Brevan Howard Credit Catalyst Master Fund Limited

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

BREVAN HOWARD CREDIT
)
CATALYST MASTER FUND
)
LIMITED, BREVAN HOWARD
)
MASTER FUND, VISIUM CATALYST )
CREDIT MASTER FUND, LTD., ALJ)
CAPITAL I, LP, ALJ CAPITAL II, LP,
)
LJR CAPITAL, LP, and CEDARVIEW
)
OPPORTUNITIES MASTER FUND, )
LP, )
)
Plaintiffs, ) Civil Action No. 9209-VCG
)
v. )
)
SPANISH BROADCASTING SYSTEM, )
INC., )
)
Defendant. )

MEMORANDUM OPINION

Date Submitted: June 10, 2014
Date Decided: June 27, 2014

Stephen E. Jenkins, Catherine A. Gaul, and Peter H. Kyle, of ASHBY & GEDDES,
Wilmington, Delaware, Attorneys for the Plaintiffs.

Robert S. Saunders, Nicole A. DiSalvo, Ronald N. Brown, III, and Matthew P.
Majarian, of SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington,
Delaware, Attorneys for the Defendant.

GLASSCOCK, Vice Chancellor
 This matter is brought by preferred stockholders seeking to enforce rights

inherent in their stock. According to the Plaintiffs, the Defendant corporation has

breached certain of those rights. The Defendant has moved to dismiss; for the

following reasons, that Motion is denied.

I. FACTS

1. The Parties

This action arises out of facts set out in greater detail in a prior proceeding

before this Court, Lehman Brothers Holdings Inc. v. Spanish Broadcasting System,

Inc.1 The Defendant here, Spanish Broadcasting System, Inc. (“SBS,” or the

“Company”), a Delaware corporation, is “the largest publicly traded Hispanic-

controlled media and entertainment company in the United States.”2 SBS owns

and operates Spanish-language radio and television stations, produces live concerts

and events, and operates a “bilingual Spanish-English online site providing content

related to Latin music, entertainment, news and culture.”3

The Plaintiffs in this action are current holders of the Company’s Series B

Preferred Stock (“Series B”). Brevan Howard Credit Catalyst Master Fund Ltd.

1
Lehman Bros. Holdings Inc. v. Spanish Broad. Sys., Inc., 2014 WL 718430 (Del. Ch. Feb. 25,
2014). To the extent the facts presented in that prior proceeding provide useful background
information, I refer the reader to that February 25, 2014 Memorandum Opinion. As addressed
below, counts alleged in this action that overlap with those presented in the prior litigation have
been stayed, and the present Memorandum Opinion addresses only an additional breach of
contract claim not litigated in the prior action.
2
Am. Compl. ¶ 14. The facts cited herein are taken from the Plaintiffs’ Verified Amended
Complaint unless otherwise indicated.
3
Id. at ¶ 15.

2
and Brevan Howard Master Fund (collectively, “Brevan”) together hold 16,000

shares of Series B, at least some of which were purchased after October 15, 2013.

Cedarview Opportunities Master Fund, LP (“Cedarview”) holds 1,500 shares of

Series B, all purchased after October 15, 2013. ALJ Capital I, LP; ALJ Capital II,

LP; and LJR Capital, LP (collectively, “Capital”) together hold 5,000 shares of

Series B; the Amended Complaint indicates that Capital acquired their shares no

later than October 11, 2013.4 Visium Catalyst Credit Master Fund, Ltd.

(“Visium”) owns 4,902 shares of Series B; the Amended Complaint indicates that

Visium acquired its shares no later than October 14, 2013.5

2. The Series B Certificate

This litigation centers on the contractual rights of SBS’s Series B preferred

stock. As of October 15, 2013, there were 92,349 total shares of Series B

outstanding. The rights of the holders of Series B preferred stock are delineated in

the Certificate of Designations Setting Forth the Voting Power, Preferences and

Relative, Participating, Optional and Other Special Rights and Qualifications,

Limitations and Restrictions of the 10 3/4% Series B Cumulative Exchangeable,

Redeemable Preferred Stock of Spanish Broadcasting System, Inc. (the

“Certificate”). Though an equity investment, the rights associated with the Series

4
See id. at ¶ 49 (“The ALJ Funds tendered their shares to their broker for repurchase on or about
October 11, 2013.”).
5
See id. (“Visium demanded repurchase of their shares by letter[] dated . . . October 14,
2013 . . . .”).

