Earlier this week, the Delaware Supreme Court issued a significant decision reinforcing Delaware's strong policy favoring private ordering and giving effect to agreements among sophisticated stockholders. The decision particularly affirms important practices in the private company context. In its majority opinion in Manti Holdings, LLC et al. v. Authentix Acquisition Company, Inc., authored by Justice Tamika Montgomery-Reeves, the Delaware Supreme Court upheld a waiver of statutory appraisal rights contained in a stockholders agreement and reached other noteworthy conclusions about the interpretation of the stockholders agreement.
The decision arises from the 2017 acquisition of Authentix in an all-cash deal. A group of common stockholders, who received almost no consideration in the deal, petitioned for statutory appraisal of the fair value of their shares in the Court of Chancery pursuant to Section 262 of the Delaware General Corporation Law (DGCL). Authentix moved to dismiss, relying on a provision in the company's stockholders agreement signed by the petitioners contractually waiving their rights to statutory appraisal. The Court of Chancery agreed and dismissed the petition, noting that the contract was entered into, following negotiations, by sophisticated parties with bargaining power who were represented by counsel. The petitioners subsequently appealed to the Delaware Supreme Court.
On appeal, the Delaware Supreme Court considered whether Section 262 prohibits a Delaware corporation from enforcing an advance waiver of appraisal rights against its stockholders. It concluded that Section 262 "does not prohibit sophisticated and informed stockholders, who were represented by counsel and had bargaining power, from voluntarily agreeing to waive their appraisal rights in exchange for valuable consideration." Echoing its recent decision in Salzberg v. Sciabacucchi, which upheld the validity of federal forum provisions in certificates of incorporation of Delaware corporations, the court began its analysis by emphasizing that "at its core, the DGCL is a broad enabling act that allows immense freedom for businesses to adopt the most appropriate terms for the organization, finance, and governance of their enterprise." It further noted that Delaware's corporate statute is considered the "most flexible in the nation," and that public policy favoring private ordering is found throughout the DGCL.
In light of this strong public policy preference for freedom of contract and private ordering, the Delaware Supreme Court concluded that the plain language of Section 262 does not broadly prohibit stockholders from agreeing to waive their appraisal rights. Although the statute grants stockholders a mandatory right to seek judicial appraisal, the court held that "does not prohibit stockholders from alienating that entitlement in exchange for valuable consideration."
In upholding the waiver of appraisal rights, the Delaware Supreme Court reached other significant conclusions. The court rejected the argument that companies cannot be parties to, and cannot enforce, stockholders agreements—which is important, given that private companies often rely on stockholders agreements to set forth various governance provisions. The court also determined that the surviving, post-merger company could enforce the terms of the stockholders agreement, both as a party to the agreement and as an intended beneficiary of the provision, and that the appraisal rights waiver did not fall away upon the termination of the agreement (which occurred, under the terms of the agreement, upon a consummation of the transaction). The court likewise rejected the argument that the waiver constituted a stock restriction that must be included in the certificate of incorporation, reasoning that the waiver imposed a personal contractual obligation on the stockholders party to the stockholders agreement, and not a restriction on the actual shares of stock.
In a rare dissenting opinion, Justice Karen Valihura disagreed with the majority opinion on several grounds. She viewed the waiver of appraisal rights as ambiguous and therefore inadequate. In her view, the waiver of appraisal rights expired on the closing of the transaction. And while she recognized the DGCL's preference for private ordering, she reasoned that because the right to appraisal is a fundamental feature of the DGCL—providing fair compensation to dissenting stockholders and, in her view, serving as a check on corporate transactions at an unfair price—it is a mandatory right that cannot be waived, and if the DGCL is amended to address the issue, modifications to that right should at most be permitted only in the corporation's certificate of incorporation. Notwithstanding Justice Valihura's dissent, the majority opinion reflects the current state of Delaware law.
Finally, in response to the types of concerns raised in the dissent, the majority opinion explained that the focus of an appraisal proceeding, which has already been limited in certain respects by the DGCL, is the payment of fair value for a dissenter's stock—not "policing misconduct or preserving the ability of stockholders to participate in corporate governance." Accordingly, the new decision does not directly address the enforceability of other types of waivers, such as waivers of stockholders' statutory rights to inspect a corporation's books and records. Nonetheless, the opinion provides welcome confirmation of corporate practices based on the issues that were before the Delaware Supreme Court.
