BENCHMARK CAPITAL PARTNERS IV v. VAGUE, 19719 (Del.Ch. 7-15-2002)

C.A. No. 19719Court of Chancery of Delaware, New Castle CountyDate Submitted: July 11, 2002
Date Decided: July 15, 2002

Kevin G. Abrams, Esquire, Srinivas M. Raju, Esquire, Peter B. Ladig, Esquire, Lisa R. Stark, Esquire, Kelly A. Green, Esquire, and John D. Hendershot, Esquire, of RICHARDS, LAYTON FINGER, P.A., Wilmington, Delaware, Attorneys for Plaintiff.

Kenneth J. Nachbar, Esquire, William M. Lafferty, Esquire, David J. Teklits, Esquire, and Thomas W. Briggs, Jr., Esquire, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware, Attorneys for Defendant Juniper Financial Corp.

David C. McBride, Esquire, of YOUNG CONAWAY STARGATT TAYLOR LLP, Wilmington, Delaware, Attorney for Defendants CIBC Delaware Holdings, Inc. and Canadian Imperial Bank of Commerce.

MEMORANDUM OPINION
NOBLE, Vice Chancellor.

I. Introduction
This is another one of those cases in which sophisticated investors have negotiated protective provisions in a corporate charter to define the balance of power or certain economic rights as between the holders of junior preferred stock and senior preferred stock. These provisions tend to come in to play when additional financing becomes necessary. One side cannot or will not put up more money; the other side is willing to put up more money, but will not do so without obtaining additional control or other diminution of the rights of the other side. In short, these cases focus on the tension between minority rights established through the corporate charter and the corporation’s need for additional capital.

In this case, Plaintiff Benchmark Capital Partners IV, L.P. (“Benchmark”) invested in the first two series of the Defendant Juniper Financial Corp.’s (“Juniper”) preferred stock. When additional capital was required, Defendant Canadian Imperial Bank of Commerce (“CIBC”) was an able and somewhat willing investor.[1] As a result of that investment, Benchmark’s holdings were relegated to the status of junior preferred stock and CIBC acquired a controlling interest in Juniper by virtue of ownership of senior preferred stock. The lot of a holder of junior preferred stock is not always a happy one. Juniper’s Fifth Amendment and Restated Certificate of Incorporation (the “Certificate”) contains several provisions to protect the holders of junior preferred stock from abuse by the holder of senior preferred stock. Two of those provisions are of particular importance here. The Certificate grants the junior preferred stockholders a series vote on corporate actions that would “[m]aterially adversely change the rights, preferences and privileges of the [series of junior preferred stock].”[2] In addition, the junior preferred stockholders are entitled to a class vote before Juniper may “[a]uthorize or issue, or obligate itself to issue, any other equity security . . . senior to or on a parity with the [junior preferred stock].”[3]

The Certificate provides that those provisions protecting the rights of the junior preferred stockholders may be waived by CIBC.[4] CIBC may not, however, exercise this power “if such amendment, waiver or modification would . . . diminish or alter the liquidation preference or other financial or economic rights” of the junior preferred stockholders or would shelter breaches of fiduciary duties.[5]

Juniper now must seek more capital in order to satisfy regulators and business requirements, and CIBC, and apparently only CIBC, is willing to provide the necessary funds. Juniper initially considered amending its charter to allow for the issuance of another series of senior preferred stock. When it recognized that the protective provisions of the Certificate could be invoked to thwart that strategy, it elected to structure a more complicated transaction that now consists principally of a merger and a sale of Series D Preferred Stock to CIBC. The merger is scheduled to occur on July 16, 2002 with a subsidiary merging with and into Juniper that will leave Juniper as the surviving corporation, but with a restated certificate of incorporation that will authorize the issuance of a new series of senior preferred stock and new junior preferred stock with a reduced liquidation preference and will cause a number of other adverse consequences or limitations to be suffered by the holders of the junior preferred. As part of this overall financing transaction, Juniper, after the merger, intends to issue a new series of preferred, the Series D Preferred Stock, to CIBC in exchange for a $50 million capital contribution. As the result of this sequence of events, the equity holdings of the junior preferred stockholders will be reduced from approximately 29% to 7%. Juniper will not obtain approval for these actions from the holders of the junior preferred stock. It contends that the protective provisions do not give the junior preferred stockholders a vote on these plans and, furthermore, in any event, that CIBC has the right to waive the protective provisions through the Series C Trump.[6]

Benchmark, on the other hand, asserts that the protective provisions preclude Juniper’s and CIBC’s heavy-handed conduct and brings this action to prevent the violation of the junior preferred stockholder’s fundamental right to vote on these corporate actions as provided in the Certificate and to obtain interim protection from the planned evisceration of its equity interest in Juniper. Because of the imminence of the merger and the issuance of the new senior preferred stock, Benchmark has moved for a preliminary injunction to stop the proposed transaction. This is the Court’s decision on that motion.

II. The Parties
Benchmark, a Delaware limited partnership based in Menlow Park, California, is a venture capital firm specializing in preferred stock investments. It manages more than $2 billion and has made approximately 50 preferred stock investments in the preceding 5 years.

Juniper is a Delaware corporation with its principal place of business in Wilmington, Delaware, where it has more than 300 employees. It is a financial services enterprise with the issuance of credit cards as its core business. Juniper Bank is Juniper’s wholly-owned state-chartered banking subsidiary.