3
B preferred cause those securities to function much like debt instruments. For one,

the Series B preferred are designed to pay to their holders a minimum annual

return by issuance of a dividend, which accrues daily and is “payable quarterly in

arrears on October 15, January 15, April 15, and July 15 of each year.”6 In

addition, because the Series B preferred were issued to finance acquisitions at a

time when the Company did not have much cash on hand,7 the Certificate provided

the Company an option, on or before October 15, 2008, to pay dividends to the

Series B holders “in kind”—in other words, to “pay dividends in cash or in

Dividend Shares.”8 As a result, the Company retained an option, in the first five

years after the Series B issuance, to satisfy its dividend obligation by issuing

additional Series B shares, although the newly issued shares would themselves

accrue dividends going forward. Further, the Certificate granted the Company the

option in those first five years, on or before October 15, 2008, to “exchange all but

not less than all of the then outstanding shares of Series B Preferred Stock for . . .

Exchange Notes to be issued under an indenture . . . .”9

Finally, central to the dispute before me here, the Series B preferred also

function like debt instruments by providing what may be likened to a maturation

6
Certificate § 4(a); see id. (“The Holders of the outstanding shares of the Series B Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds
of the Company legally available therefor, dividends on the Series B Preferred Stock, which shall
accrue at a rate per annum equal to 10.75% of the Liquidation Preference.”).
7
Lehman Bros. Holdings Inc., 2014 WL 718430, at *1.
8
Certificate § 4(a).
9
Id. at § 8(a).

4
date. For example, Section 6 of the Certificate provides that, “[o]n or after October

15, 2008, Series B Preferred Stock may be redeemed . . . at any time, in whole or

from time to time in part, at the option of the Company . . . .”10 The Company has

never exercised such a right. However, Section 7 of the Certificate further

provides holders of Series B shares the right, on October 15, 2013, to require the

Company to repurchase their shares under certain circumstances described in more

detail below. Under the terms of the Certificate, in the event “the Company fails to

discharge any redemption or repurchase obligation with respect to the Series B

Preferred Stock (whether or not the Company is permitted to do so by the terms of

the Senior Credit Facilities, the Senior Subordinated Notes, the DGCL, or any

other obligation of the Company),”11 a Voting Rights Triggering Event (“VRTE”)

occurs, and, as a result, the holders of Series B receive certain rights, including

rights to fill seats on the Company’s board of directors and to block the Company’s

incurrence of certain debt.

3. The Series B Repurchase Right

As noted above, Section 7 of the Series B Certificate grants holders of Series

B, on October 15, 2013, the right to require the Company to repurchase some or all

of their shares, subject to certain limitations. On October 15, 2013, of the 92,349

shares of Series B outstanding, holders of virtually all of the shares—92,233—

10
Id. at § 6(a).
11
Id. at § 9(b)(ii).

5
sought to exercise their repurchase rights. In response, the Company repurchased

1,800 shares for approximately $2.5 million, but took the position that it lacked

sufficient “legally available funds” to repurchase additional shares. SBS

acknowledged in an October 17, 2013 Form 8-K that its failure to repurchase all

shares from holders seeking to exercise their repurchase rights caused the

occurrence of a VRTE.

