Yesterday, the Delaware Supreme Court issued its long-awaited decision in Manti Holdings v. Authentix Acquisition, (Del. 9/21). The Court upheld the Chancery Court’s prior decision, in which Vice Chancellor Glasscock held that, subject to certain conditions, sophisticated stockholders could agree to waive statutory appraisal rights granted to them under the DGCL.
The Supreme Court rejected the petitioners’ contention that appraisal rights represented a mandatory provision of the DGCL that cannot be varied by contract. Instead, the Court held that, at least in limited circumstances involving sophisticated parties, such a waiver was permissible. Here’s an excerpt from Justice Montgomery-Reeves’ majority opinion:
We acknowledge that the availability of appraisal rights might theoretically discourage attempts to pay minority stockholders less than fair value for their cancelled stock. Nonetheless, the focus of an appraisal proceeding is paying fair value for the petitioner’s stock, not policing misconduct or preserving the ability of stockholders to participate in corporate governance. Granting stockholders the individual right to demand fair value does not prohibit stockholders from bargaining away that individual right in exchange for valuable consideration.
And while the availability of appraisal rights may deter some unfair transactions at the margins, we are unconvinced that appraisal claims play a sufficiently important role in regulating the balance of power between corporate constituencies to forbid sophisticated and informed stockholders from freely agreeing to an ex ante waiver of their appraisal rights under a stockholders agreement in exchange for consideration.
The Court also affirmed the other aspects of the Chancery Court’s decision, including its conclusion that the petitioners agreed to a clear waiver of their appraisal rights with respect to the transaction in question, that the waiver was not a stock restriction that had to be included in the corporation’s charter, and Delaware corporations may enforce stockholders agreements.
Justice Valihura dissented. She concluded that the waiver was not sufficiently clear and unambiguous, that statutory appraisal rights were not waivable under the DGCL, and that even if they were, a stockholders agreement was the wrong place for them. Here’s an excerpt from her dissent:
Stockholder agreements may offer venture capital funded start-ups flexibility versus complying with the formalities of charters and bylaws. And unlike charters, they are not public documents filed with the Secretary of State. But 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 General Assembly and courts have attempted to maintain among a Delaware corporation’s constituencies.
The ordinary place for private ordering provisions that alter this balance is in the charter or bylaws. Principles of corporate democracy support this preference. If private contract by and between all stockholders could override the charter and bylaws, that agreement would transform the corporate governance documents into gap-filling defaults and collapse the distinction between a corporation and alternative entities. Thus, assuming arguendo the validity of ex ante waivers of important statutory governance rights like appraisal rights (the question next addressed), they should be in a corporation’s charter and not in a stockholders agreement.
As always, Ann Lipton’s Twitter feed is an indispensable resource for getting a quick and insightful read on any major Delaware decision, and we’ll be posting memos in our “Appraisal Rights” Practice Area.
– John Jenkins