CIBC is a Canadian bank based in Toronto and controls Juniper through a subsidiary as the result of a $145 million investment in 2001.

The individual defendants are directors of Juniper. Defendants Richard Vague and James Stewart are founders and officers of Juniper. Defendant John Tolleson is a member of the special committee appointed by the board of Juniper to review the Series D Preferred financing.

III. Factual Background A. Benchmark and CIBC Invest in Juniper

Benchmark became the initial investor in Juniper when in June 2000, it invested $20 million and, in exchange, was issued Series A Preferred Shares. Juniper raised an additional $95.5 million in August 2000 by issuing its Series B Preferred Shares. Benchmark contributed $5 million in this effort. It soon became necessary for Juniper to obtain even more capital. Efforts to raise additional funds from existing investors and efforts to find new potential investors were unavailing until June 2001 when CIBC and Juniper agreed that CIBC would invest $27 million in Juniper through a mandatory convertible note while CIBC evaluated Juniper to assess whether it was interested in acquiring the company. CIBC also agreed to provide additional capital through a Series C financing in the event that it chose not to acquire Juniper and if Juniper’s efforts to find other sources for the needed funding were unsuccessful.

In July 2001, CIBC advised Juniper that it would not seek to acquire Juniper. After reviewing its options for other financing, Juniper called upon CIBC to invest the additional capital. The terms of the Series C financing were negotiated during the latter half of the summer of 2001. A representative of Benchmark, J. William Gurley, and its attorney were active participants in these negotiations. Through the Series C Transaction, which closed on September 18, 2001, CIBC invested $145 million (including the $27 million already delivered to Juniper).[7]
With its resulting Series C Preferred holdings, CIBC obtained a majority of the voting power in Juniper on an as-converted basis and a majority of the voting power of Juniper’s preferred stock. CIBC also acquired the right to select six of the eleven members of Juniper’s board. As required by Juniper’s then existing certificate of incorporation, the approval of the holders of Series A Preferred and Series B Preferred Stock, including Benchmark, was obtained in order to close the Series C Transaction.[8]
B. The Certificate’s Protective Provisions

In the course of obtaining that consent, CIBC had extensive negotiations regarding the provisions of Juniper’s charter designed to protect the rights and interests of the holders of Series A Preferred and Series B Preferred Stock.[9] For example, CIBC had sought the power to waive, modify or amend certain protective provisions held by the Series A Preferred and Series B Preferred stockholders. As the result of those discussions, the Certificate was adopted. CIBC obtained the right to waive certain protective voting provisions, but the right was not unlimited. A review of the Certificate’s protective provisions directly involved in the pending dispute follows.

Juniper’s Certificate protects the holders of Series A Preferred and Series B Preferred from risks associated with the issuance of any additional equity security that would be senior to those shares by requiring their prior approval through a separate class vote as prescribed in Section C.6.a(i):

So long as any shares of Series A Preferred Stock or Series B Preferred Stock remain outstanding, the Corporation shall not, without the vote or written consent by the holders of at least a majority of the then outstanding shares of the Series A Preferred Stock and Series B Preferred Stock, voting together as a single class; provided, however, that the foregoing may be amended, waived or modified pursuant to Section C.4.c: (i) Authorize or issue, or obligate itself to issue, any other equity security (including any security convertible into or exercisable for any equity security) senior to or on a parity with the Series A Preferred Stock or Series B Preferred Stock as to dividend rights or redemption rights, voting rights or liquidation preferences (other than the Series C Preferred Stock and Series C Prime Preferred Stock sold pursuant to, or issued upon the conversion of the shares sold pursuant to, the Series C Preferred Stock Purchase Agreement . . .)

Under Section C.6.a(ii), Juniper also must provide the holders of the junior preferred stock with a class vote before it may proceed to dispose of all or substantially all of its assets or to “consolidate or merge into any other Corporation (other than a wholly-owned subsidiary Corporation).” Furthermore, this right to a class vote also applies to efforts to increase the number of Juniper’s directors.

Because CIBC was investing a substantial sum in Juniper, it insisted upon greater control than it would have obtained if these voting provisions (and other comparable provisions) could be exercised without limitation by the holders of Series A Preferred and Series B Preferred shares as a class. Thus, it sought and obtained a concession from the Series A Preferred and Series B Preferred holders that it could amend, waive, or modify, inter alia, the protective provisions of Section C.6.a.[10] The right of CIBC to waive the voting rights of the Series A Preferred and Series B Preferred holders was limited by excluding from the scope of the waiver authority any action that “would (a) diminish or alter the liquidation preference or other financial or economic rights, modify the registration rights, or increase the obligations, indemnities or liabilities, of the holders of Series A Preferred Stock, Series A Prime Preferred Stock or Series B Preferred Stock or (b) authorize, approve or waive any action so as to violate any fiduciary duties owed by such holders under Delaware law.”

Another protection afforded the holders of both the Series A Preferred and Series B Preferred Stock was set forth in Sections C.6.c(ii)
C.6.d(ii) of the Certificate. Those provisions require a vote of the holders of each series, provided that the requirement for a series vote was not amended or waived by CIBC in accordance with Section C.4.c, if that corporate action would “[m]aterially adversely change the rights, preferences and privileges of the Series A Preferred [and Series B] Preferred Stock.”