The parties dispute what obligations are created on the part of the Company

by Section 7, governing the repurchase rights of the Series B holders. That Section

provides, in part:

(a) On October 15, 2013 (the “Purchase Date”), each Holder of shares
of Series B Preferred Stock will have the right to require the Company
to repurchase (subject to the legal availability of funds therefor and to
Section 170 of the DGCL) all or a portion of the Series B Preferred
Stock held by such Holder at a purchase price equal to 100% of the
Liquidation Preference thereof, plus all accumulated and unpaid
dividends to the date of repurchase (the “Purchase Price”), in
accordance with the procedures set forth below.
...
(g) No Series B Preferred Stock may be repurchased except with
funds legally available for the purpose. The Company shall take all
actions required or permitted under the DGCL to permit any
repurchase pursuant to this Section 7.12

The Plaintiffs contend that SBS has breached its obligations under Section 7 in two

ways. First, the Plaintiffs read the second sentence of subsection (g)—that “[t]he

Company shall take all actions required or permitted under the DGCL to permit

12
Id. at § 7.

6
any repurchase”—as creating an obligation on the part of the Company to take all

actions that could generate funds to repurchase the Series B (such as issuing

additional equity, taking on new debt, or selling assets), so long as those actions

would not violate the DGCL, that is, the Plaintiffs regard the second sentence as an

obligation to go beyond use of “legally available funds.” Second, the Plaintiffs

contend that, even if SBS’s obligation under subsection (g) is limited to the use of

“legally available funds,” that understanding itself implies an obligation on the part

of the Company to assess what legally available funds may be raised, using the

mechanisms described above, when considering the repurchase requests of the

Series B holders.13 Accordingly, the Plaintiffs allege in their Amended Complaint

that the Company breached Section 7(g) of the Certificate by “fail[ing] to take any

actions required or permitted by the Delaware General Corporation Law, such as

selling assets or issuing and selling additional equity, which would have given it

‘legally available funds’ with which to repurchase the Series B Preferred Stock as

required by the Certificate.”14

13
The Defendant likewise concedes that “[t]hose procedures [required by Section 7] included . . .
a determination of the amount of funds legally available for any potential repurchase . . . .”
Def.’s Op. Br. in Supp. of Mot. to Dismiss at 7.
14
Am. Compl. ¶ 50 (typeface altered from original); see also id. at ¶ 51 (“The Company failed to
take any actions to aid in the repurchase of the Series B Preferred Stock despite previously
acknowledging that ‘[t]he source of funds for any such repurchases would be our available cash
or cash generated from operations or other sources, including borrowings, sales of equity or
funds provided by a new controlling person or entity.’”) (typeface altered from original).

7
 4. Indenture Restrictions

Although only tangentially referenced in the Amended Complaint,15 the

Defendant explains in briefing that, in February 2012, SBS “closed an offering of

senior secured notes due 2017, paying 12.5% interest on a total $275 million

principal amount.”16 According to the Defendant, “[t]he terms of the Senior

Secured Notes Indenture governing the 2012 Notes . . . restrict SBS’s ability to

take certain financial actions,” including repurchasing the Series B shares except in

four circumstances.17 The Defendant explains that the Indenture permits (1) a

repurchase if it is made from “a one-time $2.5 million ‘general basket’ from which

Restricted Payments may be made at any time;”18 (2) a repurchase “if, prior to

making the repurchase offer, SBS first commences and settles an offer to buy back

the 2012 Notes in an aggregate amount equal to that of the proposed stock

repurchase;” (3) a repurchase if it is funded “out of the proceeds of, the concurrent

issuance of certain junior indebtedness in accordance with” the Indenture

provisions; and (4) a repurchase if it is funded “out of the proceeds of, new

Preferred Stock issued in accordance with” the Indenture provisions.19 In addition,

15
Id. at ¶ 47.
16
Def.’s Op. Br. in Supp. of Mot. to Dismiss at 8.
17
Id.
18
The partial repurchase was in fact made from this $2.5 million “basket.” Def.’s Op. Br. in
Supp. of Mot. to Dismiss at 28.
19
Id. at 8-9.

8
the Defendant represents that the Indenture places restrictions on the Company’s

ability to sell assets.

