Manti Holdings, LLC, et al. v. Authentix Acquisition Company, Inc., No. 354, 2020 (Del. Sept. 13, 2021) (Montgomery-Reeves, Justice)
The Delaware Supreme Court, with Justice Valihura dissenting, affirmed a Court of Chancery ruling that a stockholder may waive the right to seek appraisal under DGCL 262 ex ante. The Court held that Petitioners, who were sophisticated common stockholders of Authentix Acquisition Company, Inc. (“Authentix”), waived their right to seek appraisal in connection with a 2017 merger pursuant to a stockholders agreement they entered into in 2008.
Petitioners became stockholders of Authentix, an acquisition company created by Carlyle Holdings, through a 2008 merger. As one of the conditions in the merger, Petitioners entered into a stockholders agreement (the “Stockholders Agreement”), which provided that, “[I]n the event that . . . a Company Sale is approved by the Board and . . . the Carlyle Majority, each Other Holder shall consent to and raise no objections against such transaction . . ., and . . . [shall] refrain from the exercise of appraisal rights with respect to such transaction” (the “Refrain Obligation”).
In 2017, Authentix merged with a third-party, resulting in the cancellation of Petitioners’ stock and conversion into merger consideration. Petitioners timely sent appraisal demands to Authentix, which demanded that Petitioners withdraw the demands. Petitioners then filed suit in the Court of Chancery seeking appraisal. In 2018, the Court of Chancery granted Authentix partial summary judgment holding that Petitioners had waived their appraisal rights in the Stockholders Agreement, and the Court denied reargument in 2019. In 2020, the Court of Chancery issued its final memorandum opinion, holding that Authentix could enforce a fee-shifting provision but was not entitled to pre-judgment interest, and that Petitioners were entitled to pre-judgment interest on the merger consideration. Both sides then appealed.
The Supreme Court upheld the Court of Chancery’s opinion in its entirety. First, the Court held that Petitioners had waived their right to appraisal through the Refrain Obligation. The Court rejected Petitioners’ argument that the Refrain Obligation was unenforceable under a provision requiring equal treatment of all shares in a sale of Equity Securities because the transaction at issue was a merger, not a sale of Equity Securities. The Court then held that the Refrain Obligation would survive completion of a merger and termination of Petitioners’ stock, because appraisal rights would only be ripe after close of the merger. Next, the Court rejected Petitioners’ argument that they did not waive their right to appraisal due to the Stockholder Agreement’s use of “refrain,” because “refrain” made sense in the context of the Stockholders’ Agreement, where Petitioners only agreed to forego appraisal rights upon the satisfaction of certain conditions. The Court then held that Authentix could enforce the Refrain Obligation as a party to the Stockholders Agreement, and because the post-merger corporation would be an intended beneficiary of the Refrain Obligation, as it would be the entity responsible for paying fair value to Petitioners in an appraisal proceeding.
Second, the Court held that the DGCL did not bar enforcement of the Refrain Obligation. Petitioners first argued that Section 151(a) prevented ex ante waiver of appraisal rights. The Court rejected this argument because the Refrain Obligation put restrictions on stockholders personally, not the stock itself. Additionally, the Court held that the notice concerns animating Section 151(a) were not present because Petitioners were sophisticated entities represented by counsel that negotiated and signed the Stockholders Agreement.
Petitioners next claimed that ex ante waiver was impermissible because they could not know the details of the transaction in advance. The Court rejected this argument because it was foreseeable that Authentix would seek to enforce the Refrain Obligation in connection with a merger that Petitioners believed paid them insufficient consideration for cancelled stock and they were sophisticated, well-represented entities who were aware of the Refrain Obligation when they entered into the Stockholders Agreement.
Petitioners also argued that permitting waiver of appraisal rights would undermine the distinction between corporations and alternative entities. The Court noted, however, that the DGCL provides flexibility for corporate certificates and bylaws in Sections 102(b) and 109 and that the DGCL is an enabling act. Thus, the question was whether appraisal was a mandatory right that a stockholder could not waive in advance. The Court held that appraisal rights were not sufficiently important to balancing the power of corporate constituencies that a sophisticated and informed stockholder could not waive them in exchange for valuable consideration. In reaching this conclusion, the Court stated that the de minimis exception barring appraisal rights for stockholders below a certain ownership preference and the existence of drag-along rights that effectively waive appraisal rights suggested that ex ante waiver of appraisal rights was permissible. The Court also pointed to other provisions of the DGCL which contained language—not present in Section 262—prohibiting charter amendments or bylaws abrogating the rights they conferred. The Court also discussed the difference between the situation before it, where the waiver was procured through negotiation against sophisticated and informed insiders in a stockholders agreement in exchange for valuable consideration, and a situation where the waiver would be enforced against a small stockholder with little bargaining power or an outsider who lacked material information, suggesting that a waiver may not be enforceable in those situations.
Petitioners then pointed the Court to a prior opinion in which the Court of Chancery stated in dicta that appraisal rights were mandatory provisions of the DGCL but could be waived as to preferred stock in the documents creating the security, arguing that the opinion’s waiver principle did not apply to common stock. However, the Court disagreed, interpreting the opinion as standing for the general proposition that a stockholder can waive its appraisal rights ex ante under certain circumstances. The Court further noted that Section 262 does not make a distinction between preferred stock and common stock.
Third, the Court affirmed the Court of Chancery’s holding that the Petitioners were entitled to pre-judgment interest on the merger consideration, noting that they could not accept the merger consideration during the underlying appraisal proceeding, which concerned novel and complex issues of Delaware law.
Finally, the Court affirmed the ruling that Authentix was not entitled to pre-judgment interest on its attorneys’ fees because Authentix was not entitled to attorneys’ fees under the fee-shifting provision until it became the prevailing party.
In a dissenting opinion, Justice Valihura articulated the view that the Refrain Obligation was, at best, ambiguous, and therefore did not represent a clear waiver of appraisal rights because it had no savings clause, because the use of “refrain” instead of “waive” was significant, and because only enforcing it pre-close would not render it a nullity. Justice Valihura also did not think permitting waivers of rights in corporate stockholders agreements was permissible given the availability of alternative entities and the possibility of creating different sets of rules for private and public corporations and that any such waiver should occur in a certificate or bylaws, if at all. Moreover, Justice Valihura found that appraisal was a mandatory right that should not be subject to waiver because it was a statutorily created right meant to compensate stockholders for the loss of veto power over certain transactions and acted as a deterrent to executing transactions at an unfair price.