Manti Holdings, LLC v. Authentix Acquisition Company, Inc. ( 2021 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
MANTI HOLDINGS, LLC, MALONE §
MITCHELL, WINN INTERESTS, §
LTD., EQUINOX I. A TX, GREG § No. 354, 2020
PIPKIN, CRAIG JOHNSTONE, TRI-C §
AUTHENTIX, LTD., DAVID § Court Below – Court of Chancery
MOXAM, LAL PEARCE, and JIM § of the State of Delaware
RITTENBURG §
§ C.A. No. 2017-0887-SG
Petitioners Below, §
Appellants/Cross-Appellees, §
§
v. §
§
AUTHENTIX ACQUISITION §
COMPANY, INC., §
§
Respondent Below, §
Appellee/Cross-Appellant. §
§
Submitted: May 12, 2021
Decided: September 13, 2021
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR and
MONTGOMERY-REEVES, Justices.
Upon appeal from the Court of Chancery. AFFIRMED.
John L. Reed, Esquire (argued), Peter H. Kyle, Esquire, Kelly L. Freund, Esquire,
DLA PIPER LLP (US), Wilmington, Delaware; for Appellants/Cross-Appellees
Manti Holdings, LLC, Malone Mitchell, Winn Interests, Ltd., Equinox I. A Tx, Greg
Pipkin, Craig Johnstone, Tri-C Authentix, Ltd., David Moxam, Lal Pearce, and Jim
Rittenburg.
Samuel A. Nolen, Esquire (argued), RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Andrew Hammond, Esquire, Michelle Letourneau-Belock,
Esquire, Bryan Beaudoin, Esquire, WHITE & CASE LLP, New York, New York;
for Appellee/Cross-Appellant Authentix Acquisition Company, Inc.
MONTGOMERY-REEVES, Justice, for the Majority:
In 2017, a third-party entity acquired Authentix Acquisition Company, Inc.
(“Authentix”). The cash from the merger was distributed to the stockholders pursuant to a
waterfall provision. The Authentix common stockholders received little to no
consideration. A group of common stockholders filed a petition for appraisal in the Court
of Chancery under Section 262 of the Delaware General Corporation Law (“DGCL”).
Authentix moved to dismiss the petition, arguing that the petitioners had waived their
appraisal rights under a stockholders agreement that bound the corporation and all of its
stockholders. The Court of Chancery granted the motion to dismiss, holding that the
petitioners had agreed to a clear provision requiring that they “refrain” from exercising their
appraisal rights with respect to the merger. In a separate opinion, the court awarded the
petitioners equitable interest on the merger consideration and declined to award Authentix
pre-judgment interest under a fee-shifting provision. All parties appealed the Court of
Chancery’s decisions.
The arguments in this appeal largely focus on whether Section 262 of the DGCL
prohibits a Delaware corporation from enforcing an advance waiver of appraisal rights
against its own stockholders. Pointing to Delaware’s strong policy favoring private
ordering, Authentix argues that stockholders are free to set the terms that will govern their
corporation so long as such alteration is not prohibited by statute or otherwise contrary to
2
the laws of this State. Authentix contends that a waiver of the right to seek appraisal is not
prohibited by the DGCL and is not otherwise contrary to the laws of this State.
The petitioners recognize that the DGCL is flexible, but they argue that the DGCL
has mandatory provisions that are fundamental features of the corporate entity’s identity.
These features, they contend, cannot be varied by a contract between the corporation and
all its stockholders. The petitioners argue that, if one desires true “freedom of contract,”
Delaware provides that option through the alternative entity forms, which expressly give
maximum effect to the principle of freedom of contract. The petitioners warn that, if this
Court allows a waiver of any mandatory right under the DGCL, such as the right to demand
appraisal, then any other right could be waived. For example, they argue that a Delaware
corporation and all its stockholders could also agree to a preemptive and blanket waiver of
their statutory right to seek books and records under Section 220, their ability to challenge
an election under Section 225, their ability to bring an action to compel a stockholders’
meeting under Section 211, and their ability to file a breach of fiduciary duty action, among
others.
As a matter of public policy, there are certain fundamental features of a corporation
that are essential to that entity’s identity and cannot be waived. Nonetheless, it is the Court’s
view that the individual right of a stockholder to seek a judicial appraisal is not among those
fundamental features that cannot be waived. Accordingly, we hold that Section 262 does
not prohibit sophisticated and informed stockholders, who were represented by counsel and
3
had bargaining power, from voluntarily agreeing to waive their appraisal rights in exchange
for valuable consideration.
This Court also affirms the other aspects of the Court of Chancery’s decision. The
petitioners agreed to a clear waiver of the appraisal rights with respect to the 2017 merger.
Authentix was an intended beneficiary capable of enforcing that waiver. The waiver is not
a stock restriction that had to be included in the corporation’s charter, and Delaware
corporations may enforce stockholders agreements. The Court of Chancery did not abuse
its discretion by awarding the petitioners equitable interest on the merger consideration; nor
did the court abuse its discretion by declining to award Authentix pre-judgment interest
under a fee-shifting provision. Accordingly, the Court of Chancery’s judgment is affirmed.
I. BACKGROUND
A. Parties and Relevant Non-Parties
Authentix is a Delaware corporation.1
Appellants and Cross-Appellees Manti Holdings, LLC; Malone Mitchell; Winn
Interests, Ltd.; Equinox I. A Tx; Greg Pipkin; Craig Johnstone; Tri C Authentix, Ltd.; David
Moxam; Lal Pearce; and Jim Rittenburg (collectively, the “Petitioners”) were minority
stockholders of Authentix before the corporation’s merger with a third-party entity.2
1
J.A. to Opening Br. 1600 (hereinafter, “J.A._”).
2
J.A. 1599-600.
4
The Carlyle Group and J.H. Whitney & Co. (collectively, “Carlyle”) were majority
stockholders of Authentix before the corporation’s merger with a third-party entity.3
Authentix, Inc. is the predecessor entity to Authentix.4
B. The Petitioners Enter into the Stockholders Agreement
In 2007, Authentix, Inc. retained an investment banker and began exploring its
strategic and financial options.5 At that time, each of the Petitioners owned stock in
Authentix, Inc.; and Manti Holdings, LLC held a majority of the outstanding shares.6
Several prospective bidders made offers, including Carlyle.7 The Carlyle offer won out,
and in 2008 Authentix, Inc. entered into a transaction under which it became a wholly-
owned subsidiary of Authentix. Carlyle gained majority control of the parent corporation,
Authentix.8 The Petitioners rolled over or reinvested their stakes and became minority
stockholders in the post-merger Authentix.9
As a condition of the 2008 merger, Carlyle required that Authentix and all of its
stockholders enter into a stockholders agreement (the “Stockholders Agreement”).10 The
Petitioners, Authentix, and Carlyle were all represented by counsel; the Stockholders
3
J.A. 1601.
4
J.A. 1600.
5
Id.
6
J.A. 1601. Manti Resources, Inc.—a related entity to Manti Holdings, LLC—may have owned
some of these shares. See id.
7
Id.
8
Id.
9
Id.
10
Id. This Opinion discusses the relevant provisions of the Stockholders Agreement in the
Analysis section. See infra Part III.
5
Agreement was not a contract of adhesion; and all of the parties received valuable
consideration in exchange for entering into the agreement.11 Authentix and each of the
Petitioners signed the Stockholders Agreement, along with Carlyle.12
In 2009, Authentix sought to raise additional capital by issuing Series B preferred
stock.13 All of the existing stockholders, including the Petitioners, participated on a pro rata
basis.14 Carlyle and other stockholders purchased shares of the Series B preferred stock.15
In connection with this transaction, the Stockholders Agreement was amended to add a
definition of “Preferred Stock.”16
C. Authentix Merges with a Third-Party Entity
On September 12, 2017, the Authentix board recommended a merger with a third-
party entity.17 On September 13, 2017, Carlyle approved the merger by written consent,
and closing occurred the same day.18 The Petitioners did not receive advance notice of the
merger and were not given an opportunity to vote on the transaction.19
11
J.A. 1601-04; see, e.g., Manti Hldgs., LLC v. Authentix Acq. Co. (Manti I), 2018 WL 4698255,
at *4 (Del. Ch. Oct. 1, 2018).
12
J.A. 93-123.
13
J.A. 1604.
14
Id.15
Id.16
J.A. 58-59, 1604.
17
Manti Hldgs., LLC v. Authentix Acq. Co. (Manti III), 2020 WL 4596838, at *2 (Del.
Ch. Aug. 11, 2020).
18
J.A. 164-168 (written consent); J.A. 170-257 (merger agreement).
19
See J.A. 459-60 (Confidential Information Statement and Notice of Action by Written Consent
and Approval of Merger).
6
Shortly after the merger closed, the Petitioners were provided with a written notice
that the corporation had executed a merger agreement by written consent.20 The notice
summarized various details of the merger agreement and “request[ed] that [the recipient]
execute [an attached] Written Consent to waive any appraisal rights that [they] may have
under Section 262 of the DGCL pursuant to [their] obligations set forth in the Company’s
Stockholder’s Agreement to which [they] are a party and to which [they] are bound.”21 The
notice included a one-page disclosure informing the recipient of their appraisal rights:
APPRAISAL RIGHTS OF STOCKHOLDERS
The Company’s stockholders who do not consent in
writing to the Merger may be entitled to certain appraisal rights
under Section 262 of the DGCL in connection with the Merger
as described below. . . . Stockholders who executed and
delivered a written consent of stockholders to consent to the
adoption of the Merger Agreement will not be entitled to
these rights. [The recipient] [is] reminded that [they] have
contractually agreed to refrain from exercising any
appraisal rights pursuant to the Company Stockholders
Agreement to which [they] are bound.22
Under the merger agreement, all of the Petitioners’ stock was cancelled and
converted into a right to receive the merger consideration.23 The merger consideration was
to be distributed to stockholders based on a waterfall provision that gave priority to the
20
Id.21
J.A. 459.
22
J.A. 469.
23
J.A. 193-200, at § 3.1.
7
preferred stockholders.24 It appears that common stockholders, like the Petitioners, could
expect to receive little to no compensation for their cancelled stock and that nearly all of the
merger consideration would be paid to the preferred stockholders, such as Carlyle.25
D. The Court of Chancery Dismisses the Appraisal Petition
In September and October of 2017, the Petitioners sent timely appraisal demands to
Authentix.26 In response, Authentix requested that the Petitioners withdraw their appraisal
demands and agree to exchange their shares for the merger consideration.27 The Petitioners
refused and filed a petition (the “Appraisal Petition”) in the Court of Chancery seeking to
exercise their statutory appraisal rights under Section 262 of the DGCL.28 Authentix filed
counterclaims and moved for summary judgment on the appraisal claim.29 The Petitioners
moved to dismiss the counterclaims.30
On October 1, 2018, the Court of Chancery issued a letter opinion granting
Authentix’s motion for partial summary judgment and denying the Petitioners’ motion to
dismiss the counterclaims.31 The court held that the Petitioners had waived their appraisal
24
J.A. 195-97, at § 3.1(f).
25
J.A. 464.
26
Manti III, 2020 WL 4596838, at *3.
27
Id.28
Id.29
Id.30
Id.31
Manti I, 2018 WL 4698255, at *1-2.
8
rights under the Stockholders Agreement and that the appraisal waiver was not a stock
restriction that must be included in the corporation’s charter under Section 151(a).32
On August 14, 2019, the Court of Chancery issued a memorandum opinion denying
the Petitioners’ motion for reargument.33 Among other things, the Petitioners argued that
the court’s October 2018 opinion erred because a Delaware corporation’s stockholders
cannot agree to a blanket and advance waiver of a mandatory statutory right, such as the
right to demand a judicial appraisal under Section 262.34 The court disagreed and held that
the Petitioners agreed to a clear and enforceable waiver of their appraisal rights.35
On August 11, 2020, the Court of Chancery issued its final memorandum opinion,
which addressed whether Authentix could enforce a fee-shifting provision and whether the
Petitioners were entitled to interest on the merger consideration.36 The court held that
Authentix could enforce the fee-shifting provision but was not entitled to pre-judgment
interest.37 The court also awarded the Petitioners equitable interest on their portion of the
merger consideration.38
32
Id. at *3-5.
