The Delaware Court of Chancery dismissed a claim that sought to unwind the conversion of plaintiff’s preferred stock into common stock, where the defendant’s certificate of incorporation specifically authorized the conversion at issue. The certificate of incorporation of Mary’s Gone Crackers, Inc. (“MGC”) contained a provision that triggered an automatic conversion of all of the corporation’s preferred stock into common stock upon the affirmative vote of the holders of a majority of the outstanding Series A preferred stock and Series B preferred stock, voting together as a class. On February 17, 2012, MGC received the requisite consent of its preferred stockholders for the conversion and proceeded to amend its certificate of incorporation to eliminate the provisions of its certificate of incorporation which related to its previously outstanding preferred stock. MGC did not seek the vote of any MGC stockholder in connection with the elimination of the preferred stock terms, by amending the charter of MGC, as permitted by Section 151(g) of the General Corporation Law of the State of Delaware (the “DGCL”).
Plaintiff, a former holder of Series B preferred stock, argued that the forced conversion and subsequent elimination of the preferred stock terms were unlawful without a separate class vote of the holders of Series B preferred stock under Section D.2(b) of MGC’s certificate of incorporation (“Section D.2(b)”). Prior to its elimination, Section D.2(b) required MGC to obtain the vote of the holders of Series B preferred stock prior to effecting “any agreement or action that alters or changes the voting rights or other powers, preferences or other special rights” of the Series B preferred stock. The Court found that Section D.2(b) did not provide the holders of Series B preferred stock with a blocking right in connection with the conversion of the preferred stock or subsequent elimination of the terms of the preferred stock from MGC’s certificate of incorporation.
According to the Court, Section D.2(b) did not limit the application of the automatic conversion provision because the automatic conversion provision was itself a special right of the holders of MGC’s preferred stock. In other words, the conversion was effected by the exercise of an existing right of the holders of preferred stock, not the alteration or change of any right. The Court also held that Section D.2(b) did not limit MGC’s authority to eliminate the preferred stock terms under the DGCL because the Series B preferred stock was not outstanding at the time of the charter amendment.