## Facts

- Avatex Corporation, a Delaware corporation, had common stock and multiple series of preferred stock, including First Series Preferred.
- The First Series Preferred terms in Avatex’s certificate of incorporation provided a class vote for any “amendment, alteration or repeal, whether by merger, consolidation or otherwise” that would “materially and adversely affect” that series’ rights, preferences, privileges, or voting power.
- Avatex formed Xetava Corporation as a wholly owned subsidiary and entered a transaction in which Avatex would merge into Xetava, with Xetava as the surviving corporation.
- The merger would nullify Avatex’s certificate of incorporation and convert Avatex preferred stock into Xetava common stock.
- Preferred stockholders sued in the Delaware Court of Chancery to enjoin the merger, asserting they were entitled to a separate class vote under the certificate of incorporation.
- The Court of Chancery ruled for the defendants, reasoning the adverse effect stemmed from conversion of shares rather than an amendment, alteration, or repeal triggering class voting rights.
- The preferred stockholders appealed to the Delaware Supreme Court.

## Issues

1. Whether a certificate provision granting preferred holders a class vote upon any “amendment, alteration or repeal, whether by merger, consolidation or otherwise” applies when a merger nullifies the issuer’s certificate of incorporation.
2. Whether the merger’s elimination of charter-based preferred protections and conversion into surviving-company common stock materially and adversely affected the First Series Preferred so as to trigger the class-vote requirement.

## Decision

- The Delaware Supreme Court reversed and remanded.
- The Court held the First Series Preferred stockholders were entitled to a separate class vote on the merger under the express terms of Avatex’s certificate of incorporation.
- The Court concluded the merger nullified and thereby repealed Avatex’s certificate provisions protecting the First Series Preferred, and that repeal occurred “by merger,” squarely within the contractual language.
- The Court found the transaction materially and adversely affected the class by eliminating its charter-based protections and substituting securities lacking the same preferences and rights.

## Legal Principles

- Preferred stock rights are primarily contractual and are determined by the certificate of incorporation (or the instrument creating the series), interpreted under objective contract principles.
- Where a certificate expressly provides for a class vote upon any amendment, alteration, or repeal “whether by merger, consolidation or otherwise,” the right applies when a merger nullifies the issuer’s certificate and eliminates the protected provisions.
- Corporate transactional form cannot defeat expressly drafted protective provisions when the certificate language clearly covers the form chosen.
- A class-vote trigger requiring a “material and adverse” effect is satisfied when the transaction removes bargained-for charter protections and replaces preferred interests with materially different securities.

## Conclusion

The court enforced the First Series Preferred’s contract-based class voting protection, holding that a merger that nullifies the issuer’s charter effects a “repeal” covered by the certificate’s “whether by merger” language and, where materially adverse to preferred rights, requires a separate class vote.


Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843 (Del. 1998)