SV Investment Partners, LLC v. Thoughtworks, Inc.
7 A.3d 973
| Del. Ch. | 2010Background
- SVIP, a group of affiliated investment funds, held 94% of ThoughtWorks Series A Preferred Stock and sought cash redemption starting five years after issuance.
- ThoughtWorks could not fund full redemption; Board analyzed surplus, available cash, and going-concern risks quarterly since 2005, redeeming $4.1 million (222,802 shares) across eight redemptions.
- Charter Article IV(B) § 4(a) required redemption “out of funds legally available therefor” and not from working capital designated by the Board; redemption, if funds were insufficient, pro rata among holders.
- SVIP argued “funds legally available” equaled surplus and that ThoughtWorks had $68–$137 million surplus; ThoughtWorks argued funds = cash legally available and not insolvent.
- Delaware DGCL § 160 restricts redemptions to funds that do not impair capital or creditors; common law prohibits redemptions that render the company insolvent; Board’s working capital carve-out and valuation provisions do not override these limits.
- The court ultimately held for ThoughtWorks, ruling that SVIP failed to show funds legally available because the company could not redeem 100% of the preferred stock without impairing creditors or going concern.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Meaning of funds legally available vs surplus | SVIP: funds legally available = surplus; should redeem all | ThoughtWorks: funds legally available require cash on hand and legality under law | Funds legally available ≠ surplus; no complete redemption alternative. |
| Board’s determination of funds legally available | SVIP: Board misvalued assets to inflate funds | Board acted in good faith with expert analyses | Board acted in good faith; no bad faith or fraud proved. |
| Effect of the Valuation Provision | Valuation should yield higher funds to redeem all | Valuation provision does not override insolvency and legal constraints | Valuation provision does not create obligation to redeem if funds unset; cannot override going-concern/insolvency limits. |
| Policy/market alternatives for investors | Investors rely on redemption protections | Investors could have used debt, drag-along, or other protections | Court acknowledges alternatives but declines rewriting terms; court enforces contract as written. |
Key Cases Cited
- Klang v. Smith's Food & Drug Ctrs., Inc., 702 A.2d 150 (Del.1997) (surplus vs. capital distinction in redemption)
- In re Int'l Radiator Co., 92 A.255 (Del.Ch.1914) (insolvency constraints on stock repurchases)
- Morris v. Standard Gas & Elec. Co., 63 A.2d 577 (Del.Ch.1949) (insolvency and going-concern considerations in redemptions)
- In Culbertson's, 54 F.2d 753 (9th Cir.1932) (contracts to redeem limited by creditor protection and legality)