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Equity-Linked Investors, L.P. v. Adams
Delaware Court of Chancery
705 A.2d 1040 (Del. Ch. 1997)
Genta Incorporated (Genta) (defendant), a pharmaceutical corporation, was owned by preferred and common stock shareholders. The corporation was on the edge of insolvency. If liquidated, it would probably be worth less than the $30 million liquidation preference of the preferred stock. However, Genta had several "promising technologies" in research, and these technologies would bring in a large amount of money if they turned into commercial products. The Genta board tried to find new sources of capital to continue the business with a hope of developing commercial products from its "promising technologies." The board believed in good faith that securing additional capital was in the best interest of the common stockholders. The preferred stockholders, on the other hand, sought to cut their losses by liquidating Genta and distributing most of the assets to the preferred shareholders. Later, Genta borrowed on a secured basis about $3 million from a third party, allowing the corporation to purse its business plan for a further period. In exchange, the third party received warrants exercisable into half of Genta's outstanding stock. Equity-Linked Investors, L.P (plaintiff), one of Genta's preferred stockholders, brought suit in the Delaware Court of Chancery, challenging the loan transaction.
Rule of Law
Holding and Reasoning (Allen, C.)
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