Company Breached Registration Rights Agreement
By Rodney Tonkovic
Associate Writer-Analyst
Wolters Kluwer Law and Business
A district court (SD NY) held that a company was obliged under the terms of an agreement to redeem an investor's shares. The action arose out of an alleged breach of a provision in the agreement that the company would redeem its convertible preferred stock for cash or an equivalent value of common stock. The provision granted preferred holders a qualified right of redemption upon the occurrence of certain "triggering events. The shareholders claimed that the suspension of the convertible stock's registration statement for sixty days due to the company's failure to timely file its annual report constituted a "triggering event" and demanded that their shares be redeemed. The company refused to tender any stock or the equivalent value of cash.
The court first determined that the suspension of the convertible stock's registration statement for sixty days constituted a triggering event under the structure and language of the agreement. Next, the right to redeem was only triggered if the registration statement lapsed during the Effectiveness Period, which was defined in the agreement as the period during which all registrable securities could be sold without volume restrictions pursuant to Rule 144(k). The company argued that the investors holdings were subject to Rule 144(e), meaning that the effectiveness period would have ended before the suspension. The court disagreed, finding that it was indisputable that, at the time the investor requested redemption of its preferred shares, some registrable securities were subject to the volume restrictions of Rule 144(e).
The court read the agreement as plainly and unambiguously requiring a uniform effectiveness period of two years under Rule 144(k). The court, however, found that, given the posture of the summary judgment motion and the complex nature of the damages calculation, the factual record was inadequate to support an immediate reward of damages and other equitable relief.
Portside Growth and Opportunity Fund v. Gigabeam Corp., Inc. (SD NY)