The Delaware Court of Chancery has ruled in favor of Lady Benjamin PD Cannon, formerly known as Ben Cannon, in a case involving a stock warrant dispute with Michael Patterson, the former CEO of Romeo Systems, Inc., and related entities. The court found that Patterson had converted a stock warrant belonging to Cannon, entitling her to significant damages.
Background of the Case
The case stemmed from a consulting agreement between Cannon and Romeo Systems, a startup company. To resolve a payment dispute, the company, through Patterson, offered Cannon a stock warrant. The initial draft of the warrant stated it was for one percent of the company’s outstanding shares at the time it was issued. Cannon, with the help of her attorney, changed the warrant to reflect that it was for one percent of the company’s outstanding shares at the time of exercise. Patterson, the CEO, signed the warrant but admitted he didn’t read the final version before signing.
The company later recorded the warrant on its books as being for 100,000 shares. Later, as a result of a stock split, the company increased the number to 1,000,000 shares.
Patterson then made a personal loan to Cannon, secured by a pledge agreement that referenced the warrant for 1,000,000 shares. When Cannon defaulted on the loan, Patterson caused the company to transfer the warrant to him. He then exercised the warrant, receiving 1,000,000 shares.
Subsequently, Romeo Systems was acquired by a public company in a stock-for-stock merger. Cannon, upon learning of the merger, inquired about her warrant. The company informed her that the warrant had been transferred to Patterson. In the merger, Patterson received 121,730 shares of the post-merger company for the 1,000,000 warrant shares.
Cannon sued, claiming she was entitled to 965,246 shares in the post-merger company, not the 121,730 shares Patterson received and later sold.
The Court’s Findings
The court found that the warrant was valid and enforceable for one percent of the company’s outstanding shares at the time of exercise. It rejected Patterson’s argument that there was no meeting of the minds regarding the terms of the warrant, emphasizing that Patterson, as CEO and sole director, had signed the agreement.
The court also determined that no valid security interest attached to the warrant under Article Nine of the Uniform Commercial Code (UCC). The Pledge Agreement, which was supposed to secure Patterson’s loan to Cannon, described the warrant as being for a fixed number of shares (1,000,000), not a percentage. Therefore, the description was insufficient to create a valid security interest in the warrant.
The court held that Patterson had converted the warrant by exercising it without having a valid security interest. It rejected Patterson’s arguments that Cannon was barred from disputing the security interest or that she failed to properly demand the return of the warrant before filing suit.
Damages Award
The court awarded Cannon damages based on the highest intermediate value of 965,246 shares of the post-merger company within a reasonable period following the merger. The court calculated damages based on the average high price of the stock during the three trading days after the merger, which resulted in a per-share profit of $28.397 on the 965,246 shares, leading to a base damages award of $27,419,743.12. The court is crediting Patterson for the $108,802.24 that he had previously remitted to Cannon.
In addition, Cannon is entitled to prejudgment interest at the legal rate, compounded quarterly, on the damages from the time the shares could have been sold, as well as post-judgment interest, also compounded quarterly.
Implications of the Ruling
This case highlights the importance of carefully drafting and reviewing legal documents, especially in corporate transactions. It also underscores the significance of adhering to the requirements of the UCC when creating security interests. The court’s decision provides a clear example of the consequences of failing to do so.