5. Procedural History

The Plaintiffs filed their Complaint in this action on December 27, 2013. On

March 3, 2014, the Plaintiffs filed an Amended Complaint. The Amended

Complaint alleges counts for (I) a declaratory judgment that a VRTE went into

effect on April 15, 2010; (II) breach of contract based on the Company’s 2011 and

2012 incurrence of debt while a VRTE was purportedly in effect; (III) breach of

contract based on the Company’s failure to meet its obligations under Section 7 of

the Certificate, governing repurchase of the Plaintiffs’ Series B shares; and (IV)

breach of the implied covenant of good faith and fair dealing. On March 31, 2014,

the Defendant moved to dismiss the Amended Complaint for failure to state a

claim upon which relief could be granted. On June 10, 2014, I heard oral argument

on the Defendant’s Motion with respect to Count III, and stayed this action with

respect to Counts I, II, and IV, pending the Supreme Court’s resolution of the

plaintiffs’ appeal in the earlier filed action, Lehman Brothers Holdings Inc. v.

Spanish Broadcasting System, Inc.20 In the remainder of this Memorandum

Opinion, I address the Defendant’s Motion to Dismiss Count III of the Amended

Complaint.

20
2014 WL 718430 (Del. Ch. Feb. 25, 2014).

9
 II. STANDARD OF REVIEW

When considering a motion to dismiss, this Court must assume as true the

well-pleaded allegations in the complaint,21 and give the plaintiff “the benefit of all

reasonable inferences that can be drawn from its pleading.”22 Accordingly, a

motion to dismiss may be granted only where “the plaintiff could not recover under

any reasonably conceivable set of circumstances susceptible of proof.”23 A

complaint “need only give general notice of the claim asserted,”24 but conclusions

will not be assumed to be true without “specific allegations of fact which support

the conclusion.”25 In deciding a motion to dismiss, I may rely on documents

incorporated in the complaint as well as the allegations of the complaint itself.26

III. ANALYSIS

The Defendant contends that Count III of the Amended Complaint fails to

state a claim because (1) the Plaintiffs who fail to plead that they owned shares of

Series B on the October 15, 2013 repurchase date either lack standing or cannot

adequately plead that they suffered damages, and (2) even accepting as true the

21
Malpiede v. Townson, 780 A.2d 1075, 1082 (Del. 2001).
22
In re USACafes, L.P. Litig., 600 A.2d 43, 47 (Del. Ch. 1991).
23
Bettis v. Premier Pool & Prop. Mgmt., LLC, 2012 WL 4662225, at *2 (Del. Ch. Sept. 26,
2012).
24
Rabkin v. Philip A. Hunt Chem. Corp., 498 A.2d 1099, 1104 (Del. 1985).
25
Haber v. Bell, 465 A.2d 353, 357 (Del. Ch. 1983).
26
See LNR Partners, LLC v. C-III Asset Mgmt. LLC, 2014 WL 1312033, at *9 (Del. Ch. Mar. 31,
2014) (“Generally, on a motion to dismiss under Rule 12(b)(6), the Court will consider only the
complaint and the documents integral to or incorporated by reference into it.”).

10
allegations of the Amended Complaint, the remaining Plaintiffs fail to adequately

plead that SBS breached Section 7 of the Series B Certificate. I address those

contentions in turn, below.

1. Standing

As a threshold matter, the Defendants contend that those Plaintiffs who did

not hold shares of Series B on the October 15, 2013 repurchase date lack standing

to bring a claim, or, put another way, that those Plaintiffs “cannot allege that they

were harmed by any of SBS’s purported breaches of the Certificate . . . .”27 As

noted above, Brevan and Cedarview purchased some or all of their shares of Series

B after October 15, 2013, the date on which, according to the Plaintiffs, SBS failed

to comply with Section 7 of the Series B Certificate.

