Delaware Court of Chancery Holds that Waiver of Appraisal Rights is Permitted Under Delaware Law
The Delaware Court of Chancery recently held that the Delaware General Corporation Law (DGCL) does not prevent sophisticated owners of a corporation from waiving statutory appraisal rights in advance as part of a negotiated agreement. Manti Holdings, LLC, et al. v. Authentix Acquisition Company, Inc., C.A. No. 2017-0887-SG, 2019 WL 3814453 (Del. Ch. August 14, 2019).
In 2008, the stockholders of Authentix Acquisition Company, Inc. (“Authentix”) entered into a stockholder agreement as an inducement to a merger transaction. The stockholder agreement required the stockholders to consent to a future sale of the merged entity and refrain from exercising their statutory appraisal rights. The merged entity was later sold in a subsequent merger transaction with a third party. The petitioners were common stockholders who had their shares converted to the right to receive only nominal cash consideration in the merger. The petitioners pursued a claim for statutory appraisals rights under DGCL Section 262. The Court denied the petitioners’ claim, ruling that they were contractually barred from asserting appraisal rights as the stockholders had voluntarily agreed to waive those rights under the stockholder agreement in return for consideration. The prior case focused on interpretation of the stockholder agreement but did not expressly address whether a waiver of appraisal rights is valid under Delaware law. Manti Holdings LLC v. Authentix Acquisition Co., C.A. No. 2017-0887-SG, 2018 WL 4698255 (Del. Ch. October 1, 2018).
The petitioners filed a Motion for Reargument, asserting that the DGCL does not permit an advance waiver of appraisal rights and that such a waiver would otherwise be inconsistent with Delaware law. The Court agreed to consider the motion on the basis that it had not explicitly ruled that the DGCL permits a stockholder, by contract, to waive appraisal rights in advance. The Court’s analysis in the present case focused on whether the DGCL forbids the sophisticated owners of a corporation from negotiating a term as part of a merger agreement that binds them to a future sale and waives statutory appraisal rights.
The petitioners argued that DGCL Section 262 is a mandatory provision, and that mandatory rights cannot be waived ex ante. The petitioners cited the Court’s decision in Appraisal of Ford Holdings, Inc. Preferred Stock, which stated that “generally . . . mandatory provisions may not be varied by the terms of the certificate of incorporation or otherwise.” The Court noted that Ford Holdings nevertheless upheld a contract that fixed the appraisal price of preferred stock, rendering statutory appraisal meaningless. The Court further noted that appraisal rights are mandatory only in the sense that they exist for all stockholders of Delaware corporations by statute; however, they are not mandatory given that stockholders need not pursue appraisal, and an appraisal action need not proceed in every instance in which statutory appraisal is permitted under the DGCL. In addition, stockholders must meet certain procedural requirements to invoke appraisal rights, and stockholders are deemed to have waived appraisal rights if those requirements are not satisfied.
Petitioners also argued that a corporation may not impose an advance waiver of appraisal rights by separate agreement because, even if not clearly prohibited by the DGCL, an advance waiver of appraisal rights is nevertheless inconsistent with the DGCL. Petitioners pointed to a hierarchy, with DGCL at the top echelon, followed by a corporation’s certificate of incorporation, then its bylaws, and then other contracts, such as the stockholder agreement at issue in the present case.
The Court noted that the DGCL does not explicitly prohibit contractual modification or waiver of appraisal rights, nor does it require a party to exercise its statutory appraisal rights. Accordingly, such modification or waiver serves to supplement the DGCL, and is not inconsistent with, nor contrary to, the DGCL. The Court applied the same logic to Authentix’s certificate of incorporation and its bylaws, which were silent regarding waiver of appraisal rights; moreover, as a contract between the corporation and its stockholders, the Court stated that the stockholder agreement augments the parties’ rights and responsibilities.
The Court held that given the reasoning in the Ford Holdings case, in light of Delaware’s precedent permitting waiver of other statutory rights, and in light of the specific facts of the present case, the waiver of appraisal rights is permitted under Delaware law, as long as the relevant contractual provisions are clear and unambiguous. The Court found that the stockholder agreement is a clear, unambiguous contract, created in connection with a merger, that was entered into by sophisticated parties, including the petitioners who owned the entire interest in the entity to be merged, and under which the petitioners obtained some rights and relinquished others, accepting the benefits of the agreement for many years. The Court did not decide whether a waiver of appraisal rights would be upheld in other circumstances.
The Court’s decision provides clear authority that advance waivers of appraisal rights are permitted under Delaware law provided the relevant contractual provisions are clear and unambiguous. Practitioners and companies should ensure that waivers of appraisal rights are carefully drafted to avoid successful challenge on grounds of clarity and ambiguity.