Wood v. Coastal States Gas Corporation

Lo-Vaca Gathering Co. (Lo-Vaca) (defendant) was a subsidiary of Coastal States Gas Producing Co. (Producing) (defendant), which was in turn a subsidiary of Coastal States Gas Corporation (Coastal) (defendant). Lo-Vaca obtained permission to increase its rates to ensure its ability to deliver gas to its customers. The customers brought suit for breach of contract, the rate increase was rescinded, and the customers became eligible for refunds. A complex tangle of litigation resulted in a settlement agreement. The settlement agreement provided for Producing to be renamed Valery Energy Corporation (Valery) and spun off from Coastal, 13.4 percent of Valery common stock to be placed in a trust for the Lo-Vaca customers and the remaining 86.8 percent of the Valery common stock to be distributed as a special dividend to holders of Coastal common stock. Holders of Coastal convertible preferred shares (the preferred stockholders) (plaintiffs) were contractually entitled to share in a distribution resulting from a recapitalization—including a merger or consolidation—but they received no Valery common stock. More specifically, Coastal’s certificate of incorporation stated that the preferred stockholders were entitled to receive, in lieu of common stock receivable in a recapitalization, the same kind and amount of securities distributable upon recapitalization with respect to the common stock. The certificate also provided that no conversion-ratio adjustment would be made for a dividend to the common stockholders payable in property other than Coastal common stock. The preferred stockholders brought suit in Delaware Chancery Court to enjoin a final vote on the settlement agreement. The court held that the distribution of Valery common stock to the Coastal common stockholders was not a recapitalization and was therefore permissible without the preferred stockholders’ participation. The preferred stockholders appealed. The Delaware Superior Court granted certiorari.