Chancery Court Denies Appraisal Rights Where a Stockholders’ Agreement Requires that Stockholders Refrain from Appraisal Petition

By: Annette Becker and Will Smith

In a letter opinion, Manti Holdings, LLC et al. v. Authentix Acquisition Co, Civil Action No. 2017-0887-SG (Del. Ch. October 1, 2018), the Delaware Court of Chancery denied the petitioning stockholders’ cross-motion for statutory appraisal rights under Section 262 of the DGCL, ruling that the stockholders were contractually barred from asserting such rights regarding a merger of respondent Authentix Acquisition Co. (the “Company” and “Respondent”).  The Court held that the terms of a stockholders agreement (the “SA”) imposed a duty on Manti Holdings, LLC and the other moving stockholders (“Petitioners”) to forebear from the exercise of their appraisal rights, and granted Respondent’s motion for partial summary judgment on the statutory entitlement to appraisal rights.

The claims in this case arose from the sale of the Company by merger to a third party.  Petitioners, who were common stockholders, lost their shares through the merger and received very little cash consideration in return.  Years earlier, Petitioners and the other stockholders entered into the SA with the Company to induce investment by the Carlyle Group.  The SA provided for specific rights and duties in the event of a sale of the Company.  Among such duties was the obligation to “refrain from the exercise of appraisal rights with respect to such transaction.”  At the time of the merger, the Carlyle Group was the Company’s majority stockholder and controller.  Although the Carlyle Group also received next to nothing for its common stock holdings pursuant to the sale of the Company, it did receive additional consideration for its preferred shares under the distribution waterfall in the Company’s charter.

Petitioners contended that the SA did not bar their exercise of appraisal rights.  Petitioners argued that SA terminated as of the time of sale, which extinguished the duty to refrain from appraisal post-close.  Petitioners asserted that the word “refrain” in the SA implied a vested right held in abeyance rather than a right extinguished by the SA.  Accordingly, the SA did not irrevocably waive appraisal rights, and such rights were re-invigorated after the termination of the SA on closing of the merger. The Court disagreed.  The Court found that the termination provisions set forth in the SA were unambiguous, and that no reasonable contracting party could consider itself free to exercise appraisal rights after the Company’s board of directors approved a contractually compliant sale.

Petitioners also argued that the sale of the Company was not compliant with the SA’s requirement that stockholders receive the same per share price.  Petitioners contended that their duty to refrain from appraisal was not triggered by the merger because the sale of the Company did not meet this condition.  The Court found Petitioners’ argument inapplicable. Although the Carlyle Group received a price per share dissimilar to Petitioners because the Carlyle Group also held preferred shares, the Court found that the SA’s consideration requirement applied only in the case of a sale of the Company by stock sale, not a merger.  The Court ruled that where the sale was accomplished by a board-approved merger, Petitioners were bound by the affirmative duties of cooperation provided in the SA, including the duty to refrain from appraisal.

Finally, Petitioners argued that the SA was not enforceable by the Company as a matter of public policy, even if the SA could be construed to contain a waiver of appraisal rights.  Petitioners sought support from the requirement under Section 151(a) of the DGCL that limitations on classes of stock to be set out in the corporate charter.  Petitioners contended that the Company’s enforcement of the SA transformed Petitioners’ shares of stock into a de facto new restricted class.  In contrast, the Court found that the Company entered into the SA because it was in the corporate interest to entice investment by the Carlyle Group—a benefit that was shared by all stockholders who became a party to the agreement.  Therefore, the Court ruled that the SA did not restrict illicitly Petitioner’s appraisal rights.  Instead, Petitioners agreed to forbear from exercising appraisal rights in consideration for the benefits of new investment secured by entering into the SA.  The Company’s enforcement of the SA was not in contravention of the DGCL or public policy.

Manti Holdings, LLC, et al., v. Authentix Acquisition Co., letter opinion 181001

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