In Alta Berkeley VI C.V. v. Omneon, Inc., C.A. No. N10C-11-102 JRS CCLD (Del. Super. July 21, 2011), the Delaware Superior Court’s Complex Commercial Litigation Division¹ denied a claim for a liquidation preference by certain former preferred stockholders of Omneon, Inc. in connection with a merger between Omneon and Harmonic, Inc.

In May, 2010, Omneon entered into an Agreement and Plan of Reorganization (the “Reorganization Agreement”) with Harmonic pursuant to which Harmonic was to acquire Omneon for approximately $190 million in cash and $120 million in stock. The Reorganization Agreement provided for a sequence of transactions, including as a first step a conversion of all but one series of Omneon’s preferred stock into common stock, subject to a vote of Omneon’s preferred stockholders. Once that conversion took place, the Reorganization Agreement contemplated a series of steps that would culminate in Omneon being merged with and into an acquisition vehicle formed by Harmonic. 

Plaintiffs, who were holders of one of the series of preferred stock that was converted into common stock, brought an action for breach of contract against Omneon alleging that Omneon wrongfully denied them a liquidation preference in connection with the merger. Plaintiffs asserted that each step of the proposed merger, including the vote to convert preferred stock into common stock, was part of a “series of related transactions” that comprised a Liquidation Event under Omneon’s Certificate of Incorporation and allegedly entitled plaintiffs to a liquidation preference. Omneon argued that the vote to convert Omneon preferred stock to common stock occurred prior to the Liquidation Event (the merger), and therefore the right to a liquidation preference never accrued. 

In addressing the parties’ respective contentions, the Court confirmed that, under Delaware law, the rights of preferred stockholders as set forth in a certificate of incorporation are contractual rights, but cautioned that Delaware Courts may not “by judicial action, broaden the rights obtained by a preferred stockholder at the bargaining table.” 

The Court found that Omneon’s Certificate of Incorporation clearly and unambiguously provided that plaintiffs were entitled to a liquidation preference if and only if the Liquidation Event occurred prior to the conversion of their shares. On this issue, the Court held that while the conversion was clearly an “integral part” of the proposed merger, it was “equally clear that a ‘reasonable third party’ would read the Reorganization Agreement to stage the automatic conversion as a condition, inter alia, to the first-step merger, not to include the conversion among the ‘series of related transactions’ that comprised the merger itself.” Because the conversion occurred prior to the Liquidation Event, the Court held that plaintiffs were not entitled to a liquidation preference and granted summary judgment to the defendants. Plaintiffs have appealed the Court’s decision to the Delaware Supreme Court.  

¹The Superior Court Complex Commercial Litigation Division was created in May of 2010 to handle complex business disputes. A panel of four Superior Court judges comprises the Division and has drafted rules and procedures for the expeditious handling of these cases. See Superior Court Complex Commercial Litigation Division, https://courts.delaware.gov/Superior/complex.stm.