waiver of appraisal rights in a stockholder agreement is enforceable under delaware law

By Annette Becker and Pouya Ahmadi

In Manti Holdings, LLC v. Authentix Acquisition Co., Inc., C.A. No. 2017-0887 SG (Del. Ch. Aug 14, 2019), the Delaware Court of Chancery (the “Court”) held that Contractual agreements limiting or waiving future appraisal rights are not prohibited as a matter of law under the Delaware General Corporation Law (“DGCL”).

In 2008, as an inducement to a merger transaction, the sole owners of Authentix Acquisition Company, Inc. (“Authentix”) entered into a stockholders agreement with The Carlyle Group and J.H. Whitney & Co. (collectively, “Carlyle”). 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 subsequently sold in a later merger to a third party.

The petitioners were common stockholders who had their shares converted to the right to receive nominal cash in the third-party merger. They initially pursued a claim for statutory appraisals rights under DGCL Section 262, which the Court denied, ruling that they were contractually forbidden from asserting appraisal rights because they had voluntarily waived those rights under the stockholder agreement. The initial case focused on interpretation of the stockholder agreement but did not address whether a waiver of appraisal rights was valid, as a matter of law, under Delaware law. This second suit, filed as a Motion for Reargument, addresses this question.

According to Authentix, the DGCL is a mandatory provision that does not permit an advance waiver of appraisal rights and therefore Delaware law prohibits such a waiver. Furthermore, they argue that even if such waiver is not prohibited by the DGCL, a corporation may not impose an advance waiver of appraisal rights by a separate agreement because doing so is nonetheless inconsistent with the DGCL. “They point to a hierarchy, in which the DGCL resides at the top, followed by a corporation’s certificate of incorporation, then its bylaws, and then other contracts (such as the one at issue here).” Per Authentix, the lower items cannot conflict with the higher-ranking ones and since the DGCL, Authentix’s certificate of incorporation, and its bylaws do not allow contractual waiver of appraisal rights, the provision to that effect in the stockholders agreement is in conflict with those three “higher” items and cannot be enforced.

The Court finds both arguments unpersuasive and notes that “the DGCL does not explicitly prohibit contractual limitation 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 or prohibited by it.” The Court applied the same logic to Authentix’s certificate of incorporation and its bylaws, which in this case were silent on waiver of appraisal rights.

In conclusion, the Court held that given the Court’s precedent in In Re Ford Holdings Inc. Preferred Stock, which upheld a contract that fixed the appraisal price, and in light of the 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 at issue is a clear and unambiguous contract, which was entered into by sophisticated parties, and is therefore enforceable.