Manti Holdings, LLC v. The Carlyle Group Inc., C.A. No. 2020-0657-SG (Del. Ch. February 14, 2022) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery denied defendants’ motion to dismiss claims alleging breaches of fiduciary duties in connection with a sale of Authentix Acquisition Company, Inc. (“Authentix”). The defendants argued a provision in the Stockholders Agreement waived such claims for breaches of fiduciary duties. The Court concluded the language that purportedly waived such claims was not a clear and knowing relinquishment of the right to seek redress against corporate directors and controllers for breach of fiduciary duty, and therefore, was not a prospective waiver of such claims.
This dispute arose out of a post-closing damages action in which plaintiffs alleged breaches of fiduciary duty by the controlling stockholder and certain directors and officers of Authentix associated with the controlling stockholder relating to the sale in 2017 of Authentix. The plaintiffs, common stockholders of Authentix, alleged that the sale was prompted by a “self-imposed deadline” by the controlling stockholder rather than a desire to maximize value for the common stockholders. The defendants moved to dismiss the Amended Complaint for failure to state a claim and because plaintiffs purportedly waived their right to bring such claims in the Stockholders Agreement, which required the stockholders to “consent to and raise no objections against such transaction” if it was approved by “holders of at least fifty percent (50%) of the then-outstanding Shares.”
In denying defendants’ motion, the Court, relying on case law from the alternative entity context, explained that waivers generally must be clear and unequivocal and that the intent to eliminate fiduciary duties must be plain and unambiguous in the document otherwise “the interpretive scales . . . tip in favor of preserving fiduciary duties.” In analyzing whether the language set forth in the Stockholders Agreement was sufficient to constitute a waiver of fiduciary duties, the Court looked to the specific applications of the duties that were further enumerated in the waiver provision, which included an agreement of the stockholders to (i) vote their shares in favor of the transaction, (ii) refrain from exercising appraisal rights, and (iii) execute certain transaction documents. The Court determined that the failure to explicitly include the waiver of fiduciary duties in the carefully enumerated applications set forth in the waiver provision was dispositive and that the obligation to “raise no objections” was not sufficient to constitute a knowing waiver of fiduciary duties.
The Court rejected the defendants’ argument that the provision did not waive the fiduciary duties themselves but rather waived claims for breaches of fiduciary duties, admitting that was “a distinction too fine for [its] legal palate.” That was because a right without an enforcement mechanism is an empty right and would make the fiduciary duties owed to the stockholders illusory. The Court further explained that a more reasonable interpretation of the waiver provision was that the plaintiffs would be precluded from actions that would impede or delay the closing of the transaction.
The Court explicitly did not address whether a waiver of fiduciary duties in the corporate context is permissible under Delaware law. In a footnote, however, the Court noted that permitting such a waiver would be a departure from the norms of corporate governance and would blur the lines between alternative entities and corporations.