The Plaintiffs contend that “[t]here is no need . . . for Plaintiffs to allege

when they became holders of the Series B Preferred stock so long as they are the

current holders because, as a matter of law, the current holder of the shares has

authority to enforce the Certificate, including for any previous breaches.”28 In

support of that contention, the Plaintiffs point to 6 Del. C. § 8-302(a), which states

that, “[e]xcept as otherwise provided in subsections (b) and (c), a purchaser of a

certificated or uncertificated security acquires all rights in the security that the

27
Def.’s Op. Br. in Supp. of Mot. to Dismiss at 17.
28
Pls.’ Answering Br. in Opp’n to Def.’s Mot. to Dismiss at 48-49.

11
transferor had or had power to transfer.”29 The Plaintiffs accordingly assert that

the right to sue for breach of the Certificate was a right in the Series B securities

that passed to the Brevan and Cedarview Plaintiffs when they purchased their

Series B shares after SBS’s purported October 15, 2013 breach.

In considering whether certain rights transfer to a purchaser of a security in

accordance with 6 Del. C. § 8-302(a), this Court has explained that “[t]he phrase

‘all rights in the security’ can be understood as distinguishing between personal

rights of the holder, on the one hand, and rights that inhere in the security itself, on

the other.”30 In applying that understanding here, I note that a right inherent in the

Series B preferred stock at issue is the right, under certain circumstances, to a

repurchase of the shares by the Company at a set price on a date certain. The

Plaintiffs contend that this right has been breached, and seek specific performance,

which will require that each Plaintiff own, and be able to tender, those shares. A

right to performance of a promise to repurchase is a right inherent in these

securities, and thus was transferred, upon sale of the shares, to the purchaser. I

therefore find that all the Plaintiffs have standing here.31

29
6 Del. C. § 8-302(a).
30
In re Sunstates Corp. S’holder Litig., 2001 WL 432447, at *3 (Del. Ch. Apr. 18, 2001); see
also Schultz v. Ginsburg, 965 A.2d 661, 667 n.12 (Del. 2009) (“The phrase ‘all rights in the
security’ means rights in the security itself as opposed to personal rights.”).
31
Although it does not form the basis of my decision here, I note that the behavior of the parties
in fact indicates that at least some of the holders of shares of Series B believed they were selling,
along with their shares, a right to pursue a claim for breach of the Certificate: Brevan purchased
shares from, and subsequently entered this litigation in place of, River Birch Master Fund, L.P.

12
 2. Contract Claim

The Defendant also contends that Count III of the Amended Complaint fails

to state a claim upon which relief may be granted because (1) SBS complied with

the unambiguous terms of Section 7(g) of the Certificate, and (2) even if SBS had

not complied with Section 7(g), the Plaintiffs fail to satisfy the requisite pleading

standard for a breach of contract claim. For the reasons that follow, I find that the

Defendant’s interpretation of Section 7(g) is correct, but that the Amended

Complaint states a claim for breach of that Section.

A. Section 7(g) is Unambiguous

As explained above, both the Plaintiffs and Defendant submit that the

language of Section 7(g) of the Certificate, which codifies the repurchase rights of

the Series B holders, is unambiguous. The parties dispute, however, what

obligations are imposed on the Company by the language of that Section. Section

7 states:

(g) No Series B Preferred Stock may be repurchased except with
funds legally available for the purpose. The Company shall take all
actions required or permitted under the DGCL to permit any
repurchase pursuant to this Section 7.32

and River Birch Ltd., after the initial Complaint in this action was filed. River Birch Master
Fund, L.P. and River Birch Ltd. have withdrawn and are no longer pursuing rights arising from
these securities.
32
Certificate § 7.

13
Under the Plaintiffs’ interpretation of this provision, the requirement that “the

Company shall take all actions . . . permitted under the DGCL” obligates the

Company to take all possible actions that would result in generating legally

available funds from which the Company could satisfy its repurchase obligations,

so long as those actions are not prohibited by the DGCL. The Defendant rejects

that broad reading of Section 7(g), contending instead that the requirement to “take

all actions required or permitted under the DGCL” creates an obligation only to

“take the necessary steps established by the DGCL for a Delaware corporation to

repurchase shares.”33 For the reasons that follow, I concur with the Defendant’s

interpretation of the unambiguous language of Section 7(g).

