New York Judge Considers Meaning Of "Voting Power" In California Contract

Chapter 1 of the California General Corporation Law includes a large number of definitions, beginning with "Acknowledged" (Section 149) and ending with "Written, in writing" (Section 195).  It is easy to gloss over these terms as the balance of the CGCL doesn't use initial capitals or italics to identify defined terms.  I suspect that many lawyers may be unaware that the terms they use in contracts are defined in Chapter 1.  Such seems to have been the case in Special Situations Fund QP, LP v. Overland Storage, Inc., 2017 NY Slip Op 32125 (Oct. 10, 2017).

The dispute arose from an agreement requiring the defendant to pay $6 million if a "specified transaction" occurred.  A "specified transaction" was defined as, among other things, as "an acquisition by any Person and its Affiliates of more than 50% of the then outstanding voting power of Seller [Overland]".  After the defendant, Overland, completed a transaction in which a third party acquired 54% of Overland's fully diluted shares, the plaintiff sued claiming that a "specified transaction" had occurred.  Overland countered that a "specified transaction" had not occurred because the third party had not acquired the power to elect directors due to a voting agreement restricting its right to nominate and vote for directors.  The parties agreed that California law governed the contract.

Overland pointed out that Section 194.5 of the Corporations Code defines "voting power" as "the power to vote for the election of directors at the time any determination of voting power is made and does not include the right to vote upon the happening of some condition or event which has not yet occurred."  The plaintiffs argued that this definition was irrelevant and in support submitted an affirmation by the lawyer who represented the plaintiffs in negotiating the contract.  He affirmed that he did not insert the term "voting power" "based on any California statute or regulation defining the term `voting power.'"

Ruling on the parties' motions for summary judgment, New York Supreme Court Judge Marcy Friedman found that even if the attorney's affirmation were to be considered, "his conclusory assertion that he did not consider the California statute does not require this court to disregard that statute, which evidences the common and technical usage of that term in the corporate context in California, and accordingly bears on the parties' understanding of the term under the California authorities discussed above".