## Facts

- Coastal States Gas Corporation, through subsidiaries, operated a natural-gas gathering and marketing business that supplied intrastate Texas customers.
- During the 1970s energy crisis, increased wellhead gas prices triggered regulatory proceedings and extensive Texas litigation involving customer contracts and refunds.
- Coastal negotiated a settlement to resolve the Texas litigation that included reorganizing a subsidiary (renamed Valero Energy Corporation) and spinning it off from Coastal.
- As part of the settlement, approximately 13.4% of Valero common stock would be placed in a trust for certain customers, and the remaining Valero shares would be distributed as a special dividend to Coastal common stockholders.
- Coastal had two series of convertible preferred stock whose rights were set by a certificate of designations within the corporate charter.
- The certificate provided that in specified “recapitalization” events, preferred holders converting would receive the same kind and amount of securities distributable with respect to common stock.
- The certificate also stated that no adjustment in the conversion ratio would be made for dividends to common stockholders payable in property other than Coastal common stock.
- Coastal distributed Valero shares only to common stockholders; preferred stockholders received no Valero shares.
- Preferred stockholders filed a class action seeking to block the transaction and obtain participation in the Valero distribution; the Court of Chancery dismissed the complaint, and the preferred holders appealed.

## Issues

1. Whether the spin-off and distribution of Valero shares solely to common stockholders constituted a “recapitalization” (or similar covered transaction) that contractually required preferred holders to receive equivalent securities or an adjustment to conversion rights.
2. Whether excluding preferred stockholders from the Valero stock distribution violated their rights under the charter-based contract or supported equitable theories such as fiduciary duty or unjust enrichment.

## Decision

- The Delaware Supreme Court affirmed dismissal of the preferred stockholders’ claims.
- The Court held the spin-off and distribution did not constitute a “recapitalization” under the certificate of designations.
- The Court held the transaction fit the certificate’s provision allowing property dividends to common stockholders without any conversion-ratio adjustment.
- The Court rejected claims seeking relief beyond the certificate’s express terms, including unjust-enrichment and fairness-based theories.

## Legal Principles

- Preferred stockholder rights are primarily contractual and are determined by the corporation’s charter and the certificate of designations.
- Courts enforce the express allocation of rights in the certificate and will not add protections for preferred stockholders that are not clearly stated.
- A distribution to common stockholders of property other than the issuer’s common stock, when expressly exempted from conversion-ratio adjustment, does not require participation by convertible preferred holders.
- A transaction is not treated as a covered “recapitalization” merely because it shifts value; the inquiry focuses on whether the issuer’s capital structure and the conversion entitlement specified in the certificate have been altered in the manner contemplated by the contract.

## Conclusion

The court enforced the certificate of designations as written, holding that the Valero spin-off distributed as a property dividend to common stockholders did not trigger recapitalization protections or conversion adjustments, and that preferred stockholders could not use equitable theories to obtain value not granted by the charter-based contract.


Wood v. Coastal States Gas Corp., 401 A.2d 932 (Del. 1979)