33
Manti Hldgs., LLC v. Authentix Acq. Co. (Manti II), 2019 WL 3814453 (Del. Ch. Aug. 14,
2019).
34
Id. at *3.
35
Id. at *3-4.
36
Manti III, 2020 WL 4596838, at *4-11.
37
Id. at *4-10.
38
Id. at *10-11.
9
Both sides have appealed. The Petitioners challenge the Court of Chancery’s
dismissal of their appraisal petition.39 Authentix challenges the court’s holdings granting
the Petitioners equitable interest on the merger consideration and denying Authentix pre-
judgment interest under the fee-shifting provision.40
II. STANDARD OF REVIEW
This Court reviews de novo the Court of Chancery’s grant of summary judgment.41
Summary judgment is appropriate if, viewing the facts in the light most favorable to the
nonmoving party, there are no disputed issues of material fact, and the moving party has
demonstrated that it is entitled to judgment as a matter of law.42
The parties agree that there are no disputed issues of material fact.43 Accordingly,
the bulk of this appeal addresses whether the Court of Chancery committed errors of law in
granting summary judgment against the Petitioners. The final two issues on appeal,
however, add a second standard of review: whether the Court of Chancery abused its
discretion by ordering improper relief.44
39
Opening Br. 6-10.
40
Answering Br. 5-11.
41
Monzo v. Nationwide Prop. & Cas. Ins. Co., 249 A.3d 106, 117 (Del. 2021).
42
Id. (citing Sherman v. Ellis, 246 A.3d 1126, 1131 (Del. 2021)).
43
See, e.g., Opening Br. 2 (“The facts are undisputed; it remains only to apply the law and the
language of the [Stockholders Agreement] to the facts.”); Answering Br. 46 (“This Court . . . can
. . . limit its holding to the undisputed facts of this case.”).
44
See, e.g., Boush v. Hodges, 705 A.2d 242, 1998 WL 40220, at *2 (Del. Jan. 15, 1998)
(TABLE).
10
III. ANALYSIS
This appeal presents four issues. First, whether the Petitioners agreed to a clear
waiver of their appraisal rights with respect to the 2017 merger. Second, whether a
Delaware corporation can enforce a waiver of appraisal rights against its own stockholders.
Third, whether the Court of Chancery abused its discretion by awarding the Petitioners
equitable interest on the merger consideration. And fourth, whether the Court of Chancery
erred by refusing to award Authentix pre-judgment interest on its attorneys’ fees.
A. The Petitioners Agreed to a Clear Waiver of their Appraisal Rights
The first question on appeal is whether the Petitioners waived their statutory
appraisal rights by agreeing, under Section 3(e) of the Stockholders Agreement, to “refrain”
from exercising their appraisal rights with respect to a “Company Sale” if the board and
Carlyle approve the transaction (the “Refrain Obligation”):
[I]n the event that . . . a Company Sale is approved by the
Board and . . . the Carlyle Majority, each Other Holder shall
consent to and raise no objections against such transaction . . .,
and . . . [shall] refrain from the exercise of appraisal rights with
respect to such transaction.45
The Petitioners argue that the Refrain Obligation did not waive their appraisal rights
with respect to the 2017 merger for three reasons. First, the Petitioners argue that the Refrain
Obligation was never triggered because, under the 2017 merger agreement, the preferred
stock held by Carlyle was not acquired on the “Same Terms and Conditions” as the common
45
J.A. 73-74, at § 3(e).
11
stock held by the Petitioners.46 Second, the Petitioners argue that the Stockholders
Agreement did not impose a clear post-termination duty to refrain from exercising appraisal
rights because the contract’s termination provision can be reasonably construed to
extinguish all obligations, including the Refrain Obligation, “upon” the consummation of a
Company Sale.47 Third, the Petitioners argue that the post-merger Authentix could not
enforce the Stockholders Agreement because it was not an intended beneficiary.48 For the
reasons provided below, this Court rejects each of these arguments.
1. Principles of contract interpretation
The principles of contract interpretation under Delaware law are well-established.
When interpreting a contract, Delaware courts read the agreement as a whole and enforce
the plain meaning of clear and unambiguous language.49 Contracts will be interpreted to
“give each provision and term effect” and not render any terms “meaningless or illusory.”50
“When a contract is clear and unambiguous, the court will give effect to the plain meaning
of the contract’s terms and provisions.”51 Language is ambiguous if it is susceptible to more
46
Opening Br. 24-27.
47
Id. at 18-23.
48
Id. at 20-21.
49
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010) (first citing Kuhn Constr.,
Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del. 2010); and then citing Rhone-
Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992)).
50
Id. at 1159 (quoting Kuhn, 990 A.2d at 396-97; Sonitrol Hldg. Co. v. Marceau Investissements,
607 A.2d 1177, 1183 (Del. 1992)).
51
Id. at 1159-60 (citing Rhone-Poulenc, 616 A.2d at 1195).
12
than one reasonable interpretation.52 An interpretation is unreasonable if it “produces an
absurd result” or a result “that no reasonable person would have accepted when entering the
contract.”53 “The parties’ steadfast disagreement over interpretation will not, alone, render
the contract ambiguous.”54
2. The “Same Terms and Conditions” provision did not apply to the
2017 merger
The Petitioners argue that the 2017 merger did not trigger the Refrain Obligation
because Carlyle received more compensation for its preferred stock than the Petitioners
received for their common stock.55 This argument rests on the premise that
the 2017 merger was “structured as a sale of Equity Securities” because it involved the
acquisition of control and not the acquisition of assets. Under Section 3(e) of the
Stockholders Agreement, a “sale of Equity Securities” only triggers the Refrain Obligation
if Carlyle’s stock is acquired “on the Same Terms and Conditions” as stock held by
Authentix’s other stockholders. According to Petitioners, because the merger agreement
paid more compensation for preferred stock than common stock, Carlyle’s shares of
52
Id. at 1160 (first citing Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 628
(Del. 2003); and then citing Rhone–Poulenc, 616 A.2d at 1195); see also Sunline Com. Carriers,
Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 847 (Del. 2019) (“If, after applying these canons
of interpretation, the contract is nonetheless ‘reasonably susceptible [to] two or more
interpretations or may have two or more different meanings,’ then the contract is ambiguous . . . .”
(quoting Kaiser Alum. Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996))).
53
Osborn, 991 A.2d at 1160 (citations omitted).
54
Id. (citing Rhone-Poulenc, 616 A.2d at 1195).
55
Opening Br. 24-27.
13
preferred stock were not acquired “on the Same Terms and Conditions” as the Petitioners’
shares of common stock. Thus, the 2017 merger did not trigger the Refrain Obligation.56
Under Section 3(e) of the Stockholders Agreement, Carlyle can exercise certain
drag-along rights if a “Company Sale . . . is structured as a sale of Equity Securities.”57
These rights are contingent, however, on the condition that stock held by the “Other
Holders,” like the Petitioners, is acquired “on the Same Terms and Conditions” as Carlyle’s
stock (the “Same-Terms Requirement”).58 The Stockholders Agreement defines “Same
Terms and Conditions” to mean “the same price and otherwise on the same terms and
conditions . . . .”59
The first question that the Court must address is whether the 2017 merger triggered
the Same-Terms Requirement because it was a Company Sale, “structured as a sale of
Equity Securities,” that involved the “acquisition of the Equity Securities” held by Carlyle.60
The Stockholders Agreement’s definition of Equity Securities encompasses common stock,
preferred stock, stock options, and other convertible securities.61 The Stockholders
Agreement divides the definition of a Company Sale into two types of transactions: equity
transactions “(whether such transaction is effected by merger, consolidation,
56
See id.57
J.A. 73-74.
58
Id.59
J.A. 69.
60
See J.A. 74-74, at § 3(e).
61
J.A. 67 (“‘Equity Securities’ means the Shares, any options to purchase shares of Common
Stock and any Convertible Securities.”); J.A. 69 (“‘Shares’ means the shares of Preferred Stock
and Common Stock currently issued and outstanding or that are hereafter issued to the Holders.”).
14
recapitalization, sale or transfer of the Company’s capital stock or otherwise)” and asset
transactions.62
Petitioners are correct that the definition of Company Sale lumps mergers in the
same category as stock transactions. That fact does not support Petitioners’ position that all
mergers are “structured as a sale of Equity Securities,” however, because mergers and stock
sales are two different types of transactions, even if they achieve a similar result. Carlyle
structured the 2017 merger to allow an outsider to gain control of Authentix without
acquiring any of the stock held by Carlyle or the Petitioners. Indeed, the merger agreement
cancelled all outstanding stock in exchange for the right to receive the merger
consideration.63 Thus, the 2017 merger was not “structured as a sale of Equity Securities;”64
none of Carlyle’s stock was “acqui[red]” under the 2017 merger agreement;65 the
2017 merger did not trigger Same-Terms Requirement; and it is irrelevant that Carlyle
received more compensation for its preferred stock than the Petitioners received for their
common stock.
The Petitioners other arguments do not change our analysis. Holding that the
2017 merger was not “structured as a sale of Equity Securities” does not render surplusage
the requirement under Section 3(e) that minority stockholders “execute any purchase
62
J.A. 65 (formatting added); see Opening Br. 25-27.
63
J.A. 193-94, at § 3.1(a)-(b).
64
J.A. 74, at § 3(e).
65
Id.
15
agreement, merger agreement or other agreement” in connection with a Company Sale that
is structured as a sale of Equity Securities.”66 That provision leaves flexibility for
transaction planners if other transactions are being undertaken with the equity purchase.
Similarly, federal opinions holding that mergers involve an offer or purchase of
securities under the securities laws are inapposite.67 Whether a merger meets the statutory
definition for a sale of securities under federal or state securities law has no bearing on
whether a merger is “structured as a sale of Equity Securities” under the Stockholders
Agreement.68 There is no suggestion that the parties looked to the securities laws to construe
these terms. Accordingly, this Court affirms the Court of Chancery’s holding that the Same-
Terms Requirement did not apply to the 2017 merger.
3. The Refrain Obligation clearly waived the Petitioners’ appraisal
rights with respect to the 2017 merger
The Petitioners argue that they did not agree to a clear waiver of their appraisal rights
with respect to the 2017 merger. According to the Petitioners, Section 12 of the
Stockholders Agreement provides that all obligations created under the contract cease when
a Company Sale is consummated (the “Termination Provision”).69 Noting that there is no
66
Id.
67
Opening Br. 26 n.5 (first citing Mader v. Armel, 402 F.2d 158, 160 (6th Cir. 1968); and then
citing Murphy v. Stargate Def. Sys. Corp., 498 F.3d 386, 391 (6th Cir. 2007)).
68
J.A. 73.
69
J.A. 89. (“Section 12. Termination. This Agreement, and the respective rights and obligations
of the Parties, shall terminate upon the earlier of the: (a) consummation of a Company Sale; and
[sic](b) execution of a written agreement of each Party (other than the Management Holders who
are not also Rollover Stockholders or Reinvesting Stockholders) to terminate this Agreement;
16
dispute the Refrain Obligation is an “obligation,”70 the Petitioners conclude that they were
not subject to a clear post-termination duty to refrain from filing the Appraisal Petition.71
The Petitioners also claim that the Refrain Obligation’s use of the word “refrain” rather than
“waive” cements that they did not agree to permanently relinquish their appraisal rights.72
In addition to the ordinary principles of contract interpretation, we consider the law
regarding contractual waivers of statutory rights. Under Delaware law, “[w]aiver is the
intentional relinquishment of a known right.”73 “A waiver may be either express or implied,
but either way, it must be unequivocal.”74 The contractual waiver of a statutory right must
provided, however, that Section 2, 3, 4, 6, 7, 8, and 9 hereof shall terminate upon the closing of
an IPO.”).