C. Additional Financing Becomes Necessary

By early 2002, Juniper was advising its investors that even more capital would be necessary to sustain the venture.[11] Because Juniper is in the banking business, the consequences of a capital shortage are not merely those of the typical business. Capital shortfall for a banking entity may carry the potential for significant and adverse regulatory action. Regulated not only by the Federal Reserve Board and the Federal Deposit Insurance Corporation but also by the Delaware Banking Commissioner, Juniper is required to maintain a “well-capitalized” status. Failure to maintain that standard (or to effect a prompt cure) may result in, among other things, regulatory action, conversion of the preferred stock into a “senior common stock” which could than be subjected to the imposition of additional security through the regulatory authorities, and the loss of the right to issue Visa cards and to have its customers serviced through the Visa card processing system.

Juniper, with the assistance of an investment banking firm, sought additional investors. The holders of the Series A Preferred and Series B Preferred Stock, including Benchmark, were also solicited. Those efforts failed, thus leaving CIBC as the only identified and viable participant available for the next round of financing, now known as the Series D Transaction.[12]
D. The Series D Preferred Transaction

Thus, Juniper turned to consideration of CIBC’s proposal, first submitted through a term sheet on March 15, 2002, to finance $50 million through the issuance of Series D Preferred Stock that would grant CIBC an additional 23% of Juniper on a fully-diluted basis and reduce the equity interests of the Series A Preferred and Series B Preferred holders from approximately 29% to 7%.[13]

The board, in early April 2002, appointed a special committee to consider the CIBC proposal.[14] As the result of the negotiations among Juniper, the special committee, and CIBC, the special committee was able to recommend the Series D Transaction with CIBC. The terms of the Series D Transaction are set forth in the “Juniper Financial Corp. Series D Preferred Stock Purchase Agreement”[15] and the “Agreement and Plan of Merger and Reorganization by and Between Juniper Financial Corp. and Juniper Merger Corp.”[16]

In general terms, the Series D Transaction consists of the following three steps:

1. Juniper will carry out a 100-1 reverse stock split of its common stock.[17]
2. Juniper Merger Corp., a subsidiary of Juniper established for these purposes, will be merged with and into Juniper which will be the surviving corporation. The certificate of incorporation will be revised as part of the merger.
3. Series D Preferred Stock will be issued to CIBC (and, at least in theory, those other holders of Series A, B and C Preferred who may exercise preemptive rights) for $50 million.

Each share of existing Series A Preferred[18] and each share of existing Series B Preferred will be converted into one share of new Series A Preferred or Series B Preferred, respectively, and the holders of the existing junior preferred will also receive, for each share, a warrant to purchase a small fraction of a share of common stock in Juniper and a smaller fraction of a share of common stock in Juniper.[19]
A small amount of cash will also be paid. Juniper will receive no capital infusion as a direct result of the merger. Although the existing Series A Preferred and Series B Preferred shares will cease to exist and the differences between the new and distinct Series A Preferred and Series B Preferred shares will be significant,[20] the resulting modification of Juniper’s certificate of incorporation will not alter the class and series votes required by Section C.6.[21] The changes to Juniper’s charter as the result of the merger include, inter alia, authorization of the issuance of Series D Preferred Shares, which will be senior to the newly created Series A Preferred and Series B Preferred Stock with respect to, for example, liquidation preferences, dividends, and as applicable, redemption rights.[22] Also the Series D Stock will be convertible into common stock at a higher ratio than the existing or newly created Series A Preferred and Series B Preferred Stock, thereby providing for a currently greater voting power. In general terms, the equity of the existing Series A Preferred and Series B Preferred holders will be reduced from approximately 29% before the merger to approximately 7% after the Series D financing, and CIBC will hold more than 90% of Juniper’s voting power.

Juniper intends to proceed with the merger on July 16, 2002 and to promptly thereafter consummate the Series D financing. It projects that, without the $50 million infusion from CIBC, it will not be able to satisfy the “well-capitalized” standard as of July 31, 2002. That will trigger, or so Juniper posits, the regulatory problems previously identified and business problems, such as the risk of losing key personnel and important business relationships. Indeed, Juniper predicts that liquidation would ensue and, in that event (and Benchmark does not seriously contest this), that the holders of Series A Preferred and Series B Preferred Stock would receive nothing (or essentially nothing) from such liquidation.

IV. Contentions of the Parties
Benchmark begins its effort to earn a preliminary injunction by arguing that the junior preferred stockholders are entitled to a vote on the merger on a series basis under Sections C.6.c(ii) C.6.d(ii) because the merger adversely affects, inter alia, their liquidation preference and dividend rights and on a class basis under Section C.6.a(i) because the merger, through changes to Juniper’s capital structure as set forth in its revised certificate of incorporation, will authorize the issuance of a senior preferred security.[23] Benchmark also invokes its right to a class vote to challenge the Series D Purchase Agreement under Section C.6.a(i) because that agreement obligates Juniper to issue a senior preferred security. Similarly, Benchmark challenges the issuance of the new Series D Preferred Stock after the merger because it will be issued without a class vote by the holders of either the old or the new Series A Preferred Stock and the new Series B Preferred Stock.

