Bernstein v. Canet

IVF America, Inc. (IVF) (defendant) issued two million shares of convertible preferred stock that could be converted at any time into a number of shares determined by a set conversion ratio, 1.1222 shares of common stock per share of preferred stock. The stock certificate included antidilution provisions that required IVF to adjust the conversion ratio if it took actions that diluted the value of the preferred stock. One provision stated that IVF had to adjust the conversion ratio if it sold or issued common stock for less than $8 per share. The certificate also included exceptions to the antidilution provisions, explaining that the provisions were not triggered if preferred stock was converted into common stock. In October 1994 IVF offered to convert each share of preferred stock into three shares of common stock with an additional cash payment of 20 cents per share. Because the offer would give preferred shareholders more shares of common stock per share than the standard conversion ratio, preferred shareholders were incentivized to convert their shares before the offer expired in November 1994. Over half of the preferred shareholders converted their shares into common stock. Brian Bernstein (plaintiff), a preferred shareholder who did not accept the offer, filed a lawsuit in Delaware state court against IVF, alleging that IVF had breached the antidilution provisions of the certificate by failing to adjust the conversion rate after the offer expired. Bernstein argued that IVF had issued common stock at less than $8 per share through the offer, triggering the antidilution provisions. To avoid the conversion exception, Bernstein classified the offer as an exchange of preferred stock for common stock rather than a conversion, reasoning that the offer was not a conversion because it involved a different conversion ratio than the one provided by the certificate. IVF argued that the offer involved a conversion and was exempt from the antidilution provisions.