## Facts

- Sunstates Corporation authorized and issued shares of preferred stock under its certificate of incorporation.
- The certificate included a restriction providing that Sunstates could not “purchase or redeem” its preferred shares while Sunstates was in arrears on dividends payable on that preferred stock.
- Sunstates later fell into arrears on the preferred-stock dividend.
- While those arrearages existed, one or more wholly owned subsidiaries of Sunstates acquired significant amounts of Sunstates preferred stock in the market.
- A group of Sunstates preferred stockholders brought a class action in the Delaware Court of Chancery.
- The preferred stockholders alleged that the subsidiary purchases violated (i) the certificate of incorporation’s repurchase restriction and (ii) the implied covenant of good faith and fair dealing.
- Sunstates moved for summary judgment, arguing that the certificate’s restriction applied only to repurchases by Sunstates itself and did not restrict purchases by legally separate subsidiaries.

## Issues

1. Whether a certificate-of-incorporation provision stating that Sunstates may not “purchase or redeem” preferred stock while in dividend arrears also bars Sunstates’ wholly owned subsidiaries from purchasing Sunstates preferred shares.
2. Whether, if the certificate’s text does not extend to subsidiary purchases, the implied covenant of good faith and fair dealing can supply that limitation and treat subsidiary purchases as prohibited.

## Decision

- The Court of Chancery granted Sunstates’ motion for summary judgment.
- The court held that the certificate’s repurchase restriction, by its terms, applied to Sunstates (the issuing corporation) and did not, without more, restrict purchases by Sunstates’ subsidiaries.
- The court rejected the implied-covenant theory as a basis to extend the certificate’s express restriction to subsidiary purchases where the charter language did not do so.

## Legal Principles

- Preferred stock rights and limitations are primarily contractual; the certificate of incorporation is the main source of those rights and restrictions.
- When a charter provision restricts conduct by the issuing corporation, a court will not extend that restriction to affiliated entities absent language indicating that the limitation covers affiliates or subsidiaries.
- Delaware respects the separate legal status of parent and subsidiary corporations; ownership alone does not merge their acts for purposes of interpreting an express charter term.
- The implied covenant of good faith and fair dealing is a narrow, gap-filling doctrine and cannot be used to add a new substantive restriction that is not fairly implied from the parties’ expressed bargain in the certificate.
- Summary judgment is appropriate when the dispute turns on interpretation of an unambiguous governing instrument and there is no genuine issue of material fact requiring trial.

## Conclusion

In *In re Sunstates Corp. Shareholders’ Litigation*, the Delaware Court of Chancery ruled on summary judgment that Sunstates’ charter restriction on repurchasing preferred shares while dividend arrears existed applied only to Sunstates itself and did not prohibit market purchases by Sunstates’ subsidiaries, and the court declined to use the implied covenant of good faith and fair dealing to impose a broader, affiliate-reaching restriction absent supporting charter language.


In re Sunstates Corp. Shareholders' Litigation, 788 A.2d 530 (2001)