Reading the Certificate as a whole, I find unreasonable the Plaintiffs’

interpretation of Section 7(g) as creating an obligation on the part of the Company

to generate funds by taking all actions not prohibited by the DGCL. Section 7(a),

which provides that the right to repurchase is “subject to the legal availability of

funds therefore and to Section 170 of the DGCL,” clearly imposes two conditions

on a right to repurchase: (1) that the repurchase be made from legally available

funds, and (2) that the repurchase comply with the DGCL. Section 7(g) mirrors

those two requirements, by stating (1) that “[n]o Series B Preferred Stock may be

repurchased except with funds legally available for the purpose,” and (2) that

33
Def.’s Op. Br. in Supp. of Mot. to Dismiss at 20.

14
“[t]he Company shall take all actions required or permitted under the DGCL” to

effectuate a repurchase.

Importantly, under the Plaintiffs’ reading, the first sentence of Section 7(g),

which requires that a repurchase must be made from “legally available funds,”

would lose all meaning. While Plaintiffs’ counsel suggested at oral argument that

the requirement that a repurchase be paid from “funds legally available” operates

to provide a “backstop” to the otherwise infinitely broad obligation, imposed by

the second sentence of Section 7(g), to generate funds by taking all actions not

prohibited by the DGCL, I am unable to comprehend how such a “backstop”

would operate; the Company’s obligation to repurchase shares must either be

limited by “funds legally available,” or the Company must generate additional

funds by taking all actions not prohibited by the DGCL—one standard or the other

must govern.

Reading the Certificate as a whole confirms that Section 7(g) must be read,

as the Defendant argues, to create only an obligation on the part of the Company to

take those steps necessary to comply with the DGCL when repurchasing the Series

B shares. As the Defendant points out, Section 6, governing the Company’s right

to redeem the Series B shares, also states:

15
 (f) No Series B Preferred Stock may be redeemed except with funds
legally available for the purpose. The Company shall take all actions
required or permitted under the DGCL to permit any redemption
which the Company elects pursuant to clause (a) above.34

Section 6 creates a right of the Company to repurchase, at its discretion. The

parties cannot have intended, by stating that “[t]he Company shall take all

actions . . . permitted under the DGCL,” to create an obligation for the Company,

once it elects to redeem shares, to generate funds by all legal means. Rather, the

only reasonable interpretation of that language is that the parties intended to

require the Company, if it elects to redeem shares, to accomplish such a

redemption in compliance with the DGCL. Similarly, the only reasonable

interpretation of the parallel language under Section 7 is that, when considering

repurchase requests on behalf of the Series B holders, the Company must

accomplish whatever repurchases it makes in compliance with the DGCL, and

must do so only with legally available funds.

B. The Plaintiffs Sufficiently Plead a Claim for Breach of Contract

I found above that the unambiguous language of Section 7(g) does not

obligate the Company to fund a repurchase of the Series B preferred by taking all

possible actions that would generate funds. Rather, the second sentence of that

Section requires only that the Company comply with the DGCL in accomplishing a

repurchase. The Defendant concedes, however, that Section 7 does create an

34
Certificate § 6(f).

16
obligation on the part of the Company to make “a determination of the amount of

funds legally available for any repurchase,”35 and that, consistent with case law

interpreting the phrase,36 “legally available funds” do not consist solely of

available cash, but also of funds “readily accessible through sales or borrowing.”37

While the Defendant concedes that the Company was contractually obligated to

determine whether the Company had legally available funds to repurchase the

Series B preferred on October 15, 2013, however, it contends that the Plaintiffs

have failed to plead, other than in an insufficient, conclusory fashion, a breach of

that obligation.

