By Anne Sherry, J.D.
In a split decision, the Delaware Supreme Court affirmed a chancery court decision that upheld a stockholder waiver of the right to seek judicial appraisal in respect of a merger. While as a matter of public policy there are certain features of a corporation that cannot be waived, stockholders’ individual appraisal rights are not among them. Sophisticated and informed investors, represented by counsel, may voluntarily waive their appraisal rights in exchange for consideration of value. Justice Valihura dissented, decrying the practice of using stockholder agreements rather than the corporate charter to effect ex ante waivers of governance rights (Manti Holdings, LLC v. Authentix Acquisition Company, Inc., September 13, 2021, Montgomery-Reeves, T.).
The appraisal petitioners were the shareholders in a company that merged into Authentix Acquisition Co. As a condition of that merger, the petitioners executed a stockholders agreement containing a waiver of their right to an appraisal in the event of a sale of Authentix. Authentix did later merge with a third party, and the stockholders sought appraisal, arguing that the contractual waiver was unenforceable. The chancery court held that under the specific circumstances of the case—the stockholders were the sole stockholders of a private company, they were fully informed and sophisticated investors, and the waiver was clear and unambiguous—Delaware law permits such a waiver of appraisal rights. In a later decision, the court determined that a loser-pays fee-shifting provision also bound the stockholders to pay Authentix’s costs in defending the appraisal action.
All parties appealed the chancery court’s decisions, focusing mainly on whether Section 262 of the Delaware General Corporation Law bars a corporation from enforcing an advance waiver of appraisal rights. A majority of the Supreme Court affirmed, holding that sophisticated and informed stockholders, represented by counsel and possessing bargaining power, may voluntarily waive their appraisal rights.
Majority opinion. The court first concluded that the stockholders agreement’s "refrain obligation," which bound stockholders as well as their successors, assigns, and transferees, imposed personal obligations on stockholders rather than encumbering the property rights running with the stock. Accordingly, it was not a stock restriction that must be included in the certificate of incorporation. As the chancery court had put it, the agreement "did not restrict the appraisal rights of the classes of stock held by the Petitioners; instead, the petitioners … agreed to forbear from exercising that right."
The high court observed that the DGCL is a broad enabling act that gives businesses freedom to adopt the terms for their enterprise within statutory and judicially created bounds. Nevertheless, the DGCL expressly states some prohibitions on corporate freedom, and more generally restricts charters and bylaws form containing provisions that are contrary to, or inconsistent with, Delaware law because they go against public policy.
The plain language of Section 262, however, does not prohibit stockholders from waiving their appraisal rights by stating that stockholders "shall" have a right to appraisal. The court cited several of its prior opinions holding that rights were not absolute despite the use of "shall," as well as several provisions of the DGCL that demonstrate that the legislature knows how to prohibit parties from altering a mandatory provision of the statute.
The waiver also did not violate public policy where the petitioners were sophisticated investors who entered into the agreement knowingly and with advice of counsel. The petitioners’ argument that a party needs full knowledge of a claim to agree to a knowing waiver would mean, for example, that ex ante waivers of the right to demand a jury trial are invalid, in contrast with how Delaware courts enforce arbitration clauses.
The stockholders fared no better with their argument that by choosing the corporate form over another entity type like an LLC, an enterprise signals that it has core characteristics that provide basic protections to investors. This argument, the majority wrote, "provides an incomplete framework for determining whether stockholders can waive a right." If the goal is to provide clarity about the features of a corporate entity, all of the DGCL’s provisions should be mandatory—but this result would conflict with the statute’s own discretion-granting language and the recognition that the law is a broad enabling act. The petitioners’ argument would also cast doubt on whether drag-along rights are enforceable, as they often require minority stockholders to take actions to enable the merger to close, such as voting in favor of the merger or providing written consent, both of which cause the stockholder to forfeit its appraisal claim.
Determining also that the stockholders agreement contained a valid waiver of the appraisal right and that Delaware corporations may enforce stockholder agreements, the court affirmed the chancery court.
Dissent. Justice Valihura dissented from the opinion on three grounds. First, the justice would reverse the chancery court for the standalone reason that the stockholders agreement lacked the requisite clarity to effectuate a waiver of the petitioners’ appraisal rights.
Even if the waiver were sufficiently clear and unambiguous, however, allowing a stockholders agreement (in contrast to the corporate charter or bylaws) to waive fundamental corporate governance rights is problematic, she wrote. While the DGCL provides for substantial private ordering, especially through a charter provision, "startup companies and venture capital firms … have developed a practice of using stockholder agreements to structure significant aspects of their corporation’s corporate governance. … The Majority is, no doubt, concerned about upsetting what has, or is becoming, an established practice in that sector." But the court must answer whether that practice is consistent with the DGCL and public policy, and in the justice’s view, it is not.
Justice Valihura pointed to some commentary that using shareholder agreements for these purposes amounts to "stealth governance." While the parties to these agreements may find them beneficial, "the restriction or elimination of important stockholder rights such as inspection, appraisal, election rights and fiduciary duties may minimize accountability of the Board and upset the delicate balance of power" that the legislature and courts have attempted to maintain. The justice stated that if ex ante waivers are valid, they belong in a corporation’s charter.
Finally, however, the justice would reverse on the basis that ex ante waiver of appraisal rights for common stockholders is not permissible. While it is not controversial that some provisions of the DGCL are mandatory, identifying which provisions is a more difficult task. Justice Valihura would begin with the text of the statute, and she finds the use of the word "shall" significant, though not determinative. "Adding to the difficulty here is that our courts have not yet established a clear analytical framework to discern where the dividing line is," the justice wrote. "I offer the view that certain key statutory provisions that establish the balance of powers and checks and balances between and among stockholders, directors, and officers, may qualify as mandatory, particularly when the General Assembly uses mandatory language in the provisions." She suggested the General Assembly may amend Section 262 if it disagrees, to make clear that waivers are permissible, and under what circumstances.
The case is No. 354, 2020.