Chancery Applies Contract Principles in Preferred-Shares Dispute

In Choupak v. Rivkin, C.A. No. 7000-VCL (Del. Ch. April 6, 2015), the Delaware Court of Chancery concluded after a trial that the defendant and counterclaim-plaintiff, Vladimir Rivkin, forged documents, lied about exercising options, verified interrogatory responses and pleadings that he knew contained falsehoods, and testified falsely in deposition and at trial. The court found that Rivkin’s conduct was motivated by his desire to profit from a 2011 sale by merger of Intermedia.net Inc., even though in 2008 he had sold his 4.4 percent equity interest in Intermedia to Intermedia’s founder, plaintiff Michael Choupak, and another Intermedia executive for $300,000. The court noted that had Rivkin prevailed on his claim that he was entitled to an additional 4 percent of the equity through preferred shares, he would have received over $5 million in damages based on the 2011 merger sale price of $127.5 million. The details of the facts that led the court to reach its findings are distressing but of wider import are the court’s application of traditional contract principles in ruling for Choupak, the court’s assessment of an equitable claim to unjust enrichment when the parties’ relationship is governed by contract, and its dicta agreeing with other Delaware decisions holding that exclusive forum-selection provisions are procedural and hence permitted in a bylaw.

Court Analyzes Employment Agreement and Preferred Stock Option

The gravamen of Rivkin’s counterclaim was that his employment agreement gave him an option to purchase shares of preferred stock equal to 4 percent of the company’s equity. He claimed that a preferred stock option memorialized that grant, that he exercised the preferred stock option, and that the company breached its obligations by not issuing the shares to which he was entitled. In rejecting that claim, the court held the lack of detail in the two agreements rendered the terms “preferred stock” and “anti-dilution” ambiguous. Under conventional contract analysis, the court reviewed the extrinsic evidence to determine the parties’ intent. Based on the trial evidence, the court found that Rivkin, a recent law school grad Choupak hired as company counsel in 2000, had attempted to document “the basic concept that [Rivkin] would receive at least 4 percent of Intermedia’s equity.” The court also found that Rivkin understood the term “preferred stock” to mean anti-dilution protection and that Choupak signed both documents evidencing his agreement to those terms. The court held that Rivkin received the benefit of his bargain when he sold his slightly more than 4 percent interest in 2008 and therefore there was no breach.