A recent decision of the Delaware Court of Chancery significantly affects the ability of preferred stockholders to cash out their investment in a Delaware corporation. Preferred stockholders need to take notice if they are to realize their investment expectations. The decision in In re Trados Shareholder Litigation, C.A. 1512-VCL (Del. Ch. Aug. 16, 2013), holds that directors elected by the preferred stockholders must protect the interests of the common stock or face potential liability if they favor the interests of the preferred stockholders.
First, some brief background may be helpful to explain why the Trados decision is so important. For many years, preferred stockholders were content to have the right to compel redemption of their preferred stock upon the events spelled out in the company’s certificate of designation that established the “preference” that made their stock “preferred.” For example, a typical preferred stock might have the right to be redeemed after a fixed time. Then in 2011, the Court of Chancery and Delaware Supreme Court held that the statutory and common-law limits on stock redemptions out of “funds legally available” might allow directors not to redeem the preferred and leave the preferred stockholders locked into their investment, in SV Investment Partners LLC v. ThoughtWorks, 7 A.3d 973 (Del. Ch. 2010), aff’d, 37 A.3d 205 (Del. 2011).
