Fletcher International, Ltd v. Ion Geophysical Corporation

Fletcher International, Ltd. (Fletcher) (plaintiff) owned all Series D preferred stock of ION Geophysical Corporation (ION) (defendant). The Series D stock certificates provided the voting rights of the stockholders and explained that the holders had to authorize the issuance or sale of any security by an ION subsidiary. In 2009 ION caused ION S.àr.l. (the ION subsidiary), a wholly owned subsidiary, to issue a convertible promissory note to BGP, Inc., without receiving approval of the holders of preferred stock. The promissory note was convertible into shares of ION common stock. Fletcher filed a lawsuit in Delaware state court against ION and its directors. Fletcher brought a breach-of-contract claim against ION, alleging that ION had violated the stock certificate by issuing the convertible promissory note through the ION subsidiary without receiving preferred-shareholder approval. Fletcher also alleged that ION’s directors had breached their fiduciary duty by failing to obtain Fletcher’s approval before issuing the note. Fletcher filed a motion for summary judgment. ION opposed the motion, arguing it did not have to get approval to issue the promissory note because the note was not a security. ION further argued that if the note was a security, it was a security of ION rather than the ION subsidiary because it was convertible into ION common stock. Therefore, ION reasoned that the stock certificate did not require shareholder approval for the issuance of the note. ION also argued that Fletcher’s fiduciary-duty claim should be dismissed because it duplicated the breach-of-contract claim.