Delaware Court Of Chancery Finds That Consent To Merger In Stockholders Agreement Did Not Waive Right To Bring Post-Closing Fiduciary Duty Claims
M&A and Corporate Governance Litigation
This links to the home page
  • Delaware Court Of Chancery Finds That Consent To Merger In Stockholders Agreement Did Not Waive Right To Bring Post-Closing Fiduciary Duty Claims

    On February 14, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a post-closing damages action for breaches of fiduciary duty brought by former stockholders of Authentix Acquisition Company, Inc. (“Authentix” or the “Company”), rejecting defendant’s claim that stockholders waived the right to bring suit.  Manti Holdings, LLC v. Carlyle Grp. Inc., C.A. No. 2020-0657-SG, (Del. Ch. Feb. 14, 2022).  The Court concluded that language in a Stockholders Agreement consenting to the transaction was not sufficiently specific to waive the stockholders’ right to challenge the sale.

    In connection with their investment in the Company, plaintiffs entered into a Stockholders Agreement that required them to “consent to and raise no objections against” any sale transaction recommended by the Authentix board and approved by more than fifty percent of outstanding shares.  On September 12, 2017, the Authentix board approved the sale of the Company to Blue Water Energy over the objection of a director stockholder.  After the transaction closed, plaintiff stockholders brought a post-closing damages action, alleging claims for breaches of fiduciary duty against the Authentix directors and officers, as well as preferred stockholders who allegedly controlled the Company.  Defendants moved to dismiss the complaint, arguing that plaintiffs had waived their right to sue for breach of fiduciary duty under the Stockholders Agreement by agreeing not to raise any “objection” to an approved sale.

    Despite having previously found that the consent language in the Stockholders Agreement waived plaintiffs’ appraisal rights under Delaware law, Vice Chancellor Glasscock held that the language was not sufficiently exacting to waive plaintiffs’ right to bring fiduciary duty claims.  The Court emphasized that under Delaware law, especially in the context of fiduciary duties, waiver “must be clear and unequivocal” and noted that while the Stockholders Agreement enumerated several prohibited actions—such as voting against the transaction, asserting appraisal rights, and refusing to sign documents—it was silent on fiduciary duty claims.  The Court also rejected defendants’ assertion that while fiduciary duties were not waived, the assertion of claims arising from those duties were.  In so holding, the Court observed that “[a] right without an enforcement mechanism is an empty right.”  The Court admonished that drafters must be attuned to the “lessons of earlier cases” and concluded that, as drafted, the Stockholders Agreement prohibited plaintiffs from interfering with a sale (such as by voting against it) or asserting claims based on rights that result from the sale (such as appraisal claims) but did not prevent them from pursuing claims based on rights that existed independently from the sale and extend to actions taken in connection therewith.
    CATEGORIES: Fiduciary DutiesStanding