70
See, e.g., Opening Br. 6 (referring to the Refrain Obligation as an “obligation”); Answering
Br. 5 (“The Court of Chancery correctly interpreted the Stockholders Agreement, holding that the
Agreement obligated Petitioners to refrain from exercising appraisal rights and that Authentix
could enforce this obligation post-merger.” (emphasis added)).
71
Opening Br. 19.
72
Id. (“One does not have to ‘refrain’ from exercising a right they already ‘waived.’”).
73
Minna v. Energy Coal S.p.A., 984 A.2d 1210, 1214 (Del. 2009) (citing AeroGlob. Cap. Mgmt.,
LLC v. Cirrus Indus., Inc., 871 A.2d 428, 444 (Del. 2005)).
74
Dirienzo v. Steel P’rs Hldgs. LP., 2009 WL 4652944, at *4 (Del. Ch. Dec. 8, 2009) (citing
Rose v. Cadillac Fairview Shopping Ctr. Props. (Del.), Inc., 668 A.2d 782, 786 n. 1
(Del. Super. Ct. 1995)).
17
be clear to be enforceable.75 “[T]he standards for proving waiver under Delaware law are
‘quite exacting,’”76 and “[t]he facts relied upon to prove waiver must be unequivocal.”77
Turning to the Stockholders Agreement, this Court agrees with the Court of
Chancery that the Refrain Obligation imposed a clear post-termination duty on the
Petitioners to refrain from exercising their appraisal rights with respect to the 2017 merger.78
The only reasonable interpretation of the Refrain Obligation is that the Petitioners agreed to
not seek a judicial appraisal if Carlyle and the board approved a Company Sale. This
obligation was designed to apply after a Company Sale is consummated, as a stockholder
may only “commence an appraisal proceeding” “within 120 days after the effective date of
the merger or consolidation . . . .”79 And regardless of whether a stockholder begins to
exercise its appraisal rights before a merger has closed by providing notice of its intent to
75
See, e.g., Halpin v. Riverstone Nat’l, Inc., 2015 WL 854724, at *8 (Del Ch. Feb. 26, 2015) (first
citing In re Appraisal of Ford Hldgs., Inc. Preferred Stock, 698 A.2d 973, 977 (Del. Ch. 1997)
(“Since Section 262 represents a statutorily conferred right, it may be effectively waived in the
documents creating the security only when that result is quite clearly set forth when interpreting
the relevant document . . . .”); and then citing Libeau v. Fox, 880 A.2d 1049, 1057 (Del.
Ch. 2005) (“To ensure that the statutory right to partition is not arbitrarily lost, Delaware requires
that any contractual relinquishment of the partition right be by clear affirmative words or
actions . . . .”), aff’d in part and rev’d in part on other grounds, 892 A.2d 1068 (Del. 2006)); see
also Dirienzo, 2009 WL 4652944, at *4 (“An express waiver exists where it is clear from the
language used that the party is intentionally renouncing a right that it is aware of.”);
Kortum v. Webasto Sunroofs, Inc., 769 A.2d 113, 125 (Del. Ch. 2000) (“There can be no waiver
of a statutory right unless that waiver is clearly and affirmatively expressed in the relevant
document.” (citing Hintmann v. Fred Weber, Inc., 1998 WL 83052 (Del. Ch. Feb. 17, 1998))).
76
Bantum v. New Castle Cnty. Vo-Tech Educ. Ass’n, 21 A.3d 44, 50 (Del. 2011) (quoting
AeroGlobal Cap. Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 444 (Del. 2005)).
77
Id. (alteration in original) (quoting AeroGlobal, 871 A.2d at 444).
78
See, e.g., Manti I, 2018 WL 4698255, at *3.
79
8 Del. C. § 262(e).
18
seek a judicial appraisal,80 the clear purpose of the Refrain Obligation was to assure Carlyle
and future acquirers that the minority stockholders would not be able to obtain a judicial
appraisal after a Company Sale had closed.
The Petitioners try to muddy this analysis by arguing that the Termination Provision
extinguished the Refrain Obligation when the 2017 merger closed.81 If the Termination
Provision is read in isolation, the Court might be inclined to agree with this analysis. But
Delaware courts read contracts as a whole, and interpretations that are commercially
unreasonable or that produce absurd results must be rejected.82 The Petitioners’
interpretation is commercially unreasonable. It is difficult to imagine that reasonable parties
would draft a contractual provision that would require stockholders to “refrain” from
exercising a right that would never be ripe to exercise. And it is incredible that the parties
included the Refrain Obligation to block appraisal rights only in a roundabout fashion by
stopping stockholders from taking the preliminary steps needed to perfect their appraisal
claims.83
80
See Opening Br. 22-23.
81
Opening Br. 17-27.
82
Osborn, 991 A.2d at 1159-60.
83
The Petitioners claim that that this case is “analogous” to Halpin v. Riverstone National, Inc.,
where the Court of Chancery held that the respondent in an appraisal proceeding could not enforce
drag-along rights after a merger had closed. 2015 WL 854724, at *2-4 (Del. Ch. Feb. 26, 2015).
In Halpin, the respondent sought to enforce drag-along rights that it failed to trigger while the
stockholders agreement was in force. See id. at *8-10. Contrastingly, in this case the Refrain
Obligation was triggered when the board and Carlyle approved the merger. See J.A. 73-74, at
§ 3(e) (providing that the Refrain Obligation is triggered if, inter alia, “a Company Sale is
approved by the Board and either . . . the holders of at least fifty percent (50%) of the then-
outstanding Shares or . . . the Carlyle Majority . . . .”). Accordingly, Halpin is distinguishable
19
Finally, we are not persuaded by the distinction that the Petitioners make between
agreeing to “refrain” from exercising appraisal rights and agreeing to “waive” appraisal
rights.84 The Refrain Obligation only bars the Petitioners from exercising their appraisal
rights if certain conditions are satisfied.85 It therefore makes sense that the parties used the
word “refrain” rather than “waive” when drafting the Refrain Obligation. The Petitioners
did not “relinquish” their appraisal rights.86 The Petitioners agreed “to keep [themselves]
from” exercising their appraisal rights if certain criteria were met.87 Thus, the structure of
the Refrain Obligation explains why the parties used the word “refrain” when agreeing to a
contingent waiver of appraisal rights.
As the Court of Chancery correctly concluded, “No contracting party, agreeing to
the quoted language, would consider itself free to exercise appraisal rights in light of Board
because Authentix seeks to enforce a waiver that was triggered before the Stockholders
Agreement terminated.
84
See, e.g., Bantum v. New Castle C’ty Vo-Tech Educ. Ass’n, 21 A.3d 44, 50 (Del. 2011)
(“Waiver is the voluntary and intentional relinquishment of a known right. It implies knowledge
of all material facts and an intent to waive, together with a willingness to refrain from enforcing
those [] rights.” (quoting AeroGlobal Capital Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428,
444 (Del. 2005))).
85
For example, the Refrain Obligation would only be triggered if Authentix was sold to an
outsider. J.A. 88 (“‘Company Sale’ means the consummation of any transaction or series of
transactions pursuant to which one or more Persons or group of Persons (other than any Initial
Carlyle Stockholder, Manti, Whitney or any of the respective Affiliates” acquires control of
Authentix. (emphasis added)); J.A. 73-74 (tying the Refrain Obligation to a Company Sale).
86
See Opening Br. 19 (citing Waive, Meriam-Webster Online Dictionary (last visited Sept. 7,
2021) (“waive” means “to relinquish (something such as a legal right) voluntarily”),
https://www.merriam-webster.com/dictionary/waive).
87
Id. (citing Refrain, Meriam-Webster Online Dictionary (last visited Sept. 7, 2021) (“refrain”
means “to keep oneself from doing”), https://www.merriam-webster.com/dictionary/refrain).
20
approval of a contractually compliant Company Sale.”88 Accordingly, the only reasonable
interpretation of the Stockholders Agreement is that the Refrain Obligation imposed a post-
termination duty on the Petitioners to “refrain” from filing the Appraisal Petition. To hold
otherwise would undermine the objective intent of the bargain the parties struck and lead to
the absurd result that a contractual provision included to stop the Petitioners from exercising
their appraisal rights would never impose a burden on the Petitioners to refrain from filing
an appraisal petition.89
4. Authentix is the intended beneficiary of the Refrain Obligation
The Petitioners’ final contractual argument is that post-merger Authentix was not an
intended beneficiary capable of enforcing the Stockholders Agreement.90 The Petitioners
seem to reason that because the 2017 merger agreement resulted in a complete change in
ownership, post-merger Authentix is not a party to the Stockholders Agreement even though
it was the surviving entity under the merger agreement. In other words, the Petitioners
complain that they “did not enter into the [Stockholders Agreement] with the buyer . . . .”91
88
Manti I, 2018 WL 4698255, at *3.
89
The Petitioners and the Dissent suggest several changes the parties could have made to make
it clearer that the Refrain Obligation was intended to survive termination, such as using the word
“waive” instead of “refrain,” including a savings clause, or stating that the Petitioners agreed to
refrain from exercising their appraisal rights “at any time.” With the benefit of hindsight, these
changes might have headed off the current dispute. Even without these changes, however, the
Refrain Obligation in present form clearly waives the Petitioners’ appraisal rights with respect to
the 2017 merger.
90
Opening Br. 20-21.
91
Id. The Petitioners also seem to argue that post-merger Authentix—along with all of the other
parties to the Stockholders Agreement—cannot enforce the Refrain Obligation because that
obligation was extinguished when the 2017 merger closed. See, e.g., id. The Court rejects this
argument for the reasons provided above.
21
This argument misses the mark for several reasons. First, it is a fundamental
principle of Delaware law that a corporation is an entity, capable of forming a contract,92
with an identity separate from its stockholders.93 Thus, the change in control did not alter
Authentix’s status as a party to the Stockholders Agreement.
Because Authentix is a party to the Stockholders Agreement, it need not rely on its
status as an intended beneficiary to enforce the agreement.94 Nonetheless, if anyone is an
intended beneficiary of the Refrain Obligation it is Authentix. The “surviving or resulting
corporation” is the respondent in an appraisal proceeding that would be liable for paying the
petitioner fair value for its cancelled stock.95 Thus, the parties must have recognized when
they formed the Stockholders Agreement that the Refrain Obligation was intended to
benefit Authentix—or the “resulting corporation” under different circumstances—by
providing a defense to an appraisal petition. Accordingly, Authentix could rely on its status
92
See, e.g., 8 Del. C. § 122(13) (“Every corporation created under this chapter shall have the
power to . . . (13) Make contracts . . . .”).
93
See, e.g., Cargill, Inc. v. JWH Special Circumstance LLC, 959 A.2d 1096, 1109 (Del.
Ch. 2008) (“Even though every stockholder of a corporation may change, the corporation
maintains its own identity in perpetuity, because it is a separate and distinct legal entity from its
shareholders.” (first citing 8 Del. C. § 102(b)(5); and then citing Orzeck v. Englehart, 195 A.2d
375, 377 (Del. 1963))).
94
NAF Hldgs., LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175, 180-81 (Del. 2015) (“It is a
fundamental principle of contract law that the parties to a contract are bound by its terms and
have a corresponding right to enforce them.” (emphasis added) (citations omitted)); cf.
Restatement (Second) of Contracts § 302 (Am. L. Inst. 1981) (“Unless otherwise agreed between
promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a
right to performance in the beneficiary is appropriate to effectuate the intention of the parties and
. . . the circumstances indicate that the promise intends to give the beneficiary the benefit of the
promised performance.”).
95
See 8 Del. C. § 262(i).
22
as an intended beneficiary of the Refrain Obligation to enforce the Stockholders Agreement,
though Authentix need not do so because it was a party to the contract.
