Fletcher International, Ltd. v. Ion Geophysical Corp., et al. (C.A. No. 5109-VCS) (Mar. 29, 2011) (Strine, V.C.)

In this opinion dismissing a preferred stockholder’s claim for breach of contract, the Court of Chancery reiterated that Delaware courts will not extend the contractual  rights of a preferred stockholder beyond those clearly and unambiguously negotiated by the parties at the bargaining table, even if the corporation purposefully acted to avoid triggering the preferred’s contractual rights.

Fletcher International is the record owner of all Series D preferred stock of ION Geophysical Corporation.  The rights and preferences of the Series D preferred are governed by the Certificate of Rights and Preferences, which includes a provision requiring ION to obtain the consent of the Series D shares in order to “permit any Subsidiary of [ION] to issue or sell, or obligate itself to issue or sell, except to [ION] or any wholly owned Subsidiary, any security of such Subsidiaries.”

In 2010, ION and non-party BPG, Inc. China National Petroleum Corp. (“China National”) formed a joint venture. As contemplated by the agreement between ION and China National, ION formed INOVA, a wholly owned subsidiary of ION, and in March 2010, ION (who at the time owned 100% of INOVA’s outstanding stock) delivered to China National 51% of INOVA’s stock. Significantly, the transfer of INOVA’s stock was directly from ION to China National.

Fletcher then filed suit alleging that the transfer of INOVA stock to China National without Fletcher’s consent breached the Certificate of Rights and Preferences and that INOVA tortiously interfered with Fletcher’s consent rights. Although Fletcher conceded that, formally speaking, the sale of INOVA stock was from ION to China National, Fletcher argued that the “economic substance” of the entire joint venture  transaction was a sale by INOVA to China National of INOVA stock. Fletcher urged the Court to adopt a broad definition of “sale” and to treat the process by which INOVA stock was issued to ION and later sold to China National as a single “sale” of stock from INOVA to China National.

The Court of Chancery rejected Fletcher’s proffered interpretation, reasoning that: (i) a preferred stockholder’s rights are contractual in nature, (ii) where the language of those rights is clear and unambiguous the contract must be accorded its plain meaning, and (iii) rights of preferred stockholders “are to be strictly construed and must be expressly contained in the relevant certificates.” The Court found that the contractual provision at issue gave Fletcher a “narrow and unambiguous” right to consent to sales and issuances of stock by an ION subsidiary to a third party, but that INOVA’s only issuance of stock was directly to ION (an action exempt from the consent right), ION was the sole owner of INOVA when the sale agreement between ION and China National was signed, and no further action by INOVA was required when ION delivered the stock to China National.

The Court also noted that it was immaterial whether ION purposefully structured the transaction with China National so as to avoid triggering Fletcher’s consent rights, holding that – as a sophisticated contracting party – Fletcher could have bargained for the rights it now claims, and its failure to do so does not allow the Court to rewrite an unambiguous contract. Finally, the Court also dismissed Fletcher’s claim against INOVA for tortious interference with contract because, in order to state such a claim, a plaintiff must first adequately allege an underlying claim for breach of contract, which Fletcher failed to do.

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