The Plaintiffs plead that “the Company failed to take any actions or explore

any options that would have given it legally available funds with which to purchase

the outstanding Series B Preferred Stock,” and that “[h]ad the Company taken the

appropriate actions, such as selling assets or issuing and selling additional equity, it

would have had sufficient funds to repurchase the outstanding Series B Preferred

35
Def.’s Op. Br. in Supp. of Mot. to Dismiss at 7; see also id. at 22 (“But SBS is already
obligated to explore means of funding a requested repurchase, because the Certificate requires
SBS to determine the amount of ‘funds legally available’ in response to a repurchase request.”).
36
See SV Inv. Partners, LLC v. ThoughtWorks, Inc., 7 A.3d 973, 988 (Del. Ch. 2010), aff’d 37
A.3d 205 (Del. 2011) (“‘Funds legally available’ means something different. It contemplates
‘funds’ (in the sense of cash) that are ‘available’ (in the sense of on hand or readily accessible
through sales or borrowing) and can be deployed ‘legally’ for redemptions without violating
Section 160 or other statutory or common law restrictions, including the requirement that the
corporation be able to continue as a going concern and not be rendered insolvent by the
distribution.”).
37
Def.’s Op. Br. in Supp. of Mot. to Dismiss at 22 (emphasis added).

17
Stock.”38 The Defendant contends that these allegations are conclusory, and

accordingly cannot withstand a motion to dismiss. The Plaintiffs, however, have

alleged a breach of a conditional right—the right to a repurchase—where the

occurrence of the condition—the existence of legally available funds—is

exclusively within the Defendant’s knowledge and control.39 The Plaintiffs have

alleged that the Defendant failed in its obligation to evaluate whether the condition

occurred, and at the current stage of the litigation, that allegation is sufficient to

provide the Defendant notice of their breach of contract claim.40

In addition, Defendant’s counsel suggested at oral argument that the

Plaintiffs’ allegations cannot be understood to allege that SBS breached its

obligation to determine whether “legally available funds” existed, but only that

SBS failed to generate funds in addition to existing legally available funds, that is,

38
Am. Compl. ¶¶ 63, 65.
39
See, e.g., Corporate Prop. Assocs. 8, L.P. v. Amersig Graphics, Inc., 1994 WL 148269, at *3
(Del. Ch. Mar. 31, 1994) (“This said, I find that [the plaintiffs’] pleadings, while less than ideal,
state a minimally sufficient claim . . . to survive a motion to dismiss. The complaint alleges
ASG’s and Foote’s insolvency as well as that ASG and Foote received less than fair
consideration for the asset transfer. Given the fact that the value of the assets transferred to AS
Memphis and AS Southeast as well as the amount of debt forgiven by Heller as a consequence of
the asset transfer are particularly within the knowledge of defendants—especially in light of the
fact that plaintiffs have had no opportunity to conduct discovery—plaintiffs’ allegations are not
merely conclusory, but sufficiently state a claim under 6 Del. C. § 1304.”) (emphasis added).
40
See Cent. Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC, 27 A.3d 531,
536 (Del. 2011) (“The pleading standards governing the motion to dismiss stage of a proceeding
in Delaware, however, are minimal. When considering a defendant’s motion to dismiss, a trial
court should . . . accept even vague allegations in the Complaint as ‘well-pleaded’ if they provide
the defendant notice of the claim . . . . Indeed, it may, as a factual matter, ultimately prove
impossible for the plaintiff to prove his claims at a later stage of a proceeding, but that is not the
test to survive a motion to dismiss.”).

18
the Defendant contends that the Plaintiffs’ allegations are limited to their theory

that the Defendant was required to resort to any non-prohibited lengths to generate

funds, a theory I rejected above. Our pleading standard is not so exacting,

however.41 In the interest of precision, the Plaintiffs could, perhaps should, have

pled that the Company failed to take any actions or to explore any options that

would have generated cash and that should have been included in the Company’s

determination of its legally available funds. However, by pleading that “the

Company failed to take any actions or explore any options that would have given it

legally available funds,” the Plaintiffs sufficiently allege that the Company failed

to investigate its options for generating cash that could have been used to

repurchase the Series B shares. Accordingly, I find the Plaintiffs’ pleadings

sufficient to state a claim for breach of contract.