B. Neither Statutory Law Nor Public Policy Prohibits Authentix from
Enforcing the Refrain Obligation Against the Petitioners
The Petitioners argue that, even if they agreed to a clear waiver of appraisal rights,
three provisions of the DGCL prevent Authentix from enforcing the waiver. First, the
Petitioners argue that the Refrain Obligation is a stock restriction that had to be included in
the corporation’s charter under Section 151(a).96 Second, the Petitioners argue that
Section 262 prohibits stockholders from agreeing to an ex ante waiver of their appraisal
rights under a stockholders agreement.97 Third, the Petitioners argue that Section 218
prohibits Delaware corporations from enforcing a stockholders agreement with their own
stockholders.98 The Court addresses each issue below.
1. Principles of statutory interpretation
The principles of statutory interpretation are well-settled. “Statutory interpretation is
a question of law, which we review de novo.”99 “The ‘most important consideration for a
court in interpreting a statute is [the language] the General Assembly used in writing [the
statute].’”100 The first step in this analysis is to “determine whether or not the statute is
96
Opening Br. 28-29.
97
Id. at 29-41.
98
Id. at 41-45.
99
Salzberg v. Sciabacucchi, 227 A.3d 102, 112 (Del. 2020) (citing Corvel Corp. v. Homeland
Ins. Co. of N.Y., 112 A.3d 863, 868 (Del. 2015)).
100
Id. at 113 (quoting Boilermakers Loc. 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 950
(Del. Ch. 2013)).
23
ambiguous.”101 “[A] statute is ambiguous only if it is reasonably susceptible to different
interpretations, or ‘if a literal reading of the statute would lead to an unreasonable or absurd
result not contemplated by the legislature.’”102 “The fact that the parties disagree about the
meaning of the statute does not create ambiguity.”103 “If the statute is found to be clear and
unambiguous, then the plain meaning of the statutory language controls.”104 On the other
hand, if the statute is ambiguous it will be construed “‘in a way that will promote its apparent
purpose and harmonize [it] with other statutes’ within the statutory scheme.”105
2. The Refrain Obligation is not a stock restriction that must be
included in the certificate of incorporation
At the time of adoption, the Stockholders Agreement, including the Refrain
Obligation, bound all of Authentix’s stockholders and contained a clause purporting to bind
their successors, assigns, and transferees.106 The Petitioners argue that because the Refrain
Obligation applied to all of the outstanding stock in Authentix, it was a “limitation[] or
restriction[]” on a class or series of stock that, under DGCL Section 151(a), “shall be stated
101
Ins. Comm’r of Del. v. Sun Life Ins. Co. of Can. (U.S.), 21 A.3d 15, 20 (Del. 2011) (citing
Chase Alexa, LLC v. Kent Cnty. Levy Ct., 991 A.2d 1148, 1151 (Del. 2010)).
102
Id. (first citing Chase Alexa, 991 A.2d at 1151; and then quoting Dir. of Rev. v. CAN Hldgs.,
Inc., 818 A.2d 953, 957 (Del. 2003)).
103
Id. (quoting Chase Alexa, 991 A.2d at 1151).
104
Id. (citing Dir. of Rev., 818 A.2d at 957); see also Salzberg, 227 A.3d at 112 (“The court must
‘give the statutory words their commonly understood meanings.’” (quoting Kofron v. Amoco
Chems. Corp., 441 A.2d 226, 230 (Del. 1982))).
105
Sun Life Ins., 21 A.3d at 20 (quoting Eliason v. Englehart, 733 A.2d 944, 946 (Del. 1999)).
106
See, e.g., Manti I, 2018 WL 4698255, at *4 (“Here, the corporation determined it was in the
corporate interest to entice investment. It, and its stockholders individually, all entered an
agreement with the Carlyle Group that was presumably to the benefit of all parties.” (emphasis
added)).
24
and expressed in [the corporation’s] certificate of incorporation” or in the authorizing board
resolutions. Noting that the Refrain Obligation was not so disclosed, the Petitioners claim
that the Refrain Obligation is unenforceable because it does not comply with the disclosure
requirements of Section 151(a).107 The Petitioners also argue that allowing Authentix to
enforce the Refrain Obligation would render Section 151(a) a nullity because stock
restrictions will generally be codified in a written agreement and therefore would not need
to be disclosed in the charter or qualifying board resolution.108
As the Court of Chancery properly held, the Refrain Obligation is not a stock
restriction because the Stockholders Agreement imposed personal obligations on the
stockholders rather than encumbrances on the property rights that run with the stock. “The
parties, including the Company, did not transform the Petitioners’ shares of stock into a new
restricted class via the S[tockholders] A[greement]; instead, individual stockholders took on
contractual responsibilities in return for consideration.”109 Stated differently, the
Stockholders Agreement “did not restrict the appraisal rights of the classes of stock held by
the Petitioners; instead, the Petitioners, by entering the S[tockholders] A[greement], agreed
107
Opening Br. at 28 (citing Ellingwood v. Wolf’s Head Oil Refining Co., 38 A.2d 747, 747 (Del
Ch. 1944)).
108
Id. at 29 (“If special rights or limitations . . . related to stock are not set forth in the charter
. . . can nonetheless be enforced . . . as long as they are in a separate agreement, there could never
be a violation of Section 151(a) because such rights or limitations will always be set forth in
writing somewhere . . . .”).
109
Manti I, 2018 WL 4698255, at *4.
25
to forbear from exercising that right.”110 Thus, “enforcing the S[tockholders] A[greement]
is not the equivalent of imposing limitations on a class of stock under Section 151(a).”111
Additionally, enforcing the Refrain Obligation against the Petitioners does not
implicate the notice-giving public policy concern animating Section 151(a). This is not a
case where a corporation seeks to enforce the Refrain Obligation against a party that did not
sign the Stockholders Agreement. Authentix is only seeking to enforce the Refrain
Obligation against sophisticated parties that negotiated and signed the Stockholders
Agreement. The Petitioners can hardly complain about a lack of notice given the facts in
this case. And while the clause purporting to bind successors, assigns, and transferees may
be unenforceable,112 the Stockholders Agreement has a severability clause,113 and
Authentix is not attempting to enforce the Refrain Obligation against any stockholders that
did not sign the Stockholders Agreement in exchange for consideration.
Further, the Petitioners’ interpretation of Section 151(a) leads to the conclusion that
any performance duties imposed under a stockholders agreement binding all of a
110
Id.111
Id.112
J.A. 89, at § 13(b) (“Successors, Assigns, and Transferees. This Agreement shall be binding
upon and inure to the benefit of the Parties and their respective legal representatives, heirs,
legatees, successors and assigns and any other transferee and shall also apply to any securities
acquired by a Holder after the date hereof.”).
113
J.A. 91, at § 13(j) (“Severability. In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in
any respect for any reason, the validity, legality and enforceability of any such provision in every
other respect and of the remaining provisions contained herein shall not be in any way impaired
thereby.”).
26
corporation’s stockholders is a stock restriction, provided that such performance obligations
place a burden on the rights that come with owning stock. This result is inconsistent with
the language of Section 218(a), which authorizes “[o]ne stockholder or 2 or more
stockholders” to form a stockholders agreement and does not impose any limitations on the
number or percentage of a corporation’s stockholders that can form a stockholders
agreement.114 Given Delaware’s public policy favoring private ordering,115 the Court is
unwilling to add a total-percentage-of-stockholders limitation to Section 218 where none
exists. Accordingly, the Court rejects the Petitioners’ argument that any performance duty
imposed under a bilateral agreement binding all of a corporation’s stockholders is a stock
restriction.
Finally, allowing Authentix to enforce the Refrain Obligation against the Petitioners
does not render Section 151(a) a nullity. A corporation must still make the necessary
disclosures in order to issue stock with restrictions.116 And holding that the Refrain
Obligation is not a stock restriction does not mean that corporations can use stockholders
agreements to circumvent the requirements applicable to an actual stock restriction.
Accordingly, this Court affirms the Court of Chancery’s holding that the Refrain Obligation
114
(emphasis added).
115
See, e.g., Salzberg, 227 A.3d at 116.
116
To avoid any doubt, the Court does not hold that a Delaware corporation can issue stock that
lacks appraisal rights. Rather, the Court holds more narrowly that the Refrain Obligation is not a
stock restriction because it imposed personal obligations on the Petitioners.
27
is not a stock restriction that had to be disclosed in the corporation’s charter or the
authorizing board resolutions under Section 151(a).
3. Sophisticated and informed stockholders can voluntarily agree to
waive their appraisal rights in exchange for valuable
consideration
Section 262(a) of the DGCL provides that “[a]ny stockholder of a corporation of this
State” that meets the predicate requirements for filing an appraisal petition “shall be entitled
to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of
stock.”117 The Petitioners argue that because the General Assembly used the word
“shall,”118 common stockholders have a mandatory right to seek a judicial appraisal that
cannot be abrogated in a corporate charter.119 The Petitioners note that “when evaluating
corporate action for legal compliance, a court examines whether the action contravenes the
hierarchical components of the entity-specific corporate contract,” which includes from top
to bottom, “(i) the [DGCL], (ii) the corporation’s charter, (iii) its bylaws, and (iv) other
entity-specific contractual agreements, such as . . . a stockholder agreement.”120 Because
the charter is higher up in the corporate hierarchy than a stockholders agreement, the
Petitioners conclude that Authentix cannot use the Stockholders Agreement to impose a
117
(emphasis added).
118
8 Del C. § 262(a).
119
Opening Br. 29-41.
120
Opening Br. 35-36 (quoting Quadrant Structured Prod. Co., Ltd. v. Vertin, 2014 WL 5465535,
at *3 (Del. Ch. Oct. 28, 2014).
28
limitation that could not be included in the corporation’s charter.121 The Petitioners also
warn that allowing Authentix to enforce the Refrain Obligation will invite corporations to
use stockholders agreements to alter other mandatory provisions of the DGCL, upsetting
the hierarchy of corporate law and blurring the distinctions between corporations and
alternative entities.122
The Court’s discussion of this issue is divided into three parts. The first part discusses
how the DGCL reflects Delaware’s public policy favoring private ordering. The second
part holds that the plain language of Section 262 does not prohibit stockholders from
agreeing to an ex ante waiver of their appraisal rights. The third part holds that the public
policy concerns underlying Section 262 do not prohibit sophisticated and informed
stockholders from voluntarily waiving their appraisal rights in exchange for valuable
consideration.
a) The DGCL is a broad enabling act that allows immense
freedom for private ordering
“At its core, the [DGCL] is a broad enabling act” that “allows immense freedom for
businesses to adopt the most appropriate terms for the organization, finance, and governance
of their enterprise” “provided the statutory parameters and judicially imposed principles of
fiduciary duty are honored.”123 “In fact, ‘Delaware’s corporate statute is widely regarded
121
Id. at 35-36.
122
Id. at 35-41.
123
Salzberg, 227 A.3d at 116 (alteration in original) (italics added) (first quoting Williams v.
Geier, 671 A.2d 1368, 1381 (Del. 1996); and then citing Edward P. Welch & Robert S. Saunders,
29
as the most flexible in the nation because it leaves parties to the corporate contract
(managers and stockholders) with great leeway to structure their relationships, subject to
relatively loose statutory constraints and to the policing of director misconduct through
equitable review.’”124
This public policy favoring private ordering is reflected in Section 102(b)(1), which
allows a corporate charter to contain virtually any provision that is related to the
corporation’s governance and not “contrary to the laws of this State”:
In addition to the matters required to be set forth in the
certificate of incorporation by subsection (a) of this section, the
certificate of incorporation may also contain any or all of the
following matters: (1) Any provision for the management of
the business and for the conduct of the affairs of the
corporation, and any provision creating, defining, limiting and
regulating the powers of the corporation, the directors, and the
stockholders, or any class of stockholders . . .; if such
provisions are not contrary to the laws of this State.125
Section 109(b) provides similarly broad authorization for bylaws that are “not inconsistent
with law or with the certificate of incorporation,” and which “relat[e] to the business of the
corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its
stockholders, directors, officers, or employees.”
