## Facts

- Kaiser Aluminum Corporation had one class of common stock and had issued a series of preferred stock (PRIDES) with contractual conversion rights set out in a Certificate of Designations.
- The board approved a recapitalization that would (1) reclassify authorized common shares into a new Class A common with full voting rights and (2) authorize a new low-vote common class with one-tenth vote per share.
- PRIDES holders argued the recapitalization would change what they would receive upon conversion by substituting conversion into the new post-recapitalization common structure rather than stock equivalent to the pre-recapitalization common.
- Kaiser and related defendants contended the Certificate permitted adjustment of conversion rights so PRIDES would convert into the new classes created by the recapitalization.
- PRIDES holders sued in the Delaware Court of Chancery to enjoin the recapitalization, asserting it altered their conversion rights without required preferred-holder consent.
- The Court of Chancery issued a preliminary injunction; defendants took an interlocutory appeal.

## Issues

1. How should the PRIDES conversion provisions in the Certificate of Designations be construed when they are ambiguous regarding the effect of a common-stock reclassification?
2. Under the proper construction, could Kaiser implement the recapitalization in a manner that altered the substance of PRIDES conversion rights without preferred-holder consent?
3. Did the plaintiffs satisfy the requirements for a preliminary injunction (likelihood of success, irreparable harm, and balance of equities)?

## Decision

- The Delaware Supreme Court affirmed the preliminary injunction.
- The Court held the conversion provisions were ambiguous as to whether “Common Stock” referred to post-recapitalization common or the pre-recapitalization common.
- The ambiguity was construed in favor of the preferred holders’ existing contractual rights, requiring conversion into the common stock that existed before the recapitalization (or its equivalent), not the newly created common classes.
- Because the proposed recapitalization would effectively alter those bargained-for conversion rights without preferred-holder consent, maintaining the status quo by injunction was proper.

## Legal Principles

- Preferred stock rights are contractual and are defined by the certificate of incorporation and any certificate of designations; special rights must be clearly expressed and are not implied.
- Courts apply ordinary contract-construction principles to preferred stock terms; when conversion provisions are ambiguous, the construction favoring protection of the preferred holders’ existing rights and reasonable expectations may control.
- A recapitalization or reclassification cannot be implemented in a manner inconsistent with contractual conversion rights, including by changing the substantive character of what preferred shares convert into, absent the consent required by the governing terms.
- A preliminary injunction is appropriate where plaintiffs show a reasonable likelihood of success on the contractual claim, irreparable harm from an irreversible change to equity rights, and equities favor preserving the pre-transaction status quo pending final adjudication.

## Conclusion

The court affirmed an injunction blocking Kaiser’s recapitalization because the PRIDES conversion provisions were ambiguous and were construed to preserve conversion into the pre-recapitalization common-stock equivalent, making an unconsented alteration of conversion rights impermissible at the preliminary stage.


Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392 (Del. 1996)