Delaware Supreme Court Holds That Stockholders’ Statutory Appraisal Rights Can Be Waived In A Negotiated Contract
On September 13, 2021, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s decision holding that a corporation may enforce an advance waiver of appraisal rights against its own stockholders. Manti Holdings, LLC v. Authentix Acquisition Co., Inc., No. 354, 2020, 2021 WL 4165159 (Del. Sept. 13, 2021). The Delaware Supreme Court held that Delaware law does not prohibit sophisticated and informed stockholders—who were represented by counsel and had bargaining power—from waiving their statutory appraisal rights in exchange for valuable consideration.
Petitioners became minority stockholders in Authentix Company, Inc. (“Authentix”) after rolling over interests in a predecessor company in a 2008 merger whereby The Carlyle Group and J.H. Whitney & Co. (together, “Carlyle”) became majority owners of Authentix. In connection with that negotiated transaction, Petitioners entered into a stockholders agreement (the “Stockholder Agreement”) that contained a waiver of statutory appraisal rights (the “Refrain Obligation”) as to transactions approved by the Authentix board and Carlyle. Authentix then entered into a 2017 merger effected by written consent, whereby Petitioners’ stock was cancelled and converted into a right to receive merger consideration; the consideration was paid out by waterfall; and Authentix’s common stockholders received little to no compensation for their shares. Petitioners sought to exercise their appraisal rights, arguing that the merger did not trigger the Refrain Obligation or, alternatively, that the Refrain Obligation was unenforceable.
The Court rejected both arguments. The Court first found that regardless of whether Carlyle’s stock was acquired on the “same terms and conditions” as Petitioners’ stock, the Refrain Obligation still applied because the merger was not a “sale of Equity Securities.” The Court also concluded that the Refrain Obligation imposed a clear post-termination duty on Petitioners to refrain from exercising their appraisal rights and that Authentix had standing to enforce the provision because it was a party to the Stockholders Agreement.
The Court also ruled that neither statute nor public policy prohibited enforcement of the Refrain Obligation, emphasizing Delaware’s strong policy in favor of private ordering. The Court found that the waiver was not a stock restriction, such that it had to be incorporated into Authentix’s charter, because the Stockholders Agreement “imposed personal obligations on the stockholders rather than encumbrances on the property rights that run with the stock.” The Court, moreover, held that stockholders could contractually waive their appraisal rights, particularly where they were sophisticated, informed, and advised by counsel and agreed to a clear waiver of their appraisal rights in exchange for valuable consideration.
Finally, in response to Justice Karen L. Valihura’s lengthy dissent about the role of appraisal rights in regulating the balance of power among stockholders, directors and officers, the Court noted that while appraisal rights “may deter some unfair transactions at the margins,” they do not outweigh sophisticated stockholders’ rights to contract for themselves.