Delaware Supreme Court Upholds Enforceability of Appraisal Rights Waiver

September 21, 2021

In Manti Holdings, LLC v. Authentix Acquisition Co., Inc., decided Sept. 13, 2021, the Delaware Supreme Court upheld a lower court ruling that common stockholders’ statutory right to a court determination of the fair value of their shares in a Delaware corporation (commonly referred to as appraisal rights) may be waived by contract in exchange for good and valuable consideration.

In 2008, Authentix, Inc. and its stockholders entered into a transaction whereby Authentix, Inc. became a wholly owned subsidiary of Authentix Acquisition Company, Inc. (Authentix) and certain stockholders of Authentix, Inc. rolled over their stock in Authentix, Inc. to become minority stockholders of the post-merger Authentix. As a condition to the merger, the stockholders of Authentix, Inc. entered into a stockholders agreement with The Carlyle Group (Carlyle) and J.H. Whitney & Co., the majority stockholders of Authentix. The stockholders agreement included a provision that if a sale of Authentix is approved by the board of directors of Authentix and Carlyle, each other stockholder “shall consent to and raise no objections against such transaction . . . and . . . refrain from the exercise of appraisal rights with respect to such transaction.”

In 2017, a third-party acquired Authentix in a merger. Pursuant to the merger agreement, the common stockholders’ stock was canceled and converted into a right to receive a portion of the merger consideration, which was distributed to the stockholders pursuant to a waterfall provision that gave priority to the preferred stockholders. The Authentix common stockholders received little to no consideration. A group of common stockholders filed a petition for appraisal in the Delaware Court of Chancery under Section 262 of the Delaware General Corporation Law (DGCL). Authentix moved to dismiss the petition, arguing that the petitioners had waived their appraisal rights under the stockholders agreement that bound the corporation and all of its stockholders. The Court of Chancery granted the motion to dismiss, holding that the common stockholders had agreed to a clear provision requiring that they “refrain” from exercising their appraisal rights with respect to the merger. 

In applying the principles of contractual interpretation to the stockholders agreement, the Delaware Supreme Court stated that the only reasonable interpretation of the obligation to refrain from the exercise of appraisal rights in the stockholders agreement is that the common stockholders agreed not to seek a judicial appraisal if Carlyle and the board of directors of Authentix approved a “company sale” (as defined in the stockholder agreement). The court held that therefore, the common stockholders clearly and unequivocally waived their appraisal rights with respect to the 2017 merger. Additionally, the court determined that the termination provision in the stockholders agreement — which states that the obligations under the stockholders agreement are extinguished when a company sale is consummated — did not extinguish the obligation to refrain from exercising appraisal rights because the clear purpose of the obligation when reading the contract as a whole “was to assure Carlyle and future acquirers that the minority stockholders would not be able to obtain a judicial appraisal after a Company Sale had closed.”

The common stockholders further argued that even if there is a clear waiver of appraisal rights, the DGCL prevents Authentix from enforcing the waiver. Per the Delaware Supreme Court, the crux of the common stockholders’ argument is that “appraisal rights are core characteristics of the corporate entity that provide basic protections to investors; as such they cannot be waived — at least ex ante — under a bilateral agreement.” The common stockholders relied in part on the usage of the word “shall” in Section 262(a) of the DGCL to argue that appraisal rights cannot be abrogated in a corporate charter and therefore cannot be abrogated in a stockholders agreement, which, per the argument, is lower in the “hierarchy of corporate law” than the charter. The court rejected this argument on the grounds that the DGCL “allows immense freedom for business to adopt the most appropriate terms” for the governance of the enterprise and such freedom is reflected in other provisions of the DGCL. While the DGCL contains mandatory terms, the court held that the plain language of Section 262 does not prohibit enforcement of the obligations in the stockholders agreement to refrain from exercising appraisal rights. Further, and in response to the common stockholders’ public policy-based arguments, the court stated:

The [obligation to refrain from exercising appraisal rights] is a concession that the [common stockholders] voluntarily agreed to make in exchange for obtaining valuable funding from Carlyle. Thus, this case is about whether sophisticated and informed parties, represented by counsel and with the benefit of bargaining power, can freely agree to alienate their appraisal rights ex ante in exchange for valuable consideration. The answer to that question is yes.

Additionally, the Delaware Supreme Court rejected the common stockholders’ argument that the waiver is unenforceable because it constituted a limitation or restriction that must be disclosed in the corporation’s charter pursuant to Section 151(a) of the DGCL. The court held that the waiver was “not a stock restriction because the Stockholders Agreement imposed personal obligations on the stockholders rather than encumbrances on the property rights that run with the stock.”

The Delaware Supreme Court held that given the clear and unequivocal language of the stockholders agreement indicating the intent of the parties to waive the stockholders’ rights to an appraisal under certain conditions, public policy of the state of Delaware and the DGCL will permit the enforceability of such a waiver.