In LC Capital Master Fund, Ltd. v. James, C.A. No. 5214-VCS (Del. Ch. March 8, 2010), the Court of Chancery reaffirmed the principle that the board of directors does not owe any special fiduciary rights to preferred stockholders beyond the contractual rights of such stockholders. The preferred stockholders sought to enjoin a merger, alleging that the directors breached their duties of loyalty and care by failing to allocate more of the merger consideration to them.
The Court held that if a contractual provision, such as the conversion mechanism found in the certificate of designation in this case, exists, the board need only honor those rights. “To the extent that the board does so, it need not go further and extend some unspecified fiduciary beneficence on the preferred at the expense of the common.” LC Capital Master Fund, Ltd. v. James, C.A. No. 5214-VCS, slip op. at 22 (Del. Ch. March 8, 2010). When no such provision exists, however, “then the board must act as a gap-filling agency and do its best to fairly reconcile the competing interests of the common and preferred.” Id. at 22-23.
In denying the injunction, the Vice Chancellor noted that board of directors acted in accordance with its Revlon duties, and there was no lapse of care. Furthermore, the balance of equities cut against the issuance of an injunction since the merger gives the preferred stockholders appraisal rights and the plaintiff could pursue an equitable damages case.
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