## Facts

- Genta Incorporated, a start-up biopharmaceutical company with no profits, had multiple research-stage technologies and faced severe financial distress near insolvency.
- Institutional investors, including Equity-Linked Investors, L.P. and Equity-Linked Investors-II, held Series A convertible preferred stock with an aggregate contractual liquidation preference of about $30 million.
- Given Genta’s condition, a liquidation likely would have produced proceeds materially below the preferred’s liquidation preference, leaving little or nothing for common stock.
- The board sought new capital to avoid liquidation and preserve the possibility that successful development would create significant future value, much of which would accrue to common as the residual equity.
- Preferred holders sought to limit further downside and favored liquidation to recover as much as possible under their liquidation preference.
- After Genta could not redeem the Series A preferred as expected, negotiations between the company and a preferred-holder committee became contentious.
- The board approved a rescue financing with the Aries Funds: roughly $3 million of secured debt plus warrants exercisable into approximately half of Genta’s outstanding stock.
- The financing extended Genta’s operating runway and preserved upside potential, but increased downside risk to preferred holders through added secured debt and dilution that further weakened the practical value of the liquidation preference.
- The preferred holders sued in the Delaware Court of Chancery to enjoin or otherwise set aside the financing on fiduciary-duty grounds.

## Issues

1. When preferred stock has specific charter-based contractual rights, whether directors must, as a fiduciary matter, prioritize preferred investors’ liquidation-preference interests over common stockholders’ interests in discretionary corporate decisions.
2. Whether approving a distressed-company financing that increases risk to preferred holders and favors preserving upside for common constitutes a breach of fiduciary duty.

## Decision

- The Court of Chancery entered judgment for the defendants and upheld the Aries financing.
- The court held the directors did not breach fiduciary duties by approving the transaction.
- The court applied the business judgment rule, finding no basis to treat the financing decision as subject to heightened review.
- The court concluded that, absent express contractual limits in the certificate of incorporation, directors may exercise discretion in ways that favor common stockholders when common and preferred interests diverge.

## Legal Principles

- Preferred stock rights are principally contractual; protections for preferred holders must be found in the certificate of incorporation or other bargained-for agreements.
- In discretionary decisions where common and preferred interests conflict, directors ordinarily should favor the interests of common stockholders as residual claimants, while honoring any specific contractual rights granted to preferred.
- Decisions to liquidate or continue operations, including selecting rescue financing, are core business judgments protected by the business judgment rule absent bad faith, conflicted decision-making, or other disqualifying conduct.
- Equity will not supply preferred holders with veto rights or anti-risk-shifting protections not expressly negotiated in the governing instruments.

## Conclusion

The court refused to enjoin a distressed-company rescue financing that reduced the practical value of a preferred liquidation preference, holding that directors may pursue a good-faith strategy to preserve going-concern upside for common stockholders so long as they respect the preferred’s explicit contractual rights and their decision falls within business judgment review.


Equity-Linked Invs., L.P. v. Adams, 705 A.2d 1040 (Del. Ch. 1997)