Freedom and Its Limits in the Delaware General Corporation Law, 33 Del. J. Corp. L. 845, 856-
60 (2008)).
124
Id. (quoting Jones Apparel Grp., Inc. v. Maxwell Shoe Co., Inc., 883 A.2d 837, 845
(Del. Ch. 2004)).
125
(emphasis added).
30
Although the DGCL is a broad and enabling statute, “[i]t is not . . . bereft of
mandatory terms.”126 For example, “[t]he certificate of incorporation may not contain any
provision that would impose liability on a stockholder for the attorneys’ fees or expenses of
the corporation or any other party in connection with an internal corporate claim . . . .”127
Similarly, while a corporate charter may include “[a] provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director,” the charter may not “eliminate or limit the liability
of a director” for breaches of the duty of loyalty, acts of bad faith, or “any transaction from
which the director derived an improper personal benefit.”128 In addition to these express
prohibitions, corporate charters and bylaws may not contain provisions that are “contrary”
to,129 or “inconsistent” with,130 Delaware law because they “transgress . . . a public policy
settled by the common law or implicit in the General Corporation itself.”131
b) Section 262 does not prohibit stockholders from agreeing
to an ex ante waiver of their appraisal rights
The Petitioners argue that because the General Assembly provided that stockholders
“shall” have the right to demand a judicial appraisal, Section 262 prohibits common
126
In re Appraisal of Ford Hldgs., Inc. Preferred Stock, 698 A.2d 973, 976 (Del. Ch. 1997).
127
8 Del. C. § 102(f); see also id. § 109(b) (imposing the same restriction on bylaws).
128
Id. § 102(b)(7).
129
Id. § 102(b)(1).
130
Id. § 109(b).
131
Salzberg, 227 A.3d at 115-16 (quoting Sterling v. Mayflower Hotel, 93 A.2d 107, 118
(Del. 1952)) (citing Edward P. Welch & Robert S. Saunders, Freedom and Its Limits in the
Delaware Corporation Law, 33 Del. J. Corp. L. 845, 856-60 (2008); see also Jones Apparel Grp.,
Inc. v. Maxwell Shoe Co., 883 A.2d 837, 843 (Del. Ch. 2004) (same).
31
stockholders from agreeing to an ex ante waiver of their appraisal rights.132 The Court
rejects this argument. The plain language of Section 262 does not prohibit stockholders
from agreeing to waive their appraisal rights.
The General Assembly’s use of the word “shall” appears to grant stockholders a
mandatory right to seek a judicial appraisal.133 “[W]hen construing [a] statute, ‘shall’
generally signals [a] mandatory requirement while ‘may’ is permissive.”134 Further, “[t]he
mandatory ‘shall’ . . . normally creates an obligation impervious to judicial discretion.”135
Nonetheless, the use of “shall” does not end our analysis because parties can agree to waive
mandatory rights. For example, in Graham v. State Farm Mutual Automobile Insurance
Co., policyholders argued that an insurance company could not enforce an arbitration clause
because Article 1, Section 4 of the Delaware Constitution provides that “[t]rial by jury shall
be as heretofore” and therefore creates a mandatory right that cannot be waived.136 The
Court rejected this argument and held that the right to a jury trial “is not absolute” and can
be “waive[d] if the parties so intend.”137 Similarly, in Baio v. Commercial Union Insurance
Co., the Court held that a party could waive its statutory right to subrogation, explaining that
“our legal system permits one to waive even a constitutional right and, [a] fortiori, one may
132
Opening Br. 29-41.
133
See 8 Del. C. § 262(a).
134
GMG Cap. Invs., LLC v. Athenian Venture P’rs I, 36 A.3d 776, 782 n.20 (Del. 2012) (citing
Miller v. Spicer, 602 A.2d 65, 67 (Del. 1991) (“The use of the verb ‘shall’ in legislation generally
connotes a mandatory requirement while the verb ‘may’ is deemed permissive.”).
135
Arnold v. State, 49 A.3d 1180, 1183 (Del. 2012).
136
565 A.2d 908, 911-12 (Del. 1989) (quoting Del. Const. art. 1, § 4 (emphasis added)).
137
Id. at 912.
32
waive a statutory right.”138 Thus, granting stockholders a mandatory right to seek a judicial
appraisal does not prohibit stockholders from alienating that entitlement in exchange for
valuable consideration.139
Further, the General Assembly knows how to draft language that prohibits parties
from altering a mandatory provision of the DGCL in a corporation’s charter or bylaws.140
For example, Section 115 states that “no provision of the certificate of incorporation or the
bylaws may prohibit bringing” “internal corporate claims” “in the Courts of this State.”
Similarly, Section 102(f) prohibits charter provisions that attempt to shift fees onto
stockholders litigating internal corporate claims.141 Presumably the General Assembly
could draft language prohibiting stockholders from altering a mandatory provision under a
138
410 A.2d 502, 508 (Del. 1979) (first citing Mize v. Crose, 399 F.2d 593 (10th Cir. 1968); then
citing Davis v. Dunbar, 394 F.2d 754 (9th Cir. 1968); and then citing Components, Inc. v.
W. Elec. Co., 267 A.3d 579, 582 (Del. 1970); see generally Juul Labs, Inc. v. Grove,
238 A.3d 904, 919 n.15 (Del. Ch. 2020) (collecting cases).
139
The Petitioners claim that Graham is distinguishable because an arbitration clause still allows
a party to pursue its cause of action in an adversarial proceeding, whereas the Refrain Obligation
completely extinguished the Petitioners’ appraisal claims. Opening Br. 40. This argument
conflates the right that was waived in Graham—the right to demand a jury trial—with the
underlying cause of action, which was a separate right. Graham supports the proposition that a
party can waive a mandatory right created using the word “shall.” Further, assuming that the
other relevant criteria are met, Delaware courts will enforce the contractual waiver of a
substantive right. See, e.g., Baio, 410 A.2d at 502.
140
See, e.g., 8 Del. C. §§ 102(b)(7), 102(f), 109(b).
141
8 Del. C. § 102(f) (“The certificate of incorporation may not contain any provision that would
impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any
other party in connection with an internal corporate claim, as defined in § 115 of this title.”).
33
stockholders agreement if it chose to do so. But Section 262 does not contain any language
that prohibits stockholders from waiving their appraisal rights.142
Finally, the Petitioners point us to the Court of Chancery’s decision in Ford
Holdings.143 In Ford Holdings, the corporation issued preferred stock that would have a
predetermined value in an appraisal proceeding, effectively preventing a holder from getting
the Court of Chancery to determine the stock’s fair value.144 The stockholders argued that
these provisions were invalid because “appraisal rights are mandated by statute and cannot
be eliminated by provisions in the corporate charter or the Designations.”145 In framing the
legal issues, the court stated that appraisal rights were among the “mandatory provisions”
of the DGCL that “may not be varied by terms of the certificate of incorporate or
otherwise.”146 Nonetheless, the court held that the statutory right to seek a judicial appraisal
“may be effectively waived in the documents creating the security,” provided “that result is
142
Notably, even Sections 115 and 102(f) allow alteration through a stockholders agreement. The
synopsis of the bill adopting Section 115 states that “Section 115 is not intended . . . to prevent
the application of any such provision in a stockholders agreement or other writing signed by the
stockholder against whom the provision is to be enforced.” See, e.g., Bonanno v. VTP Hldgs.,
Inc., 2016 WL 614412, at *15 (Del. Ch. Feb. 8, 2016) (quoting Del. S.B. 75 syn., 148th Gen.
Assem. (2015)). Similarly, the synopsis to the bill adopting 102(f) provides that “[n]ew
subsection (f) is not intended . . . to prevent the application of such [fee-shifting] provisions
pursuant to a stockholders agreement or other writing signed by the stockholder against whom
the provision is to be enforced.” J.A. 2364, at 111. And the General Assembly did not provide
that clarification in the statutory text to preserve the rights of stockholders to agree to such
restrictions under a bilateral agreement. Thus, the General Assembly appears to have rejected the
Petitioners’ bright-line rule that a stockholders agreement may not impose any restrictions on
stockholders that could not be included in the charter.
143
Opening Br. 32-34.
144
698 A.2d at 978-79.
145
Id. at 975.
146
Id. at 976.
34
quite clearly set forth when interpreting the relevant document under generally applicable
principles of construction.”147
The Petitioners argue that the Court of Chancery’s analysis in Ford Holdings was
limited to preferred stock and that common stockholders have a mandatory right to seek a
judicial appraisal that cannot be waived ex ante under a corporation’s charter, bylaws, a
stockholders agreement, “or otherwise.”148 As a preliminary matter, the Petitioners rely on
dicta to support their argument. Ford Holdings addressed whether a corporation could issue
preferred stock that would have a fixed value in an appraisal proceeding.149 This did not
ask the court to decide whether common stock could be subject to a similar restriction. The
court’s focus on the “essentially contractual nature of preferred stock” did not foreclose the
possibility that sophisticated and informed common stockholders, with bargaining power,
could agree to waive their appraisal rights in exchange for valuable consideration.150
Regardless, the Petitioners’ reliance on Ford Holdings is misplaced. It may make
good economic sense to treat preferred stock differently from common stock, but
Section 262 does not make such a distinction. To the contrary, Section 262(h) instructs the
“Court [of Chancery] [to] take into account all relevant factors” when determining fair
147
Id. at 977 (citing Red Clay Educ. Ass’n v. Bd. of Educ., 1992 WL 14965, at *7
(Del. Ch. Jan. 16, 1992)).
148
Id. at 976; Opening Br. 32-34.
149
See Ford Holdings, 698 A.2d at 977-79.
150
Id. at 977.
35
value.151 On its face, this instruction applies equally to common stock and preferred stock.
Owners of both are entitled to a judicial appraisal. This statutory language casts doubt on
whether it was the contractual nature of preferred stock that made the fixed-value provisions
valid, as factors other than the contractual language could have been relevant to determining
the preferred stock’s fair value. Thus, we read Ford Holdings for the more general principle
that a stockholder can waive its appraisal rights ex ante under certain circumstances.
Additionally, allowing Authentix to enforce the Refrain Obligation against the
Petitioners does not raise the concerns about “asymmetrical information and rational apathy
on the part of widely disaggregated shareholders of public companies” that Ford Holdings
identified as possible “explanations” for treating a right as an essential feature of the
corporate form that cannot be waived.152 The Petitioners were sophisticated and informed
investors, represented by counsel, that used their bargaining power to negotiate for funding
from Carlyle in exchange for waiving their appraisal rights.153 They also comprised all of
the stockholders in the closely-held predecessor entity Authentix, Inc.,154 removing any
concerns about rational apathy that might appear in the context of a public company. And
the Refrain Obligation was not a “midstream amendment” that was forced upon the
151
(emphasis added).
152
Ford Holdings, 698 A.2d at 977 n.8 (citing Arye Bebchuk, Limiting Contractual Freedom in
Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820(1989)).
153
Manti II, 2019 WL 3814453, at *2.
154
J.A. 1601-04.
36
Petitioners without their express consent.155 Thus, despite being common stockholders, the
Petitioners have much in common with the preferred stockholders in Ford Holdings.156
In short, the Petitioners have failed to identify anything in either Section 262 or Ford
Holdings that provides a convincing explanation of why preferred stockholders should be
able to agree to ex ante determination of fair value, which effectively operates as a waiver
of their appraisal rights, while sophisticated common stockholders, represented by counsel,
that agreed to a clear waiver of appraisal rights for their common stock in exchange for
valuable consideration cannot. As the court noted in Ford Holdings, “[t]here is no utility in
defining as forbidden any term thought advantageous to informed parties, unless the term
violates substantive law.”157
Accordingly, this Court agrees with the Court of Chancery that the plain language of
Section 262 does not prohibit Authentix from enforcing the Refrain Obligation.
c) Public policy concerns do not prohibit sophisticated and
informed stockholders from waiving their appraisal rights
in exchange for valuable consideration
The question remains, however, whether the Petitioners have identified any other
public policy concerns that prevent Authentix from enforcing an appraisal waiver against
its own stockholders. The Petitioners claim that allowing Authentix to enforce the Refrain
155
Ford Holdings, 698 A.2d at 977 n.8.
