## Facts

- QuadraMed Corporation had common stock and a series of preferred stock governed by a certificate of designations setting specific contractual rights.
- The preferred stock had a conversion right with a defined formula; upon conversion in connection with a merger, preferred would receive the same per-share merger consideration as common on an “as-if converted” basis.
- The certificate provided dividend and liquidation preference rights, but it did not treat a merger as a liquidation event triggering the liquidation preference and did not grant the preferred priority to merger proceeds beyond the conversion mechanics.
- The preferred stock did not have a separate class vote on mergers.
- QuadraMed negotiated a going-private cash-out merger with Francisco Partners II, L.P.
- The merger provided $8.50 per share for common stock and $13.7097 per share for preferred stock, calculated strictly under the certificate’s as-if converted conversion formula.
- QuadraMed’s directors held significant common stock and no preferred stock, aligning their direct economic interest with the common.
- The board formed a special committee of independent directors to oversee the process, evaluate bids and structures, and obtain legal advice on the preferred’s contractual rights.
- Counsel advised that cashing out the preferred at its as-if converted contractual entitlement was permissible and consistent with the certificate and Delaware law.
- A preferred holder, LC Capital Master Fund, Ltd., sued seeking a preliminary injunction to block the stockholder vote and closing, asserting fiduciary breach in the allocation of merger consideration between preferred and common.

## Issues

1. Whether directors breached fiduciary duties by paying preferred only the amount dictated by the certificate’s conversion formula, rather than allocating additional merger consideration to reflect dividend and liquidation preference features.
2. Whether, when a certificate clearly defines preferred merger participation and provides no merger-triggered liquidation preference or class vote, directors must seek additional consideration for preferred beyond the contractual terms.
3. Whether the plaintiff satisfied the requirements for a preliminary injunction: reasonable probability of success on the merits, irreparable harm, and a balance of equities favoring injunctive relief.

## Decision

- The Court of Chancery denied the preliminary injunction.
- The court held the plaintiff failed to show a reasonable probability of success because the preferred’s merger consideration was objectively defined by the certificate’s conversion formula and the board complied with those contractual rights.
- The court found no sufficient showing of irreparable harm warranting an injunction where the preferred was receiving its contractual entitlement and monetary remedies could address any proven loss.
- The balance of equities weighed against enjoining a negotiated, board-approved merger based on a claim seeking consideration beyond the preferred’s bargained-for rights.

## Legal Principles

- Preferred stock rights are primarily contractual; when those rights are clearly set forth in the certificate of designations, directors generally satisfy obligations to preferred by honoring the contract.
- Fiduciary duties to preferred stockholders operate as gap-fillers only when contractual terms are silent or ambiguous on the contested allocation; they do not rewrite or expand clear economic terms.
- After honoring preferred’s contractual rights, directors may favor common stockholders as the residual claimants in decisions about merger value.
- Preliminary injunction relief requires proof of (1) reasonable probability of success on the merits, (2) irreparable harm, and (3) a balance of equities favoring injunctive relief.

## Conclusion

The court refused to block the merger because the preferred stockholders’ payout was fixed by an unambiguous conversion formula in the governing certificate, and Delaware fiduciary law did not require the board to negotiate extra consideration for preferred beyond those contractual terms.


LC Capital Master Fund, Ltd. v. James, 990 A.2d 435 (Del. Ch. 2010)