Further, the Defendant attempts to rebut the Plaintiffs’ allegation that the

Company failed to take any action to determine whether legally available funds

existed by pointing to the terms of the Indenture; those terms permit a repurchase

of the Series B shares only in limited circumstances, which the Defendant contends

were not feasible options for the Company. To decide that issue, I would be

required to determine whether the Company could reasonably have offered to buy

back the notes, issued junior indebtedness, or issued new preferred stock to fund a

41
Id.

19
repurchase. Whether the Company could reasonably have taken such actions on

October 15, 2013 to accomplish the repurchases requested by the Plaintiffs is a

factual determination unsuitable for resolution on a motion to dismiss.42

Finally, the Defendant suggested in briefing (although not at oral argument)

that, even if the Company in fact breached Section 7(g) of the Certificate, the sole

remedy available to the Plaintiffs is the occurrence of a VRTE. However, while

the Defendant contends that “Plaintiffs’ entire damages claim is premised on the

notion that the conditions giving rise to a VRTE are also a breach of the

Certificate”—in other words, that the Company’s failure to repurchase the Series B

preferred was the occurrence of a condition that triggered a VRTE, but not a

breach of Section 7—the Defendant misconstrues the Plaintiffs’ surviving breach

of contract claim. That theory is not that any failure to repurchase the Series B

shares—which unquestionably results in a VRTE—also breached the Certificate,

but rather that SBS breached its contractual obligations when it failed to correctly

calculate legally available funds.43 In addition, “our courts have refused to

construe a contract as taking away a common law remedy unless that result is

42
Further, to the extent the Plaintiffs contend that funds would have been legally available to
accomplish a repurchase had the Company not breached the Certificate by entering into the
Indenture, that claim is preserved pending lift of the stay of Counts I, II, and IV.
43
Def.’s Op. Br. in Supp. of Mot. to Dismiss at 48; see also Pls.’ Answering Br. in Opp’n to
Mot. to Dismiss at 47 (conceding that “[i]f SBS acted with utmost good faith and relied on
detailed analyses developed by well-qualified experts to engage in a thorough analysis of
whether it could generate legally available funds, and thus lawfully determined it could not make
the repurchase, then a VRTE would be the result of that failure”).

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imperatively required,” and as a result, “the Supreme Court has held that, even if a

contract specifies a remedy for breach of that contract, a contractual remedy cannot

be read as exclusive of all other remedies if it lacks the requisite expression of

exclusivity.”44 Accordingly, to the extent the Defendant did not waive its

contention that a VRTE is the exclusive remedy for a breach of Section 7 by failing

to present it at oral argument, that contention must fail.

To summarize, I find that Count III of the Amended Complaint adequately

pleads that SBS breached the Series B Certificate by failing in its contractual

obligations to undertake appropriate actions to determine what “legally available

funds” were at the Company’s disposal as of October 15, 2013.

IV. CONCLUSION

For the reasons explained above, I deny the Defendant’s Motion to Dismiss

Count III of the Amended Complaint. An appropriate Order is attached.

44
Reid v. Thompson Homes at Centreville, Inc., 2007 WL 4248478, at *5 (Del. Super. Nov. 21,
2007); see also Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 176
(Del. 2002 ) (“[T]his Court has held that, even if a contract specifies a remedy for breach of that
contract, ‘a contractual remedy cannot be read as exclusive of all other remedies [if] it lacks the
requisite expression of exclusivity.’”) (citing Oliver B. Cannon & Son, Inc. v. Dorr-Oliver, Inc.,
336 A.2d 211, 214 (Del. 1975)). Although the Defendant contends that the Court should not
read in additional preferences where the preferred stockholders did not bargain for them, it puts
forth no support for the contention that the right to sue for breach of an agreement is the sort of
unexpressed “preference” the Court must not presume.

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