August 2, 2023

Redemption Rights, Minus the Redemption

A recent decision by the Appellate Division of the New York Supreme Court dealt a major blow to the investors involved in Luxor Cap. Grp. LP v. Altisource Asset Mgmt. Corp., No. 650746/20, 2023 WL 3957402, at *1 (NY App. Div. June 12, 2023). The case addressed redemption rights, or what turned out to be the lack thereof. Plaintiff’s investment in defendant included the right to redeem shares for cash on certain specified dates, “out of funds legally available therefor, all, but not less than all, of the outstanding ... Shares held by [the] holder at an amount equal to the Redemption Price.” However, when plaintiff attempted to exercise this right and redeem all of the outstanding shares held by it, defendant asserted that it did not have the requisite amount in legally available funds as of the specified date and informed the investors it would not redeem such shares.

So What Did the Court Say?

Although plaintiff argued it should be entitled to partial payment out of available funds as of such specified date, and full payment once the remaining funds become available, the court disagreed. It said the language of “the all-or-nothing nature of the parties’ agreement” was unambiguous; it explicitly stated that all shares must be redeemed “‘for cash,’ on a specific date, for a specific price, out of legally available funds,” and “if the parties had intended to provide for partial or delayed payment, they would have done so.”

Should You Worry About Companies Intentionally Rendering Funds Legally Unavailable?

The court said no. It reasoned that if such circumstances exist, there are readily available remedies if evidence is presented of bad faith or fraudulent actions, or that otherwise establishes that surplus is available and a company would not be rendered insolvent, including specific performance to have such company perform its redemption obligation, which evidence the court said was not presented by plaintiff in this case.

Key Takeaways

  • Including “all, but not less than all” phrasing can effectively undercut a redemption right in certain circumstances, so such language should be used carefully and intentionally.
  • If you want a right to a partial redemption out of then legally available funds, be clear about it.
  • Specify if you want the redemption obligation to survive beyond the designated redemption date, in the event legally available funds are not available at such time.

Generally, this is a good reminder that language choices matter and courts are hesitant to add terms to contracts after the fact, particularly between sophisticated business entities that had the opportunity during negotiations to do so themselves. Even seemingly straightforward market provisions require careful, intentional drafting. It is important to engage counsel aware of such pitfalls and mindful of the changing landscape of judicial interpretations of such matters, as well as your specific motivations and needs.

What to Do If You Are Affected by This Decision

Given this decision by the Appellate Division of the New York Supreme Court (and its potential to be applied in Delaware), if you are concerned about an existing or forward-looking arrangement, please reach out to a Goodwin attorney to discuss.