156
Id. (opining that the arguments in favor of making terms mandatory to avoid problems of
information asymmetry and rational apathy “would have little bite here where, at the formation
stage, the preferred have in effect a bargaining agent in the underwriter and no-midstream
amendment is implicated.”).
157
Id. at 977.
37
Obligation is against public policy for two main reasons: (1) a stockholder cannot
knowingly waive its appraisal rights without knowing the details of the transaction that
purportedly pays them less than fair compensation and (2) allowing Authentix to enforce
the Refrain Obligation will dilute the corporate “brand” and allow corporations to use
stockholders agreements to change all other provisions of the DGCL. We disagree and
conclude that allowing Authentix to enforce the Refrain Obligation against the Petitioners
does not raise public policy concerns that justify excusing the Petitioners from the bargain
that they struck.
First, the Petitioners seem to argue that ex ante waivers of appraisal rights are invalid
because stockholders cannot knowingly waive their appraisal rights without knowing the
details of the transaction that purportedly pays them less than fair value.158 Under Delaware
law, a party agreeing to waive a claim must have “knowledge of all material facts,”
including knowledge of “the requirement or condition” they are agreeing to waive.159 The
Refrain Obligation satisfied these criteria. The Petitioners were sophisticated investors,
represented by counsel, that agreed to a clear waiver of their appraisal rights in exchange
for valuable consideration.160 The Stockholders Agreement was not a contract of
adhesion;161 and the Petitioners have not argued that they were ignorant of the Refrain
158
See, e.g., Opening Br. 41; Reply Br. 28.
159
Bantum, 21 A.3d at 50-51.
160
Manti II, 2019 WL 3814453, at *2.
161
See J.A. 1601-04.
38
Obligation when they signed the contract or that the inclusion of the Refrain Obligation was
a mistake. It also would have been easy for the Petitioners to predict the circumstances in
which the Refrain Obligation would be invoked, namely, Carlyle and the board might
approve a merger agreement that the Petitioners think pays them unfair compensation for
their cancelled stock.
Further, this framing of the knowledge requirement would render nearly all
arbitration clauses invalid or useless. If a party needs full knowledge of a claim to agree to
a knowing waiver, then ex ante waivers of the right to demand a jury trial are invalid. This
result conflicts with how Delaware courts treat arbitration clauses.162 Accordingly, we reject
the Petitioners’ suggestion that they lacked sufficient knowledge to waive their appraisal
rights.
Second, the Petitioners argue that “[t]here is no policy need to permit alteration of
the DGCL’s mandatory rights to ensure maximum freedom of contract for corporations
because there are other Delaware entities,” such as LLCs, “that already permit such
freedom.”163 “By branding itself a Delaware corporation, a firm signals that it ‘has certain
core characteristics that provide basic protections to investors.’ One of those characteristics
is the right to appraisal; but if these core characteristics can be eliminated ex ante . . ., the
162
See, e.g., Graham, 565 A.2d at 911-12 (holding that insurance policyholders could waive their
right to a jury trial under an arbitration clause before the policyholders had knowledge of a ripe
claim to bring against their insurer).
163
Opening Br. 41 (citing 6 Del. C. § 18-1101(b) (“It is the policy of this chapter to give the
maximum effect to the principles of freedom of contract . . . .”).
39
value of the brand is lost.”164 It is important to preserve the fundamental characteristics of
the corporate form. Parties wishing to deviate from those characteristics can choose to form
an alternative entity, which prioritizes the freedom of contract over mandatory provisions.165
Additionally, prohibiting the waiver or alteration of a provision of the DGCL has the benefit
of promoting transparency and standardization, as prospective investors will not need to
investigate whether that provision has been altered and can rely on existing case law to
predict how Delaware courts will treat a corporation’s actions.
The trouble with this argument, however, is that it provides an incomplete
framework for determining whether stockholders can waive a right. In fact, if the goal is to
remove any doubt about the features of the corporate form, all provisions of the DGCL
should be mandatory. The best way to save investors the trouble of determining whether a
corporation departed from a default rule would be to make that rule mandatory, or to make
that rule mandatory unless the General Assembly expressly allows alteration. But this result
would conflict with the flexibility that the General Assembly provided under
Sections 102(b)(1) and 109(b), both of which provide broad authority for corporations to
adopt charter provisions and bylaws that are not contrary to Delaware law.166 If all
164
Id. (quoting Edward P. Welch & Robert S. Saunders, Freedom and Its Limits in the Delaware
General Corporation Law, 33 Del. J. Corp. L. 845, 865-67 (2008)).
165
See 6 Del. C. § 18-1101(b).
166
8 Del. C. § 102(b)(1) (allowing the charter to contain “[a]ny provision for the management of
the business and for the conduct of the affairs of the corporation, and any provision creating,
defining, limiting and regulating the powers of the corporation, the directors, and the
stockholders, or any class of stockholders . . . if such provisions are not contrary to the laws of
this State.”); id. § 109(b) (“The bylaws may contain any provision, not inconsistent with law or
40
provisions are mandatory unless expressly stated, the discretion-granting language in
Sections 102 and 109 would serve no purpose, as it would be the language of the statutory
section being altered that would allow for alteration, not the more general
Sections 102 and 109.167 This result is contrary to the Court’s recognition that “[a]t its core,
the [DGCL] is a broad enabling act.”168
This brings us to the real crux of Petitioners’ argument. Appraisal rights are core
characteristics of the corporate entity that provide basic protections to investors; as such they
cannot be waived—at least ex ante—under a bilateral agreement. Thus, we look to the
fundamental nature of appraisal rights to determine whether stockholders can agree to an ex
ante waiver.
As the Dissent recognizes, “before the Delaware appraisal statute was enacted, no
consolidation or merger of corporations could be effected except with the consent of all the
stockholders.”169 This unanimity “scheme proved unworkable ‘since one or more minority
stockholders, if he or they desired to do so, could impede the action of all the other
stockholders.’”170 Thus, the Delaware General Assembly amended the law “to allow the
sale of a corporation upon the consent of a majority of its stockholders.”171 “Given that a
with the certificate of incorporation, relating to the business of the corporation, the conduct of its
affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or
employees.”).
167
Maxwell, 883 A.2d at 848.
168
Salzberg, 227 A.3d at 116 (citation omitted).
169
In re Solera Ins. Coverage Appeals, 240 A.3d 1121, 1133 (Del. 2020).
170
Id. (quoting Schenley Indus., Inc. v. Curtis, 152 A.2d 300, 301 (Del. 1959).
171
Id.41
single shareholder could no longer hold up the sale of a company, the General Assembly
devised appraisal in service of the notion that ‘the stockholder is entitled to be paid for that
which has been taken from him.’”172 Appraisal rights therefore allow dissenting
stockholders to seek fair compensation for property taken without consent.173
The Dissent states that in addition to providing fair compensation, appraisal claims
impose a check on corporate transactions at an unfair price. Thus, the right to demand a
judicial appraisal is a fundamental feature of the corporate form because appraisal claims
regulate the balance of power between Delaware corporations and their constituencies.174
We acknowledge that the availability of appraisal rights might theoretically discourage
attempts to pay minority stockholders less than fair value for their cancelled stock.175
Nonetheless, the focus of an appraisal proceeding is paying fair value for the petitioner’s
stock,176 not policing misconduct or preserving the ability of stockholders to participate in
172
Id. (quoting Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1, 19
(Del. 2017)).
173
See, e.g., Francis I. DuPont & Co. v. Universal City Studios, Inc., 343 A.2d 629, 634
(Del. Ch. 1975) (“The power of a stockholder majority to override minority dissenters and remit
them to the cash appraisal remedy is ‘analogous to the right of eminent domain.’” (citations
omitted)).
174
Id. at 20.
175
See, e.g., Reply Br. 23 (“The public policy behind inviolate appraisal rights has even greater
significance for stockholders of private companies—like Petitioners—who lack a robust market
for their shares.” (citing Cornerstone Research, Appraisal Litigation in Delaware: Trends in
Petitioners and Opinions 2016-2018, at 9 (2019),
https://www.cornerstone.com/publications/reports)).
176
See, e.g., 8 Del. C. § 262(a) (providing that a stockholder meeting certain criteria “shall be
entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of
stock . . . .” (emphasis added)); In re Solera, 240 A.3d at 1133 (“[A]ppraisal ‘is a limited
legislative remedy developed initially as a means to compensate shareholders of Delaware
corporations for the loss of their common law right to prevent a merger or consolidation by refusal
42
corporate governance.177 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.
Further, Section 262(g) provides a de minimis exception from appraisal rights for
stockholders of publicly-traded corporations. If appraisal rights are sacrosanct to the
corporate form, it would make little sense for the General Assembly to adopt this exception,
which “removed appraisal rights for the most disempowered shareholders.”178 And if
to consent to such transactions.’ As such, we have said that ‘[t]here is one issue in an appraisal
trial: “the value of the dissenting stockholder’s stock.”’” (second alteration in original) (first
quoting Ala. By–Prods. Corp. v. Cede & Co., 657 A.2d 254, 258 (Del. 1995); and then quoting
Dell, 177 A.3d at 19) (citing Applebaum v. Avaya, 812 A.2d 880, 893 (Del. 2002))); Cede & Co.
v. Technicolor, Inc., 542 A.2d 1182, 1186 (Del. 1988) (The purpose of appraisal rights is to
“provide shareholders dissenting from a merger on grounds of inadequacy of the offering price
with a judicial determination of the intrinsic word (fair value) of their shareholders.”).
177
Some scholars argue that appraisal rights indirectly police misconduct by deterring offers that
would pay minority stockholders unfair compensation for their stock, particularly for private
firms. See, e.g., Jill E. Fisch, Stealth Governance: Shareholder Agreements and Private
Ordering, Faculty Scholarship at Penn Law 2199, at (Mar. 1, 2021) (“The problem with analyzing
shareholder agreements as personal waivers, as the Manti court did, is that a shareholder’s
corporate governance rights affect the interests of other shareholders as well as the rights and
responsibilities of the corporation’s officers, directors and non-shareholder stakeholders. . . . An
agreement to forsake appraisal rights affects the terms of future transactions.”),
https://scholarship.law.upenn.edu/faculty_scholarship/2199. Nonetheless, the Court views such
indirect policing as an ancillary benefit and not the focus of Section 262.
178
See, e.g., Jill E. Fisch, A Lesson from Startups: Contracting Out of Shareholder Appraisal,
Faculty Scholarship at Penn Law 2198, at 45 (Mar. 1, 2021) (“Delaware amended its appraisal
statute in 2016 to require that a minimum of 1% of the outstanding shares petition for appraisal.
43
adopted, the Petitioners’ position would also cast doubt on whether drag-along rights are
enforceable. Under Section 262(a), a stockholder that “voted in favor of the merger or
consolidation,” or who provided written consent as provided for under Section 228, forfeits
its appraisal claim. Drag-along rights often require that minority stockholders take actions
that are reasonably necessary to close a merger, which would presumably include voting in
favor of the merger or providing written consent.179 If a stockholder cannot waive its
appraisal rights directly, there is no reason why a stockholder should be able to waive its
appraisal rights indirectly by agreeing to a performance obligation that would require them
to approve a merger.
Additionally, allowing Authentix to enforce the Refrain Obligation against the
Petitioners does not implicate other public policy concerns that might be present in different
bargaining contexts. For example, if Authentix attempted to enforce the Refrain Obligation
against a retail investor that was not involved in negotiating the Stockholders Agreement—
or against outsiders that lack material knowledge of Authentix’s corporate governance
dynamics—concerns about information asymmetry might justify excusing enforcement.
This de minimis exception removed appraisal rights for the most disempowered shareholders,
undercutting the argument that appraisal rights are a critical source of minority shareholder
protection.” (citations omitted)), https://scholarship.law.upenn.edu/faculty_scholarship/2198.
