August 12, 2021
Non-Signatories Bound By Merger Agreement’s Indemnification Provisions
In Houseman v. Sagerman, (Del. Ch. 7/21), the Delaware Chancery Court held that a merger agreement’s indemnification provisions were binding on the seller’s non-signatory stockholders. Unlike the situation addressed in Cigna v. Audax, (Del. Ch. 11/14), the indemnification provisions here were capped at the amount of the escrow account. While that avoided Audax’s Section 251(b) issue, Steve Quinlivan’s blog on the case discusses how the Court dealt with the issue of binding non-signatories. As this excerpt explains, that turned on the Court’s interpretation of the authority of the Shareholders’ Representative:
The Court found that even though the Shareholders’ Representative was appointed by the Owners, and not all shareholders, that did not limit the ability of the Shareholder Representative to act on behalf of the other shareholders. The Merger Agreement provided that “[t]he Owners hereby appoint Thomas D. Whittington (the “Shareholders’ Representative”) as their attorney-in-fact with full power . . . to perform any and all acts necessary or appropriate in connection with the Agreement.” The Merger Agreement further provided that the actions of the Shareholders’ Representative “shall be binding upon all of the Owners and Shareholders.”
In the view of the Court, the actions of a stockholders’ representative are generally binding on all stockholders. Looking to prior precedent, the Court noted that all Section 251 of the DGCL required was for the representative to be designated as the individual who would follow the procedures and make or participate in the determinations called for by the Merger Agreement. In this case the Merger Agreement designated the Shareholders’ Representative to carry out the actions contemplated by that Agreement. Therefore, the Shareholders, whether signatories or not, were bound by the actions and determinations of the Shareholders’ Representative to the extent they are in accordance with the Merger Agreement’s terms.
– John Jenkins