## Facts

- Venture-capital investors held a large block of Sorrento’s Series A Preferred Stock and had negotiated charter and contractual protections governing new equity issuances and redemption.
- Sorrento was a start-up that repeatedly needed financing and had borrowed over $36 million from its parent and controlling stockholder, Osicom.
- The investors’ rights included: (i) a charter-based consent right requiring approval by a majority of Series A holders before specified actions affecting the preferred, including authorization/issuance of “any other equity security”; (ii) an agreement-based right of first offer on new equity; and (iii) a redemption right exercisable by holders of at least 50% of Series A if no IPO occurred within a stated period.
- After no IPO occurred, the investors demanded redemption; Sorrento could not fund it.
- Shortly after the redemption demand, Sorrento’s board approved issuing 15 million additional shares of Series A Preferred to Osicom at $5.45 per share without obtaining Series A holder approval.
- The planned issuance would dilute the investors below the 50% threshold needed to force redemption; Osicom also contemplated acquiring additional Series A shares in exchange for cancelling Sorrento’s debt.
- Before the preliminary-injunction hearing, Sorrento issued 2.7 million Series A shares to Osicom and did not disclose that issuance to the court the next day.
- The investors sought a TRO and preliminary injunction to stop further Series A issuances without their consent and to limit additional indebtedness.

## Issues

1. Whether the certificate of incorporation’s protective provisions required Series A preferred-holder approval before Sorrento could issue additional shares of Series A Preferred.
2. Whether the attempted authorization/issuance of additional Series A Preferred complied with 8 Del. C. § 151(g) governing board-fixed (“blank check”) preferred stock terms.
3. Whether the contemplated financing was inequitable because it was structured to dilute preferred holders and frustrate their contractually conditioned redemption right.
4. Whether the investors satisfied Delaware’s requirements for preliminary injunctive relief (likelihood of success, irreparable harm, and equities).

## Decision

- The Court of Chancery granted preliminary injunctive relief in substantial part.
- The court enjoined Sorrento from issuing additional Series A Preferred Stock without prior approval of a majority of the existing Series A Preferred holders.
- The court also imposed restrictions on Sorrento incurring additional indebtedness.
- The court found the investors showed a reasonable probability of success that the charter prohibited the unapproved Series A issuance.
- The court found irreparable harm because dilution could permanently impair voting power and the ability to satisfy the redemption-threshold condition in ways not readily repaired by money damages.
- The court determined the balance of equities favored preserving the status quo pending final adjudication.

## Legal Principles

- Preferred stockholder rights are primarily contractual and are enforced as written when clearly stated in the certificate of incorporation and related agreements.
- Charter protective provisions may restrict additional issuances of a class of preferred stock when the language, read in context, reasonably supports that construction; ambiguity analysis and plain-meaning construction control at the preliminary stage.
- Boards relying on “blank check” authority under 8 Del. C. § 151(g) must comply with statutory and charter requirements when fixing and issuing preferred stock terms; deficiencies can support injunctive relief.
- Equity will scrutinize controller- or insider-driven capital-structure transactions that appear designed to interfere with bargained-for investor rights (including rights conditioned on ownership thresholds).
- Preliminary injunctions in Delaware require (i) a reasonable probability of success on the merits, (ii) imminent irreparable harm, and (iii) a balance of equities favoring relief.

## Conclusion

The court preliminarily blocked further issuances of Series A Preferred without the existing preferred holders’ consent, concluding the investors were likely to prove the charter required that approval and that the proposed dilution threatened irreparable impairment of negotiated redemption and governance rights.


Telcom-SNI Invs., L.L.C. v. Sorrento Networks, Inc., 2001 WL 1117505 (Del. Ch. 2001)