179
See generally SV Inv. P’rs, LLC v. ThoughtWorks Inc., 7 A.3d 973, 991-92 (Del. Ch. 2010)
(“Another alternative, common in stockholders’ agreements, allows a preferred stockholder to
sell its security and ‘drag along’ the remaining stockholders. ‘Drag along’ rights, which
effectively allow a preferred stockholder to sell the entire company to a third party without board
involvement, are quite common. A similar but stronger provision requires the forced sale of the
company to the preferred stockholder.”).
44
But that is not this case. The Petitioners were sophisticated and informed investors,
represented by counsel, that used their bargaining power to negotiate a waiver of their
appraisal rights in exchange for valuable consideration.180 The Petitioners were also the
sole stockholders of the predecessor entity—Authentix, Inc.—before Carlyle entered the
picture and were therefore insiders for the purpose of negotiating the Stockholders
Agreement.181 There is no suggestion that Carlyle coerced the Petitioners into waiving their
appraisal rights, that the Petitioners did not know that the Stockholders Agreement
contained the Refrain Obligation, or that Carlyle had any secret knowledge when it
negotiated the Stockholders Agreement. Stated differently, the Petitioners were
sophisticated insiders with access to all the information that they could need to understand
the Refrain Obligation’s value and cost. These capable investors do not need protection of
the courts to escape a bad bargain.
Similarly, allowing Authentix to enforce the Refrain Obligation against the
Petitioners does not raise the concerns about a lack of consent that might be present had the
board or a subset of stockholders adopted the Refrain Obligation, or if Authentix was trying
to enforce a contract of adhesion against a stockholder that lacked bargaining power.
Authentix is seeking to enforce the Refrain Obligation against stockholders that specifically
assented to the Stockholders Agreement. Those stockholders were represented by counsel
180
Manti II, 2019 WL 3814453, at *2.
181
J.A. 1601-04.
45
and had negotiating leverage. There is no basis to question that the Petitioners freely and
knowingly consented to waive their appraisal rights in exchange for valuable consideration.
Finally, throughout their papers, the Petitioners frame the Refrain Obligation as
something that Authentix imposed upon its stockholders.182 This framing is inaccurate. The
Refrain Obligation is not a performance obligation that Authentix unilaterally foisted upon
the Petitioners. The Refrain Obligation is a concession that the Petitioners voluntarily
agreed to make in exchange for obtaining valuable funding from Carlyle. Thus, this case is
about whether sophisticated and informed parties, represented by counsel and with the
benefit of bargaining power, can freely agree to alienate their appraisal rights ex ante in
exchange for valuable consideration. The answer to that question is yes.
The Petitioners warn that this holding will have broad and negative implications,
effectively rendering all provisions of the DGCL permissive and endorsing waivers of other
stockholder rights that may be fundamental to the corporate form.183 Allowing Authentix
182
See, e.g., Opening Br. 4 (“This is not a question of a knowing waiver in the face of a live
transaction, nor a question of what stockholders can do to each other by private agreement; it is a
question of corporate authority and what corporations can do to their own stockholders.”); id. at
36 (“There is no authority in the DGCL or case law for a corporation to modify stockholder rights
. . . simply by putting the modification in a stockholders agreement . . . and not denominating it a
‘certificate’ . . . in order to circumvent the Delaware corporate hierarchy.”); id. at 45 (“There is
no authority for a Delaware corporation to enter into and enforce a stockholders agreement for its
own benefit and against its own stockholders . . . .”).
183
See, e.g., Opening Br. 37 (“Under the trial court’s approach, whether a provision of the DGCL
is mandatory or permissive is irrelevant so long as the corporation acts by separate agreement.
By that logic, a corporation could enter into an agreement with all stockholders entitled
‘Governing Agreement (Charter Disclaimed) Among Corporation and Stockholders’ and each
stockholder signatory would be bound to abide by its terms, even if it disclaimed all mandatory
provisions of the DGCL.”).
46
to enforce this Refrain Obligation against these Petitioners does not mean that all ex ante
waivers of appraisal rights are enforceable or that the waiver of any other stockholder right
would be enforceable. To the contrary, there are other contexts where an ex ante waiver of
appraisal rights would be unenforceable for public policy reasons.
Similarly, there may be other stockholder rights that are so fundamental to the
corporate form that they cannot be waived ex ante, such as certain rights designed to police
corporate misconduct or to preserve the ability of stockholders to participate in corporate
governance. Allowing Authentix to enforce the Refrain Obligation against the Petitioners
does not mean that the ex ante waiver of all other stockholder rights would be enforceable.
The Petitioners have failed to identify policy concerns that would justify stopping
Authentix from enforcing the Refrain Obligation against the Petitioners under the facts of
this case.
4. Delaware corporations can enforce stockholders agreements
Section 218(c) authorizes “2 or more stockholders” of a Delaware corporation to
form a voting agreement:
An agreement between 2 or more stockholders, if in
writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall be
voted as provided by the agreement, or as the parties may agree,
or as determined in accordance with a procedure agreed upon
by them.
47
The Petitioners argue that because Section 218(c) only mentions “stockholders,” it
does not authorize corporations to enter into a voting agreement.184 Noting that there was
uncertainty about whether stockholders agreements were enforceable under common law,
the Petitioners claim that Authentix cannot enforce the Stockholders Agreement because the
General Assembly did not authorize corporations to enforce such agreements.185
This argument misses the mark for several reasons. First, the uncertainty under the
common law was about whether voting trusts were illegal because they separated
ownership from voting rights.186 The Stockholders Agreement does not assign voting rights
to someone other than the stock’s owner. Rather, it is an agreement between stockholders
to vote their shares consistent with terms to which the parties mutually agreed.187 Thus, the
Stockholders Agreement lacks the fundamental characteristic that raised doubts about
whether voting trusts were enforceable under common law.
Additionally, nothing in the language of Section 218 prohibits corporations from
entering into stockholders agreements. Forming contracts is a core corporate power.188
184
Opening Br. 41-45.
185
Id.
186
See, e.g., Oceanic Expl. Co. v. Grynberg, 428 A.2d 1, 6-7 (noting that the separation of
ownership from voting rights is both the defining feature of a voting trust and the characteristic
that cast doubt on whether such agreements are enforceable).
187
See, e.g., J.A. 73-74, at § 3(e) (imposing restrictions on the minority stockholders to vote their
own shares consistent with the terms of the Stockholders Agreement).
188
See, e.g., 8 Del. C. § 122(13) (authorizing corporations to “[m]ake contracts”).
48
Thus, given Delaware’s public policy respecting private ordering,189 the Petitioners have
failed to provide a strong reason for this Court to construe Section 218 to prohibit
corporations from entering into a stockholders agreement drafted and negotiated by
sophisticated stockholders represented by counsel. Things might be different if, for
example, a corporation’s board or officers used a stockholders agreement to perpetuate
themselves in office. But that concern is not present here.190
Accordingly, this Court affirms the Court of Chancery’s holding that Section 218
does not prohibit a Delaware corporation from enforcing a stockholders agreement.
189
See, e.g., Salzberg, 227 A.3d at 116 (“At its core, the [DGCL] is a broad enabling act which
leaves latitude for substantial private ordering, provided the statutory parameters and judicially
imposed principles of fiduciary duty are honored.” (quoting Williams, 671 A.2d at 1381)).
190
For the same reasons, the Court of Chancery’s opinion in Insituform of North America v.
Chandler is inapposite. 534 A.2d 257 (Del. Ch. 1987). In Insituform, the court suggested that
corporations might not have standing to contest an election under DGCL Section 225 because the
statute—as it was written at that time—did not expressly grant corporations standing. Id. at 270,
n.11; see Del. S.B. 244, 144th Gen. Assem., 2008 Delaware Laws Ch. 252 (amending
Section 225 to expressly confer standing upon corporations). The court’s concern seems to have
been based, however, on the public policy concerns underlying DGCL Section 160(c), which
prohibits a corporation from voting its own stock in an effort to “prevent those in control of a
corporation from using corporate resources to perpetuate themselves in office.” Insituform,
534 A.2d at 270, n.12 (citing Speiser v. Baker, 525 A.2d 1001 (Del. Ch. 1987)). That concern is
not present here because enforcing the Refrain Obligation did not allow any directors to
perpetuate themselves in office. To the contrary, the merger agreement allowed an outsider to
gain control of Authentix. See, e.g., Manti II, 2020 WL 4596838, at *1 (noting that the 2017
merger sold Authentix to a third-party). Additionally, the General Assembly did not need to list
corporations in Section 218 to grant corporations the authority to enforce a stockholders
agreement. DGCL Section 122(13) already grants corporations with the power to form and
enforce contracts.
49
C. The Court of Chancery Did Not Abuse Its Discretion by Awarding the
Petitioners Equitable Interest on the Merger Consideration
The Court of Chancery awarded the Petitioners equitable interest on their portion of
the merger consideration.191 The court explained that because the Appraisal Petition raised
several novel questions of corporate law, Authentix was able to hold onto funds belonging
to the Petitioners for a long period of time while the court resolved the dispute.192 Thus, the
court found that equity required awarding the Petitioners interest at the statutory rate, but
based on the court’s equitable power to fashion an appropriate remedy:
The Petitioners were stockholders in an entity. Through the
2017 Merger, the merger consideration became available to the
Petitioners. Nonetheless, they had significant questions
regarding their contractual and statutory rights, and in good
faith tested those rights by filing an appraisal petition. The
litigation required the resolution of several novel issues at the
intersection of contract and corporate law and has been lengthy.
The equities of the situation are this: the Petitioners
were stripped of their stock and entitled to consideration
therefore from the time of the 2017 Merger. These funds of the
Petitioners have been held by [Authentix] for the duration of
this now-lengthy action. It would, to my mind, be inequitable
not to award interest on that amount. It is within this Court’s
discretion to award such interest. Therefore, and regardless of
whether 8 Del. C. § 262(h) applies, I find that interest at the
legal rate applies to the 2017 merger consideration from the
date of the merger.193
191
Manti III, 2020 WL 4596838, at *10
192
Id.193
Id. (citations omitted) (formatting altered).
50
Authentix argues that the Court of Chancery erred by awarding the Petitioners
interest on the merger consideration because they “did not assert a claim to the merger
consideration in any pleading.”194 Authentix claims that “[w]ithout the benefit of legal
pleadings . . . [it] had no notice as to whether [the] Petitioners were seeking an award of the
merger consideration on legal or equitable grounds.”195 Further, Authentix argues that the
award of interest was contrary to the provision of the merger agreement stating that the
cancelled stock “shall be . . . converted . . . into . . . the merger consideration . . . without any
interest thereon . . . .”196 Finally, Authentix argues that there was no equitable basis to award
interest because the Petitioners caused their own misfortune by filing the Appraisal Petition
instead of accepting the merger consideration, and that Authentix did not benefit from
holding the funds belonging to the Petitioners because those funds were deposited in a non-
interest-bearing account.
The Petitioners raise several arguments in defense of the Court of Chancery’s
analysis. For example, the Petitioners claim that they did not need to plead a claim for the
merger consideration to provide adequate notice because Authentix asked the court to
“direct [the] Petitioners to . . . accept the Merger consideration for [their] shares . . . .”197
The Petitioners also argue that they were entitled to interest as a matter of right because they
194
Answering Br. 53.
195
Id. at 54.
196
J.A. 506, at § 3.8.
197
J.A. 154.
51
were entitled to receive the merger consideration, and that Delaware courts have used their
equitable powers to award interest under similar circumstances where a stockholder failed
to perfect its appraisal claim and was therefore forced to settle for the amount of the merger
consideration.