In response, Juniper and CIBC argue that the junior preferred stockholders are not entitled to a class or series vote on any aspect of the Series D financing, particularly the merger. The adverse effects of the transaction arise from the merger and not from any separate amendment of the certificate of incorporation, which would have required the exercise of the junior preferred stockholders’ voting rights.[24]
Juniper and CIBC emphasize that none of the junior preferred stock protective provisions expressly applies to mergers. Finally, Juniper and CIBC assert that the Series C Trump allows for the waiver of all of the voting rights at issue (except for the diminishment of the liquidation preference accomplished by the merger). Benchmark, as one might expect, maintains that the exercise of the Series C Trump is precluded because the “economic or financial rights” of the holders of the junior preferred will be adversely affected and, therefore, the limitation on CIBC’s right to exercise the Series C Trump is controlling.

Juniper and CIBC also vigorously contest the issuance of a preliminary injunction by arguing that a balancing of the equities (or balancing of the relative harms from granting or not granting the preliminary injunction) heavily counsels against its issuance. They point out that, in the absence of the proposed financing, Juniper would encounter severe regulatory and business problems, that liquidation would be likely, and that, with liquidation, Benchmark and the other junior preferred shareholders would receive little or nothing from their interests in Juniper.

V. Analysis A. Preliminary Injunction Standard

The familiar standard for a preliminary injunction places the burden on the movant to demonstrate “(1) a reasonable probability of success on the merits, (2) irreparable harm if the injunction is not granted, and (3) a balance of equities in favor of granting the relief.”[25] Because a preliminary injunction is an extraordinary remedy, such relief will not be granted “where the remedy sought is excessive in relation to, or unnecessary to prevent, the injury threatened.”[26] With this framework in mind, I will first consider the reasonable probability of success of each of Benchmark’s arguments.

B. Reasonable Probability of Success on the Merits
1. General Principles of Construction

Certificates of incorporation define contractual relationships not only among the corporation and its stockholders but also among the stockholders.[27] Thus, the Certificate defines, as a matter of contract, both the relationship between Benchmark and Juniper and the relative relationship between Benchmark, as a holder of junior preferred stock, and CIBC, as the holder of senior preferred stock. For these reasons, courts look to general principles of contract construction in construing certificates of incorporation.[28]

[A court’s function in ascertaining the rights of preferred stockholders] is essentially one of contract interpretation against the background of Delaware precedent. These precedential parameters are simply stated: Any rights, preferences and limitations of preferred stock that distinguish that stock from common stock must be expressly and clearly stated, as provided by statute. Therefore, these rights, preferences and liquidations will not be presumed or implied.[29]

These principles also apply in construing the relative rights of holders of different series of preferred stock.[30]
2. Challenges to the Merger

Benchmark presents two distinct challenges to the merger. First, it argues that Section C.6.c(ii), which protects the rights of the holders of Series A Preferred, and Section C.6.d(ii), which protects the rights of the holders of Series B Preferred, preclude the merger without a series vote because the merger “[m]aterially adversely changes the rights, preferences and privileges” of those classes of preferred stock. Second, Benchmark asserts that the merger cannot go forward, without a class vote by the holders of the Series A Preferred and Series B Preferred Stock combined, because of Section C.6.a(i), which precludes the authorization of a senior preferred stock without such a vote. The Series D Preferred Stock, when issued, will have rights superior to the Series A Preferred and Series B Preferred Stock, either in existing form or in the post-merger form. Because the merger agreement provides the mechanism for the authorization of the Series D Preferred Stock through the accompanying restatement of Juniper’s certificate of incorporation, it falls within the reach of Section C.6.a(i), or so Benchmark argues.

a. Merger as Changing the Rights, Preferences and Privileges

Benchmark looks at the Series D Preferred financing and the merger that is integral to that transaction and concludes that the authorization of the Series D Preferred Stock and the other revisions to the Juniper certificate of incorporation accomplished as part of the merger will materially adversely affect the rights, preferences, and privileges of the junior preferred shares. Among the adverse affects to be suffered by Benchmark are a significant reduction in its right to a liquidation preference, the authorization of a new series of senior preferred stock that will further subordinate its interests in Juniper, and a reduction in other rights such as dividend priority.[31] These adverse consequences will all be the product of the merger. Benchmark’s existing Series A Preferred and Series B Preferred shares will cease to exist as of the merger and will be replaced with new Series A Preferred Stock, new Series B Preferred Stock, warrants, common stock, and a small amount of cash. One of the terms governing the new junior preferred stock will specify that those new junior preferred shares are not merely subordinate to Series C Preferred Stock, but they also will be subordinate to the new Series D Preferred Stock. Thus, the harm to Benchmark is directly attributable to the differences between the new junior preferred stock, authorized through the merger, and the old junior preferred stock as evidenced by the planned post-merger capital structure of Juniper.

Benchmark’s challenge is confronted by a long line of Delaware cases[32] which, in general terms, hold that protective provisions drafted to provide a class of preferred stock with a class vote before those shares’ rights, preferences and privileges may be altered or modified do not fulfill their apparent purpose of assuring a class vote if adverse consequences flow from a merger and the protective provisions do not expressly afford protection against a merger. This result traces back to the language of 8 Del. C. § 242 (b)(2), which deals with the rights of various classes of stock to vote on amendments to the certificate of incorporation that would “alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.” That language is substantially the same as the language (“rights, preferences and privileges”) of Sections C.6.c(ii)
C.6.d(ii). Where the drafters have tracked the statutory language relating to charter amendments in 8 Del. C. § 242 (b), courts have been reluctant to expand those restrictions to encompass the separate process of merger as set forth in 8 Del. C. § 251, unless the drafters have made clear the intention to grant a class vote in the context of a merger.

