John Poling v. Caplease, Inc. (Cir. Ct. Balto. City)

Filed: May 13, 2015

Opinion by: Judge W. Michel Pierson

Holdings: (1) The conversion of preferred stock to cash in connection with a cash-out merger does not violate the redemption provisions of the preferred stock, when the transaction at issue does not constitute a redemption. (2) The conversion of preferred stock to cash in connection with a cash-out merger does not violate the provisions of the preferred stock that establish a limitation upon the right of preferred stockholders to convert their stock.

Facts: Plaintiff was a holder of preferred shares in defendant corporation.  Defendant's charter authorized the corporation to issue shares of Series B Preferred Stock and Series C Preferred Stock. The Articles Supplementary classifying the preferred stock included the following terms:

[Section 3 provides for the payment of cumulative dividends at the yearly rate of 8.375% of the $25.00 per share liquidation preference of the Series B Preferred Stock (equivalent to a fixed annual amount of $2.09375 per share). The Series C Articles Supplementary contains similar terms, with an interest rate of 7.25% (equivalent to a fixed annual amount of $1.8125 per share). The Charter further provides that the Series B Preferred Stock is not redeemable prior to April 19, 2017, while the Series C Preferred Stock is not redeemable prior to January 25, 2018.]

On May 28, 2013, defendant entered into a Merger Agreement with an acquirer. According to the agreement, the acquirer would pay an amount in cash equal to $8.50 per share for each outstanding share of defendant's common stock, and each share of preferred stock would be converted into the right to receive the sum of $25.00 in cash plus an amount equal to any accrued and unpaid dividends up to but excluding the closing date of the merger.

Plaintiff felt aggrieved because holders of the preferred stock would lose their right to receive future dividends after the merger. On October 8, 2013, Plaintiff sued the defendant and alleged that the merger was a breach of the company’s contract with its preferred stockholders and that the directors had violated fiduciary duties.

Analysis: The complaint of plaintiff contained four counts, each denied by the court.

For Count I, plaintiff asserted a breach of contract claim alleging the transaction violated the redemption provisions of the Articles Supplementary. The court discussed the following: (1) While section 6 of the Articles Supplementary does limit defendant’s right to redeem the preferred stock, which would restrict the conversion of the preferred stocks, the transaction at issue did not constitute a redemption, because defendant did not acquire the stock. In addition, the Maryland General Corporation Law ("MGCL") authorizes a Maryland corporation to merge into another entity. The MGCL provides that in such a merger stock may be converted into money. See MGCL Section 3-103. (2) Contrary to plaintiff’s contention, Section 9 of the Articles Supplementary does not prevent the conversion of the preferred shares to cash upon a merger. The court interpreted this provision of the Articles Supplementary to establish a limitation upon the right of preferred stockholders to convert their stock, distinguishing the preferred stock at issue from convertible preferred securities. (3) The court declined to speculate about the possible ramification of Section 7(b) of the Articles Supplementary, related to voting rights, which had not been expressly argued.

For Count II, the court held that the plaintiff had failed to state a claim based on the defendant’s breach of fiduciary duty. The breach of fiduciary duty claim largely relied upon the allegations that defendants’ conduct contravened the Articles Supplementary. However, the court already rejected plaintiff’s contention that the merger violated the Articles Supplementary.

The court briefly discussed plaintiff’s claims for declaratory relief and aiding and abetting for Count III and Count IV, before granting defendant’s motion to dismiss.

The full opinion is available in PDF.