Thread by @anothrkevinchen

1. I expect VCs and crypto startups will each pay more attention to the phrasing of redemption rights after the DE Chancery Court’s recent ruling in the Tetragon/Ripple dispute. A short thread:

2. In December 2019, UK investor Tetragon bought $150 million of Ripple’s Series C preferred stock through a Stockholders’ Agreement.

3. The Agreement gives Tetragon a “redemption right” allowing Tetragon to force Ripple to buy back Tetragon’s shares if “XRP is determined on an official basis” by the SEC or other government authority “to constitute a security.”

4. After the SEC told Ripple it intended to bring an enforcement action (on the theory that XRP is a security), Tetragon demanded Ripple repurchase its shares, worth ~ $175 million. Ripple refused.

5. In January 2021, Tetragon sued Ripple, arguing the SEC had “determined on an official basis” that XRP “constitutes a security” and that Ripple’s refusal to repurchase shares breached the Stockholders’ Agreement.

6. The DE Chancery Court granted Tetragon a TRO against Ripple while it considered a request for a preliminary injunction that would prevent Ripple from using its cash for any other purpose than to pay Tetragon for it shares.

7. The key legal question: Did the SEC “officially determine” XRP is a security by starting an enforcement action against Ripple? The Court said No.

8. Why? Because based on dictionary definitions, to “officially determine” something means to make a “final authoritative decision.”

9. So, Tetragon’s right is triggered only if the SEC (or other agency) makes a “final authoritative decision” that XRP is a security (and will be one going forward).

10. The SEC did not make a “final authoritative decision” when it commenced the enforcement action against Ripple. Rather, the SEC is using the enforcement action to ask a court to make the final decision.

11. Because no authority has made a final decision on whether XRP is a security, Tetragon’s redemption right was not triggered, and Tetragon loses.

12. The Court’s reasoning reflects standard contract interpretation principles—courts attempt to determine a contract’s plain meaning and can look to dictionary definitions for assistance.

13. All of this could have been avoided, though, if the language in the Agreement was more precise. E.g., the Agreement could have specified that the redemption right is triggered if a SEC files an enforcement action, etc.

14. Redemption rights are common in VC deals, albeit rarely used. After this ruling, and in the face of regulatory uncertainty, VCs/crypto startups may negotiate/draft these rights with greater specificity.