For example, in Warner Communications Inc., v. Chris-Craft Industries, Inc., where Warner stock through merger was converted into Time stock, this Court was confronted with a provision in the certificate that accorded preferred stockholders a class vote on corporate action to “`amend, alter or repeal any of the provisions of the Certificate of Incorporation or By-laws of the Corporation so as to affect adversely any of the preferences, rights, powers or privileges of the Series B Stock or the holders thereof. . . .'”[33] The Court, nonetheless, determined that the merger was not subject to a class vote by the preferred stock holders.

The draftsmen of this language — the negotiators to the extent it has actually been negotiated — must be deemed to have understood, and no doubt did understand, that under Delaware law (and generally) the securities whose characteristics were being defined in the certificate of designation could be converted by merger into “shares or other securities of the corporation surviving or resulting from [a] merger or consolidation” or into “cash, property, rights or securities of any other corporation.” 8 Del. C. § 251 (b); Federal United Corporation v. Havender, Del. Supr., 11 A.2d 331 (1940). . . .
* * *
I can only conclude that it is extraordinarily unlikely that the drafters of Section 3.3(i), who obviously were familiar with and probably expert in our corporation law, would have chosen language so closely similar to that of Section 242(b)(2) [providing for a class vote where a charter would “alter or change” the powers, preferences or special rights” of a class or series of stock] had they intended a merger to trigger the class vote mechanism of that section.[34]

The range of Sections C.6.c(ii) and C.6.d(ii) is not expressly limited to changes in the Certificate. However, given the well established case law construing the provisions of certificates of incorporations and the voting rights of classes of preferred stockholders, I am satisfied that the language chosen by the drafters (i.e., the “rights, preferences, and privileges”) must be understood as those rights, preferences and privileges which are subject to change through a certificate of incorporation amendment under the standards of 8 Del. C. § 242 (b) and not the standards of 8 Del. C. § 251.[35]

In Starkman v. United Parcel Service of America, Inc., this Court concluded that a supermajority vote was not necessary to accomplish a merger in part because the existing company became a wholly-owned subsidiary of the new primary company and the old company’s charter had not been amended. However, the Court went on to observe that the supermajority vote would not have been required “even if the charter of the surviving corporation in the merger amended or deleted the right of first refusal [at issue].”[36] It explained its reasoning as follows:

I reach this conclusion because the Supreme Court in Avatex rested its holding on the presence of language in the Avatex certificate of incorporation, specifically referring to the possibility of an amendment, alteration or repeal by merger, consolidation or otherwise. The critical language, referring to merger, consolidation or otherwise, was not found in Warner and is not found here. Thus, Warner, which was reaffirmed by the Supreme Court, requires that I read [the supermajority provision] to pertain only to charter amendments proposed in accordance with section 242 of the Delaware General Corporation Law. Because the transaction at issue is a merger proposed under the authority of Section 251 of the Delaware General Corporation Law, Warner requires a finding that [the supermajority provision] has no application.[37]

Finally, the corporate charter of Juniper was adopted after our Supreme Court’s decision in Avatex and the drafters of the Certificate are charged with knowledge of its holding and the following:

The path for future drafters to follow in articulating class vote provisions is clear. Where a certificate (like the Warner certificate or the Series A provisions here) grants only the right to vote on an amendment, alteration or repeal, the preferred have no class vote in a merger. When a certificate (like the First Series Preferred certificate here) adds the terms “whether by merger, consolidation or otherwise” and a merger results in an amendment, alteration or repeal that causes an adverse effect on the preferred, there would be a class vote.[38]

In short, to the extent that the merger adversely affects the rights, preferences and privileges of either the Series A Preferred or Series B Preferred Stock, those consequences are the product of a merger, a corporate event which the drafters of the protective provision could have addressed, but did not.

Accordingly, I am satisfied that Benchmark has not demonstrated a reasonable probability of success on the merits of its claim that Sections C.6.c(ii) and C.6.d(ii) require a series vote on the merger contemplated as part of the Series D Transaction.

b. Authorization of Series D Preferred Shares Through the Merger Process

Benchmark’s straightforward argument that it is entitled to a class vote on the authorization of the Series D Preferred Stock through the merger can easily be set forth. By Section C.6.a(i) of the Certificate, the holders of the Series A Preferred and Series B Preferred Stock have the right, unless that right is properly waived by CIBC, to a class vote on the authorization of a senior preferred security. The Series D Preferred Stock will be on parity with the Series C Preferred Stock and, thus, will be senior to be the existing junior preferred and the newly created junior preferred that will be created as part of the merger.[39]
The protective provisions of the Certificate do not distinguish between authorization through amendment of the Certificate under 8 Del. C. § 242 (b) and those changes in the Certificate resulting from a recapitalization accompanying a merger pursuant to 8 Del. C. § 251. Thus, according to Benchmark, it matters not how the result is achieved. Moreover, Section C.6.a(i) does not track or even resemble the “privileges, preferences and special rights” language of 8 Del. C. § 242 (b)(2) that was important to the analysis in th Warner line of cases. Benchmark thus argues that the clear and unambiguous words of Section C.6.a(i) guarantee (at least in the absence of an effective waiver by CIBC) it and the other holders of Series A Preferred and Series B Preferred shares a class vote before the Series D Preferred Stock may be authorized. While Benchmark has advanced an appealing and rational analysis, I conclude, for the reasons set forth below, that it has failed to demonstrate a reasonable probability of success on the merits of this argument.

