By Michelle Repp and Marisa DiLemme
Halpin v. Riverstone National, Inc. concerns a group of minority stockholders seeking appraisal despite a “drag-along” provision in a Stockholders Agreement. The Chancery Court found that the “drag-along” provision was not enforceable in this merger situation because the stockholders received notice of the merger only after the transaction had been consummated and the Stockholders Agreement only gave a prospective “drag-along” right, not retrospective.
In Halpin, five minority common stockholders (the “Minority Stockholders”) of Riverstone National, Inc., a Delaware corporation (“Riverstone”), sought appraisal of their shares after a June 2014 merger of Riverstone with a third party. The merger was approved by the written consent of Riverstone’s 91% controlling stockholder, CAS Capital Limited (“CAS”), on May 29, 2014. Riverstone counterclaimed against the Minority Stockholders and sought summary judgment in its favor on the appraisal claims based on a stockholders agreement (the “Stockholders Agreement”) between Riverstone and the Minority Stockholders entered into in 2009 that included a drag-along obligation of the Minority Stockholders. The Chancery Court, ruling on the parties’ cross-motions for summary judgment, granted the Minority Stockholders’ motion and denied Riverstone’s motion.
In Section 3 of the Stockholders Agreement, Riverstone was provided with the right, subject to certain restrictions, to require the Minority Stockholders to tender and/or vote their shares in favor of a change-in-control transaction approved by a majority of Riverstone’s stockholders. One of the restrictions on this “drag-along” right was that Riverstone was required to give the Minority Stockholders written notice in advance of the date of the change-in-control transaction or the date that the tender is required.
On May 30, 2014, following the written consent of CAS to the merger and without notice to the Minority Stockholders, Riverstone entered into a merger agreement with Greystar Real Estate Partners, LLC and its wholly-owned subsidiary. On June 9, 2014, Riverstone sent a letter to its stockholders in which Riverstone attempted to invoke its drag-along right by requiring the Minority Stockholders to vote to approve the adoption of the Merger Agreement by executing and delivering a provided written consent within ten days of the date of the letter. The letter also stated that if a Minority Stockholder executed the written consent, he would not be entitled to exercise appraisal rights, but if he did not execute the written consent, he would be in breach of the Stockholders Agreement.
In its counterclaim against the Minority Stockholders, Riverstone sought specific performance of the Minority Stockholders’ obligations under the Stockholders Agreement. The Court denied Riverstone’s request for specific performance on the basis that, under the plain language of the Stockholders Agreement, the drag-along right could only be enforced against the Minority Stockholders in transactions that had not yet occurred, and in this situation, the change-in-control transaction had already been consummated. The prospective nature of the drag-along right could not be ignored – the Minority Stockholders agreed in the Stockholders Agreement to, upon advanced notice, tender into or vote in favor a merger that had been proposed, not a merger that had already occurred.
The Court also denied Riverstone’s claim that the Minority Stockholders must consent to the merger because of the implied covenant of good faith and fair dealing. The Court determined that the parties could have specifically agreed to retrospective approval rights in the Stockholders Agreement, but instead expressly agreed to terms that were prospective only. Therefore, because the situation at issue was not something that was unanticipated or unforeseeable at the time of contracting, the implied covenant was not applicable.
Notably, the Court pointed out the “interesting legal issue” of whether common stockholders can, ex ante and by contract, waive the right to seek statutory appraisal in the case of a squeeze-out merger. In the past, the Court had found that preferred stockholders have rights that are largely contractual and may waive appraisal rights ex ante by contract. The Court, however, having granted summary judgment to the Minority Stockholders based on the unambiguous language of the Stockholders Agreement, did not find it necessary to answer this question and, for purposes of this case, assumed a common stockholder may waive its appraisal rights ex ante.