Continental Investors Fund LLC v. Tradingscreen Inc., C.A. No. 10164-VCL

Background

TradingScreen issued Series D convertible preferred stock in 2007; TCV purchased a majority and Continental (a Purcell vehicle) purchased a minority stake with a contractual mandatory redemption right exercisable by the Majority Holders.
In March 2013 TCV exercised redemption rights; Continental elected to participate. The parties could not agree on price; Centerview set fair value at $16.71/share (company value $120M) and the charter contemplated three equal installment payments.
A Board special committee (the Committee) evaluated how much cash the Company could legally use for redemptions and concluded in Sept. 2014 that $20M must be retained as “show capital,” leaving $7.2M available for redemptions; the Company partially redeemed preferred shares in 2014–2015.
Plaintiffs (TCV and Continental) sued claiming the Company breached the redemption provision and that 13% interest accrued on unpaid amounts; litigation proceeded through trial, then was stayed (2016) amid board/management disputes and later lifted.
In 2020 the Company obtained funds (sale of a subsidiary) sufficient to redeem outstanding preferred shares; the Company paid Continental the full redemption amount on Aug. 27, 2020 and a modest interest payment; Continental sought 13% interest dating from the 2014–2015 non-payments.
Court held the Company did not breach the redemption obligation in 2014–2015 (Committee’s $20M judgment was reasonable); Continental is only owed 13% interest on the amount legally available beginning July 7, 2020 through Aug. 27, 2020 ($99,648.85), plus pre- and post-judgment interest thereafter; otherwise defendants prevail.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Allocation of burden to show funds "legally available" for redemption	Continental: showing nonpayment establishes a prima facie breach and shifts burden to defendants to prove inability to pay	Defendants: plaintiff must prove existence of legally available funds; board decisions entitled to deference	Held: plaintiff bears burden; ThoughtWorks standard applies (must prove bad faith, unreliable methods/data, or determinations so off the mark as to be constructive fraud)
Extent of directors' obligation when redeeming (insolvency brink vs. going concern)	Continental: directors must redeem unless doing so would render company insolvent (argues near‑brink of insolvency test)	Defendants: directors may retain sufficient resources to remain a going concern; no obligation to spend to the brink of insolvency	Held: directors may preserve going-concern capital; no one-year bright line; Committee reasonably accounted for a two‑year horizon and acted within discretion
Committee process: unreliable methods/data, constructive fraud, bad faith	Continental: Committee relied on management inputs, didn’t independently validate ‘show capital’, manipulated spending and avoided financing/transactions to defeat redemptions	Defendants: Committee used advisors, forecasts, market inputs, and exercised judgment; management/Philippe not decisive and advisors corroborated range	Held: Continental failed to prove unreliable methods, constructive fraud, or bad faith; Committee reasonably set $20M floor and used excess for redemptions
When 13% interest (default rate) accrues and amount owed	Continental: interest accrues from missed payments in 2014–2015 (or each missed installment) at 13% annual rate	Defendants: interest accrues only upon an actual default (i.e., when funds legally available but not used); earlier non-payments resulted from legally constrained shortages	Held: Interest accrues only where there was a default (funds legally available but not used). No default in 2014–2015. Interest is due only from July 7, 2020 (funds became legally available) to Aug. 27, 2020 on $5,485,947 = $99,648.85; pre/post-judgment interest applies thereafter

Key Cases Cited

ThoughtWorks II v. SV Inv. P’rs, 37 A.3d 205 (Del. 2011) (board determination of funds available for redemption entitled to deference; plaintiff must show bad faith, unreliable methods/data, or determinations amounting to constructive fraud)
ThoughtWorks I v. SV Inv. P’rs, 7 A.3d 973 (Del. Ch. 2010) (existence of legally available funds is a condition precedent to enforcing a mandatory redemption)
Klang v. Smith’s Food & Drug Ctrs., 702 A.2d 150 (Del. 1997) (limitations on repurchases when they impair capital; courts defer to directors absent bad faith)
In re Int’l Radiator Co., 92 A. 255 (Del. Ch. 1914) (corporation cannot repurchase shares if purchase diminishes ability to pay debts)
Walt Disney Co. Derivative Litigation, 907 A.2d 693 (Del. Ch. 2005) (bad‑faith standard includes intentional dereliction of duty or conscious disregard for responsibilities)
Hexion Specialty Chems. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008) (context for burden/allocation principles in contract defenses)