In ascertaining whether a class of junior preferred stockholders has the opportunity to vote as a class on a proposed corporate action, the words chosen by the drafters must be read “against the background of Delaware precedent.”[40] For example, Sullivan Money Management, Inc. v. FLS Holdings, Inc. involved the question of whether a class vote was required in order to change critical rights of preferred shareholders “`by amendment to the Certificate of Incorporation of [FLS Holdings, Inc.] or otherwise.'”[41] In interpreting the charter of FLS Holdings, Inc., the Court was urged to treat the phrase “or otherwise” as including mergers. The Court, in rejecting this contention, set forth the following:

The word “merger” is nowhere found in the provision governing the Series A Preferred Stock. The drafters’ failure to express with clarity an intent to confer class voting rights in the event of a merger suggests that they had no intention of doing so, and weighs against adopting the plaintiffs’ broad construction of the words “or otherwise.”[42]

Here, the authorization of the Series D Preferred Stock results from the merger and the restatement of Juniper’s certificate of incorporation as part of that process. Warner and the cases following it, and Starkman
in particular,[43] demonstrate that certain rights of the holders of preferred stock that are secured by the corporate charter are at risk when a merger leads to changes in the corporation’s capital structure. To protect against the potential negative effects of a merger, those who draft protective provisions have been instructed to make clear that those protective provisions specifically and directly limit the mischief that can otherwise be accomplished through a merger under 8 Del. C. § 251.[44]

In sum, Benchmark complains of the harm which will occur because of alterations to Juniper’s capital structure resulting from modifications of the certificate of incorporation emerging from the merger. General language alone granting preferred stockholders a class vote on certain changes to the corporate charter (such as authorization of a senior series of stock) will not be read to require a class vote on a merger and its integral and accompanying modifications to the corporate charter and the corporation’s capital structure.[45] To reach the result sought by Benchmark, the protective rights “`must . . . be clearly expressed and will not be presumed.'”[46] Unfortunately for Benchmark, the requirements of a class vote for authorization of a new senior preferred stock through a merger was not “clearly expressed” in the Certificate. Against this background, I am reluctant both to presume that protection from a merger was intended and, perhaps more importantly, to create uncertainty in a complex area where Avatex has set down a framework for consistency.[47]

This conclusion is influenced to some extent by a few other considerations.

First, the drafters of Section C.6.a contemplated mergers expressly as evidenced by the precise restriction on some mergers set forth in Section C.6.a(ii). That the potential consequences of some mergers were addressed in Section C.6.a(ii) but no reference to mergers appears in Section C.6.a(i) lends some support to the notion that Section C.6.a(i) was not intended to apply in the context of a merger.

Second, Benchmark and its representative, Mr. Gurley, had extensive experience in investing in preferred securities and Mr. Gurley was aware that “specific voting rights with respect to mergers” are sometimes negotiated in preferred stockholders protective provisions.[48] Despite this awareness, Benchmark, its representative, and its counsel failed to obtain any specific protection in Section C.6.a(i) preserving class voting rights in the face of a merger, such as the one contemplated by the Series D Transaction. Thus, I conclude that Benchmark has not demonstrated a reasonable probability of success on its contention that the authorization of the Series D Preferred Stock through the merger, but without a class vote by the holders of Series A Preferred and Series B Preferred Stock, is precluded by Section C.6.a(i).[49]
3. Obligation to Issue and Issuance of Series D Preferred Shares

Under Section C.6.a(i), Juniper is also required to obtain class approval, unless effectively waived by CIBC, from its junior preferred holders before it can issue or obligate itself to issue a senior preferred stock. Juniper plans to issue its Series D Preferred Stock after the merger and at a time when the new Series A Preferred shares and the new Series B Preferred shares will be outstanding. The shares will not be issued as the result of the merger, but instead will be issued pursuant to the Purchase Agreement between CIBC and Juniper. Because the merger is not implicated by the issuance of the shares, there is no “background” precedent against which this act must be evaluated in the same sense as the case law addressing the consequences of mergers. These facts bring Juniper’s proposed issuance of its Series D Preferred Stock squarely within the scope of the restrictions imposed by Section C.6.a(i) of the post-merger certificate.[50] Specifically, to paraphrase that provision, so long as any shares of the new Series A Preferred or Series B Preferred are outstanding, Juniper may not, without the class vote or class consent of the new Series A Preferred and Series B Preferred stockholders, issue any senior equity security. While the restrictions of Section C.6.a(i) may be subject to the Series C Trump and, thus, may yet not prevent the issuance of the Series D Preferred Stock without the approval of the holders of the junior preferred stock, I am satisfied that Section C.6.a(i) applies, from the plain and unambiguous language of its text, to the issuance of Series D Preferred Stock when and as planned by Juniper.

Juniper fights the plain meaning of “issue” with an argument that “issue” does not mean issue but instead means something akin to “authorization to issue.” Its argument is based on the record date established for purposes shareholder approval of the transaction. The record date for shareholder approval was July 13, 2002. As of July 13, there were no new shares of Series A Preferred or Series B Preferred in existence. Thus, according to Juniper, they were not entitled to any vote at that time or any other time.

