LC Capital Master Fund, Ltd. v. James

QuadraMed Corporation agreed to a merger with Francisco Partners II, L.P. (defendant) in which Francisco Partners bought out QuadraMed’s stock at $8.50 per common share and $13.7097 per preferred share. The latter price was based on the value specified in the conversion provision of the preferred stock’s certificate of designation, which gave the preferred stockholders the right to convert to common stock. The certificate entitled the preferred stockholders to a dividend and a liquidation preference, though the latter could not be triggered by a merger. The certificate did not give the preferred shareholders the right to vote on a merger (unlike the common stockholders). QuadraMed’s directors held a significant amount of the company’s common stock, but none of the preferred stock. LC Capital Master Fund, Ltd. (LC Capital) (plaintiff), a preferred stockholder, brought suit against Francisco Partners and the QuadraMed board of directors (defendants) in the Delaware Court of Chancery to enjoin the merger. LC Capital argued that value had been unfairly allocated between QuadraMed’s common and preferred stock, and that the preferred shareholders’ liquidation and dividend rights gave rise to a fiduciary duty on the part the directors to obtain more consideration for the preferred shareholders. The directors countered that it was obligated only to allocate consideration in a manner consistent with the preferred shareholders’ contractual rights, and that it was also under a fiduciary duty to act in the best interests of the common stockholders.