of principal and interest, the presence or absence of voting rights, the status of the contribution in relation to regular corporate contributors, and the certainty of payment in the event of the corporation’s insolvency or liquidation.” Id. at *4, 2000 U.S. Dist. Lexis 1303 at *14 (citing Slappey Drive Indus. Park v. United States, 561 F.2d 572, 581-82 (5th Cir.1977)).

52

. Id. at *5, 2000 U.S. Dist. Lexis 1303 at *16.

53

. Id.

54

. Id. at *5, 2000 U.S. Dist. Lexis 1303 at *17.

55

. 2006 WL 1313985, at *5 (citing Heyn v. Fidelity Trust Co., 174 Md. 639, 649, 197 A. 292 (1938)).

56

. Although the right to vote is necessarily a characteristic right of equity, its absence is not fatal to a finding that a security is equity. Indeed, when such voting rights vest in the event of default, our courts have made precisely the opposite inference. See Color Tile, 2000 WL 152129, at *5, 2000 U.S. Dist. Lexis 1303, at *7 ("The fact that the preferred shareholders held equity is further evidenced by the fact that the Memorandum accorded shareholders voting rights if Color Tile failed to pay dividends for six consecutive quarters or if it failed to redeem the shares in 2003.”).

57

. Def.’s Opening Br. Ex. A at (d)(i) (“[I]n the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the affairs of the Corporation, the Holders of shares of Exchangeable Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders an amount in cash equal to the liquidation preference for each share outstanding, plus, without duplication, an amount in cash equal to the accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution, or winding-up.”).

58

. The 9b% Senior Secured Notes are governed by a no-action clause which requires, inter alia, that the holder of any Note seeking a remedy give the trustee written notice of the claimed default, and the holders of at least 25% in principal amount of the then outstanding Notes make a written request to the trustee to pursue the remedy. Def.'s Opening Br. Ex. B at § 6.6. The court notes that under New York law, no-action clauses of indentures are strictly construed. See Cruden v. Bank of New York, 957 F.2d 961, 968 (2d Cir.1992); see also Continental Cas. Co. v. New York Mortg. Agency, 1998 WL 513054, 1998 U.S. Dist. Lexis 12784 (S.D.N.Y.1998) (citing Cruden for the proposition that “no-action clauses are strictly construed”). Although there is some doubt as to whether even broadly drafted no-action clauses are operative against all kinds of claims, McMahan & Co. v. Wherehouse Entm’t, 65 F.3d 1044 (2d Cir.1995) (holding that a no-action clause cannot bar a securities claim because of express contrary language in the 1933 and 1934 acts), a New York federal court has expressly held that no-action clauses may bar fraudulent conveyance claims if their terms are not complied with. Victor v. Riklis, 1992 WL 122911, at *6, 1992 U.S. Dist. Lexis 7025, at *20 (S.D.N.Y. May 15, 1992) ("until [the plaintiff] can demonstrate compliance with the no-action provision of the E-II indentures, he is precluded from pursuing his RICO and fraudulent conveyance claims”). The no-action language in the Note indenture is similarly broad to that in Riklis, and if the Exchange indenture contained that language, it would bar the current plaintiff from proceeding on its claims.

7.3 Registration Rights 7.3 Registration Rights