In support of this argument, Juniper cites Berlin v. Emerald Partners[51] and Mariner LDC v. Stone Container Corp.[52] Those cases both addressed the unremarkable principle that under the Delaware General Corporation Law, only voting shares, determined as of the record date, may be voted. The question, by contrast, here is: whose approval must be obtained before a preferred security senior to the new Series A Preferred and the new Series B Preferred may be issued, when the issuance occurs while the new Series A Preferred and the new Series B Preferred are outstanding? The answer, provided by the clear and unambiguous language of Section C.6.a(i), is that the class of holders of the new junior preferred is entitled to such a vote. The right to vote on the issuance of a senior preferred security springs from the creation of the new junior security as the result of the merger. The answer, thus, does not depend on a record date prior to the merger. Instead, the approval of the new junior preferred must be obtained (unless CIBC properly waives the right of the new junior preferred to a class vote) because Juniper proposes to issue (not merely to approve the issuance of) the Series D Preferred while the new junior preferred shares are outstanding. These words, when given their plain meaning, may compel a somewhat cumbersome process. The class approval, of course, may be obtained (or waived) before the issuance date, but there is no basis for reading either the existing certificate or the new certificate to deny the Series A Preferred and Series B Preferred shareholders a class vote.[53]

Because Section C.6.a(i) will entitle the holders of the new Series A Preferred and Series B Preferred Stock to a class vote on the issuance of the Series D Preferred Stock, it becomes necessary to determine whether exercise of the Series C Trump would allow CIBC to waive the right of the junior preferred stockholders to a class vote.[54]

All of the class voting rights conferred upon the junior preferred holders by Section C.6.a(i) are subject to waiver by CIBC through the proper exercise of its Series C Trump. The Series C Trump is broad and (for present purposes) is restricted in application only if the corporate action for which the class vote is waived would “diminish or alter the liquidation preference or other financial or economic rights” of the holders of the junior preferred stock. Issuance of the Series D Preferred Stock will not “diminish or alter” Benchmark’s liquidation preference — that was accomplished through the merger. The question thus becomes one of whether the issuance of a previously authorized senior preferred security “diminish[es] or alter[s]” the junior preferred shares’ “financial or economic rights.”

In some very general sense, when shares of a security with a higher priority are issued, the financial and economic rights of the holders of junior securities are adversely affected. On the other hand, that broad of a reading of “financial or economic rights” would make it difficult to find a valid waiver under the Certificate because all of the rights at issue — liquidation preferences, dividend rights, redemption rights, and even voting rights — in some sense implicate financial or economic rights and interests. In this analysis, the Court, of course, must seek to give meaning to all of the relevant provisions of the Certificate and to interpret the Certificate “as a whole.”

One approach to interpreting the critical language can be drawn from the line of cases addressing the vexing issues associated with authorization of a new senior security without a class vote under 8 Del. C. § 242 such as whether that creation of a new security with priority can be construed to alter or change the preferences, special rights or powers given to any particular class of stock through the certificate of incorporation and whether that creation of a new senior security also can be deemed to affect such class adversely.[55] Under the analytical approach suggested by these cases, the issuance of shares of a security that has priority will not adversely affect the preferences or special rights of a junior security. The argument, in general, is that the terms and powers of that particular class of junior security have not themselves been changed. That another security with priority has been issued is said to “burden” it, but its particular rights have not been modified, and thus those rights are not perceived as having been “diminished or altered.” I tend toward this reading because it does interpret the preferred stock protective provisions against the “background of Delaware precedent” and because “financial and economic rights” appear in a list with other items such as liquidation preferences and registration rights which are more fairly viewed as technical and specific (as opposed to broad and general) rights.[56]

On the other hand, “financial and economic rights” can easily be given the broad interpretation suggested by Benchmark. Moreover, if one places too much emphasis on the Dickey Clay line of cases[56a] for interpretive assistance, the carefully negotiated hierarchy here (right to class vote, but first subject to waiver which in turn is subject to exception) might not be fully acknowledged. Thus, the potential shortcoming of interpreting this language in light of the Dickey Clay
line of cases is that the rights of the holders of the junior security in those cases are so limited that it is fair to question whether rights that narrow were intended by the parties here.

Therefore, the meaning to be given to the exception to Series C Trump or waiver is not free of ambiguity. There is no ambiguity in the actual grant of the Series C Trump to CIBC. Both sides agree that the Series C Trump, absent the exception, would provide CIBC with the authority it claims. Accordingly, the effectiveness of any exercise of the Series C Trump in this context depends upon the scope to be given to the exception. Benchmark suffers, in this context, because it must rely on the exception; terms of preferred shareholders’ protective provisions “must . . . be clearly expressed and will not be presumed”; and it bears the burden as the moving party on its motion for a preliminary injunction.

No words of explicit import clearly express the voting right the plaintiffs claim exists in this case. No positive evidence supports the claim that the drafters intended to create such a right. Although one might argue (as the plaintiffs do) that that right exists by implication, it does not exist by necessary
implication. To adopt the plaintiff’s position would amount to presuming a preferential voting right. In the present case, however, where (at least) an ambiguity exists, our law requires that it be resolved against creating the preference.[57]

A preliminary injunction necessarily involves an initial determination on less than complete record and that limitation precludes a detailed consideration of extrinsic evidence. In light of the foregoing, I conclude that Benchmark has not demonstrated a reasonable probability of success on the merits of its claim that the waiver should not be available to CIBC.[58]
C. Irreparable Harm

“To demonstrate irreparable harm, a plaintiff must present an injury `of such a nature that no fair and reasonable redress may be had in a court of law’ and must show that `to refuse the injunction would be a denial of justice.'”[59] Benchmark argues that irreparable harm will befall it should this Court fail to grant its request for a preliminary injunction because the consummation of the Series D Transaction will deprive it of its class voting rights. Benchmark further asserts that it will suffer irreparable harm because the Series D Transaction will wrongfully dilute its equity interest in Juniper.

