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Halpin v. Riverstone National, Inc., C.A. No. 9796-VCG (Del. Ch. Feb. 26, 2015) (Glasscock, V.C.)

February 26, 2015

In this decision, the Court of Chancery granted a motion for summary judgment for minority stockholders asserting appraisal rights in a squeeze-out merger.  The Court assumed, without deciding, that a common stockholder may waive statutory appraisal rights prospectively by contract.  The Court held, however, that, because the corporation failed to comply with the express terms of the stockholders’ agreement that authorized such a waiver, the minority stockholders were entitled to exercise appraisal rights.

On June 5, 2009, certain minority stockholders (the “Minority Stockholders”) holding approximately 9% of the stock of Riverstone National, Inc. (“Riverstone”) entered into a stockholders agreement with Riverstone (the “Stockholders Agreement”).  The Stockholders Agreement provided for drag-along rights (the “Drag-Along”) with respect to a merger, exercisable either through a participation right requiring the tender of shares (the “Participation Right”), or the right to require a vote in favor of the merger (the “Voting Right”).  Per the terms of the Stockholders Agreement, the Drag-Along required Riverstone to provide notice to the Minority Stockholders for any “proposed” change-of-control transaction.

On May 29, 2014, without providing any prior notice to the Minority Stockholders, the 91% majority stockholder of Riverstone provided its written consent pursuant to Section 228 of the Delaware General Corporation Law (the “DGCL”) for Riverstone to enter into a merger agreement (the “Merger Agreement”) with non-party Greystar Real Estate Partners, LLC (“Greystar”).  The Merger Agreement contemplated the merger of Greystar and its wholly-owned subsidiary into Riverstone with each share of Riverstone converted into a right to receive cash (the “Merger”).  On May 30, 2014, Riverstone and Greystar executed the Merger Agreement and the Merger became effective on June 2, 2014.  On June 9, 2014, Riverstone sent a letter to the Minority Stockholders (the “Information Statement”) providing the first notice of the Merger and attempting to invoke the Drag-Along.

Upon receiving the Information Statement, the Minority Stockholders delivered to Riverstone separate written demands for appraisal rights pursuant to Section 262 of the DGCL, after which two of the Minority Stockholders filed petitions for appraisal.  Riverstone counterclaimed for specific performance and added the remaining Minority Stockholders as counterclaim defendants to this specific performance claim.  Both the Minority Stockholders and Riverstone moved for summary judgment.

As a preliminary matter, the Court of Chancery observed that the issue of whether a common stockholder may contractually waive statutory appraisal rights in advance was a question of first impression.  The Court concluded, however, that, even assuming such a waiver was enforceable, Riverstone’s failure to comply with the terms of the Drag-Along prevented the enforcement of any such waiver. 

The Court first rejected Riverstone’s contention that the Information Statement constitutes an exercise of Riverstone’s Participation Right because there was no reference to any obligation of the Minority Stockholders to tender shares into the Merger.  As such, the Court focused on whether Riverstone properly invoked the Voting Right under the Drag-Along for specific performance to require the Minority Stockholders to execute a written consent in favor of the consummated Merger.  The Court acknowledged that, while the intent of the Drag-Along was to waive the Minority Stockholders’ appraisal rights, the unambiguous language in the Stockholders Agreement made this right prospective in nature because it required advance notice of a “proposed” merger.  Since the explicit language of the Drag-Along required advance notice, the Court found that Riverstone was not entitled to specific performance despite the fact that Riverstone could have forced the consent to the Merger if it had complied with the Stockholders Agreement.  Therefore, Riverstone was not entitled to specific performance according to the express terms of the contractual right it sought to invoke.

The Court of Chancery reached a similar conclusion in rejecting Riverstone’s claim for specific performance based on the implied covenant of good faith and fair dealing with respect to the Stockholders Agreement.  The Court explained that the implied covenant acts as a “gap-filler” to address developments unanticipated by the contracting parties, and that the Stockholders Agreement provided a “clearly delineated balance between the Minority Stockholders’ appraisal rights and Riverstone’s contractual ability to force a waiver of those rights.”  Since the Minority Stockholders were exercising their contractual rights under the negotiated terms of the Stockholders Agreement and not attempting to take advantage of an unanticipated scenario, the Court held that the implied covenant was inapposite.  The Court of Chancery granted the Minority Stockholders’ summary judgment motion and denied Riverstone’s summary judgment motion for specific performance.

The full opinion is available here