It is well established that “corporate management subjects stockholders to irreparable harm by denying them the right to vote their shares.”[60]
As such, had I found that Benchmark had demonstrated a reasonable probability of success on the merits, its allegations as to the wrongful deprivation of its rights to a class or series vote would have supported a finding of irreparable harm.[61] That, of course, did not occur. Benchmark also argues that the Series D Transaction will, in addition to abrogating its voting rights, wrongfully cause its holdings and investment in Juniper to be diluted, another type of harm that might be irreparable. I note that the extent of Benchmark’s purported harm appears to be of less significance because of Juniper’s current financial condition and the minimal liquidation value that Juniper would provide its junior preferred stockholders.[62] Accordingly, the irreparable harm faced by Benchmark as the likely result of the Series D Transaction is minimal.

D. Balancing of the Equities

Turning to a balancing of the equities or relative hardships, I find that this inquiry weighs heavily in favor of Juniper.

[A] court must be cautious that its injunctive order does not threaten more harm than good. That is, a court in exercising its discretion to issue or deny such a preliminary remedy must consider all of the foreseeable consequences of its order and balance them. It cannot, in equity, risk greater harm to defendants, the public or other identified interests, in granting the injunction, than it seeks to prevent.[63]

Benchmark argues that the financial demands faced by Juniper are minor in relation to the hardship that it will face should the Series D Transaction close, thereby depriving Benchmark of its purported rights under the Certificate to a class vote. Benchmark asserts that the Series D Transaction will undermine its core voting rights, and, in addition, it will effectively dilute its equity interests and economic rights. As noted in my discussion of irreparable harm, Benchmark’s purported loss of voting power (and the related economic rights) could constitute hardship. That hardship, however, must be balanced against the potential burdens faced by Juniper and its constituents if a preliminary injunction is awarded.

Juniper will experience dire financial consequences by the end of this month, or shortly thereafter, when it will become less than well-capitalized if the Series D Transaction does not occur. As noted above, Juniper’s failure to meet its capital requirements would likely result in the imposition of significant regulatory and business restrictions on the company.

Benchmark tacitly acknowledges that Juniper will suffer a severe financial crisis without additional funding. Indeed, Benchmark’s principal position on Juniper’s need for capital does not relate to its want for capital but to the timing of when that capital will be needed and the means necessary or appropriate to obtain that capital. As to the timing of the Series D Transaction, Benchmark has failed to offer any evidence rebutting Juniper’s position that the July 31, 2002 deadline is a steadfast one.[64] Nor has Benchmark proposed a plan through which Juniper could obtain financing other than that presented by CIBC. Instead, Benchmark argues that Juniper can solve its capital problems either by further cutting costs, a concept rejected by Juniper’s board after careful study, or by obtaining financing from CIBC on terms more favorable to the holders of the Series A Preferred and Series B Preferred Stock.

Thus, there is no question as to Juniper’s pressing need for capital. CIBC has come forward and is willing to invest an additional $50 million in the company. In light of Benchmark’s failure to challenge effectively the evidence of Juniper’s current critical need for additional capital, the lack of any alternate source for such funding, and the onerous consequences that failure to secure such capital will cause Juniper and its constituents, Benchmark’s argument that Juniper’s position is a mere gloom and doom one is unpersuasive. As such, this case may be distinguished from the one before this Court in Sorrento where “the record before the Court indicate[d] that [the company’s need for additional cash was] not imminent and that [the defendant company] ha[d] the means to sustain itself well beyond any final determination of th[e challenged] action.”[65]

While loss of a shareholder’s right to vote would certainly be a factor that must be given serious weight in this analysis, when viewed in light of the factual setting of this case, I am of the opinion that Benchmark’s risks are minor when compared to those which would likely result from depriving Juniper of financing through the Series D Transaction. Considering that Benchmark would recover nothing (or almost nothing) if Juniper were forced into liquidation,[66] my conclusion that the equities tip in favor of Juniper is bolstered even more. Accordingly, I find that the potential for harm caused by denying Juniper the much needed financing resulting from the Series D Transaction outweighs any potential harm attributable to any deprivation of Benchmark’s class voting rights or dilution of its equity interest.

VI. Conclusion
Because Benchmark has failed to meet any of the three criteria which should be satisfied by an applicant for a preliminary injunction, denial of its motion should easily follow. I pause to note, however, that Benchmark has ably advocated several arguments that are not easily dismissed. In addition, Benchmark seeks to preserve its voting rights and the voting rights of other Series A Preferred and Series B Preferred shareholders. Its claims to a right to vote as part of a class implicate significant issues of corporate governance. Nonetheless, as I balance the various well-known factors as I must, I conclude that Benchmark has failed to justify issuance of a preliminary injunction.

Therefore, for the foregoing reasons, Benchmark’s motion for a preliminary injunction is denied. An order will be entered in accordance with this memorandum opinion.