This Court reviews for abuse of discretion the Court of Chancery’s award of
equitable interest.198 The Court of Chancery has broad equitable authority to award pre-
judgment interest, including to a party that did not prevail in the litigation.199 The “court
may grant such relief as the facts of a particular case may require even if the prevailing party
has not demanded such relief in its pleadings.”200 On at least one occasion, the Court of
Chancery has suggested that a stockholder could receive equitable interest on merger
consideration despite failing to perfect its appraisal claim.201
198
See, e.g., Boush, 1998 WL 40220, at *2 (“[W]e review the [Court of Chancery’s] decision to
award . . . equitable interest . . . for abuse of discretion.” (citing Shell Petroleum, Inc. v. Smith,
606 A.2d 112, 117 (Del. 1992))).
199
See, e.g., Hayward v. Green, 88 A.2d 806, 810-13 (Del. 1952) (affirming the Court of
Chancery’s equitable award of interest to the defendant, who was not the prevailing party at trial
and did not have a contractual right to interest); ReCor Med., Inc. v. Warnking, 2015 WL 535626,
at *1 (Del. Ch. Jan. 30, 2015) (“The Court [of Chancery] ‘has broad discretion, subject to
principles of fairness’ in awarding interest.” (quoting Valeant Pharms. Int’l v. Jerney, 921 A.2d
732, 756 (Del. Ch. 2007))).
200
Boush v. Hodges, 705 A.2d 242, 1998 WL 40220, at *2 (Del. Jan. 15, 1998) (TABLE) (first
citing Ch. Ct. R. 54(c); and then citing Weinberger v. UOP, Inc., 457 A.2d 701, 714 (1983)).
201
See Mehta v. Smurfit-Stone Container Corp., 2014 WL 5438534, at *6 (Del. Ch. Oct. 20,
2014) (opining that despite the stockholders’ failure to perfect their appraisal claim, “[t]he remedy
for [the defendant’s] failure to pay the cash portion [of the merger consideration] is relatively
straightforward: damages equal to the amount of the cash portion plus an award of pre- and post-
judgment interest running from . . ., the day after the 120-day [appraisal petition] filing period
ran, until the date of payment.” (emphasis added)); see also Brandywine Smyrna, Inc. v.
Millennium Builders, LLC, 34 A.3d 482, 485 (Del. 2011) (“[I]nterest is awarded in Delaware as
a matter of right and not of judicial discretion.” (quoting Moskowitz v. Mayor and Council of
52
Although we might reach a different result on de novo review, this Court holds that
the Court of Chancery did not abuse its discretion by awarding the Petitioners equitable
interest on the merger consideration. As noted above, the Court of Chancery has broad
discretion to fashion an appropriate remedy. Regardless of whether the Petitioners pled a
claim for the merger consideration in the alternative, Authentix recommended that the Court
resolve the Appraisal Petition by ordering the Petitioners to accept the merger consideration.
This suggestion raised the question of whether the Petitioners should receive interest on
their portion of the merger consideration. And the Petitioners could not accept the merger
consideration until the court decided the many novel issues of corporate and contractual law
the Appraisal Petition raised. Finally, although the merger consideration was deposited in a
non-interest-bearing account, the fact remains that the Petitioners were deprived of the
beneficial use of their property for an extended period of time to resolve a dispute regarding
a merger agreement to which they did not agree, and that Authentix—along with Carlyle
and the acquirer—had the power to choose and control where the funds belonging to the
Petitioners were deposited. Given the totality of these circumstances, the Court of Chancery
did not abuse its discretion by holding that fairness required awarding the Petitioners interest
on their portion of the merger consideration.
Wilm., 391 A.2d 209, 210 (Del. 1978)); Boush v. Hodges, 705 A.2d 243, 1998 WL 40220, at
*2 (Del. Jan. 15, 1998) (“The law is that where a court of equity in its sound discretion finds that
justice requires interest, it is the duty of that court to allow interest.” (quoting Hayward v. Green,
88 A.2d 806, 810 (1952)).
53
D. The Court of Chancery Properly Denied Authentix’s Request for Pre-
Judgment Interest on Attorneys’ Fees
Under Section 13(i) of the Stockholders Agreement, the prevailing party in litigation
“involving the . . . enforcement of the rights or obligations of the Parties” has the right to
recover reasonable attorneys’ fees and expenses (the “Fee-Shifting Provision”):
(i) Attorney’s Fees. In the event of any litigation or
other legal proceeding involving the interpretation of this
Agreement or enforcement of the rights or obligations of the
Parties, the prevailing Party or Parties shall be entitled to
recover reasonable attorney’s fees and expenses in addition to
any other available remedy.202
The Court of Chancery held that Authentix could recover fees under the Fee-Shifting
Provision but was not entitled to pre-judgment interest.203 Authentix argues that this holding
was erroneous because it was wrongfully deprived of the beneficial use of the funds it spent
to defend against the Appraisal Petition before the Court of Chancery granted summary
judgment against the Petitioners.204 Authentix also argues that it was inappropriate to award
the losing party interest on the merger consideration while denying the prevailing party
interest on the attorneys’ fees owed under the Fee-Shifting Provision.205
The Court of Chancery properly rejected Authentix’s request for pre-judgment
interest. Under the plain language of the Fee-Shifting Provision, the Petitioners were not
202
J.A. 91, at § 13(i).
203
Manti III, 2020 WL 4596838, at *5-9.
204
Answering Br. 57-59.
205
Id.54
liable for attorneys’ fees unless and until Authentix became the prevailing party.206
Authentix became the prevailing party when the Court of Chancery granted summary
judgment against the Petitioners, and nothing in the Fee-Shifting Provision allowed for pre-
judgment interest. Thus, Authentix is asking for an award of pre-judgment interest under a
contractual provision that does not provide that remedy.
The language in the Fee-Shifting Provision preserving “any other available remedy”
does not change the analysis.207 Apart from enforcing the Fee-Shifting Provision, Authentix
does not claim that it has another path to recovering its attorneys’ fees. And for the reasons
provided above, the Petitioners could not have breached the Fee-Shifting Provision before
the Court of Chancery dismissed the Appraisal Petition. The case law Authentix cites is
inapposite for the same reason. In each of those cases, pre-judgment interest was owed
because the obligation to indemnify arose before the party seeking fees became the
prevailing party,208 or the court awarded pre-judgment interest to a party that prevailed on
its affirmative claim.209 This is not true of the Fee-Shifting Provision, and the Court is
unwilling to add language to which the parties did not agree.
206
See J.A. 91, at § 13(i).
207
See id.
208
See, e.g., Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316, at *19
(Del. Ch. May 30, 2008) (“A party seeking advancement is entitled to interest from the date on
which the party ‘specified the amount of reimbursement demanded and produced his written
promise to pay.’” (quoting Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 826 n. 10 (Del. 1992)).
209
See, e.g., Trans World Airlines Inc. v. Summa Corp., 1987 WL 5778, at *1 (Del. Ch. Jan. 21,
1987), aff’d, 540 A.2d 403 (Del. 1988) (awarding the plaintiff pre-judgment interest after the
plaintiff prevailed at trial).
55
Finally, the Court rejects Authentix’s disparate treatment argument. Whether the
Petitioners were entitled to equitable interest on their portion of the merger consideration
has no bearing on whether Authentix had a contractual right to pre-judgment interest under
the Fee-Shifting Provision. The former is a question of the Court of Chancery’s broad
equitable power to fashion an appropriate remedy. The latter is a question of the objective
intent of the bargain the parties struck. These are separate issues. Accordingly, this Court
affirms the Court of Chancery’s holding that the plain meaning of the Fee-Shifting Provision
did not grant Authentix pre-judgment interest on its attorneys’ fees.
IV. CONCLUSION
For the reasons provided above, the Court affirms the Court of Chancery’s judgment.
56
VALIHURA, J., dissenting:
Appellants/Cross-Appellees Manti Holdings, LLC, and other common
stockholders (collectively, “Petitioners”) in the predecessor entity to Appellee/Cross-
Appellant Authentix Acquisition Co. (“Authentix”) sought appraisal. The parties do not
dispute that the merger is one that would give rise to statutory appraisal rights, nor that
Petitioners took those actions necessary to perfect appraisal rights. Instead, the Court of
Chancery found that the appraisal remedy was unavailable because a stockholders
agreement (the “Stockholders Agreement”) obligated Petitioners to refrain from seeking
it. From that conclusion, the trial court held that the contractual obligation barred the
appraisal remedy.
To reach this holding, the trial court necessarily had to find that pursuing the
appraisal remedy would breach a provision of the Stockholders Agreement and that the
provision at issue is enforceable. The second of these inquiries -- whether a stockholders
agreement preemptively waiving appraisal rights ex ante and which binds all of its
stockholders and governs all of its stock is enforceable under the DGCL -- is a difficult
and important question of Delaware corporate law.1 Recognizing the importance of the
inquiry, the Court of Chancery issued a second opinion in response to Petitioners’ Motion
for Reargument expounding on that single question. The Court of Chancery’s holding is
1
Petitioners point out that “whether a stockholder can waive a mandatory right in connection with
a specific transaction -- i.e., a ‘knowing’ waiver or relinquishment -- is not the issue here. The
issue is whether such rights can be eliminated ex ante.” Op. Br. at 32. They emphasize that
“[t]his is not a question of a knowing waiver in the face of a live transaction; nor a question of
what stockholders can do to each other by private agreement; it is a question of corporate authority
and what corporations can do to their own stockholders.” Op. Br. at 4. I agree.
57
significant because it is the first time a Delaware court has held that a contractual provision
in a stockholders agreement barring common stockholders from exercising their statutory
appraisal rights under 8 Del. C. § 262 is enforceable as a matter of law.2
The Court of Chancery held in In re Appraisal of Ford Holdings, Inc. Preferred
Stock3 that the appraisal right set forth in Section 262 is “mandatory.”4 Nevertheless, it
also held that the fair value of preferred stock could be set by contract.5 But Chancellor
Allen was careful to caution that “preferred stock is a very special case.”6 The Court of
Chancery specifically addressed only “whether purchasers of preferred stock can, in
effect, contract away their rights to seek judicial determination of the fair value of their
stock, by accepting a security that explicitly provides either a stated amount or a formula
by which an amount to be received in the event of a merger is set forth.”7 I submit that
the setting of the value in a certificate of designations is not truly a waiver of Section 262
rights, but rather, “the amount so fixed or determined constitutes the ‘fair value’ of the
stock for the purposes of dissenters’ rights under Section 262.”8
2
Manti Holdings, LLC v. Authentix Acq. Co. (Manti I), 2018 WL 4698255, at *1–2 (Del. Ch. Oct.
1, 2018).
3
698 A.2d 973 (Del. Ch. 1997).
4
Id. at 976.
5
Id. at 977 (“All of the characteristics of the preferred are open for negotiation; that is the nature
of the security.”).
6
Id. (“[P]referred stock is a very special case . . .. To the extent it possesses any special rights
or powers and to the extent it is restricted or limited in any way, the relation between the holder
of the preferred and the corporation is contractual.”).
7
Id. at 976.
8
Id. at 974. See also Shiftan v. Morgan Joseph Holdings, Inc., 57 A.3d 928, 942 (Del. Ch. 2012)
(“As a general rule, preferred stock has the same appraisal rights as common stock, but ‘[u]nlike
58
The Majority opinion affirming the Court of Chancery’s decision in this case
allowing for modification of statutory governance rights ex ante in a stockholders
agreement gives me pause. I will set forth three reasons for my concern.
I. The Stockholders Agreement Fails to Clearly and Unambiguously Indicate
the Refrain Objection Survives Termination.
First, I do not think the Stockholders Agreement has the requisite clarity to
effectuate such a waiver. I leave aside for the moment the question of whether an ex ante
waiver of appraisal rights via a stockholders agreement is enforceable as a matter of
Delaware statutory law and public policy. Even if such a provision were legally
permissible and not violative of public policy, such a waiver would need to be
unequivocally and unquestionably clear.9 Waivers of statutory provisions must also be
common stock, the value of preferred stock is determined solely from the contract rights conferred
upon it in the certificate of designation.’ Therefore, when determining the fair value of preferred
stock, the court must consider the contract upon which the preferred stock’s value was based.”)
(alteration in original) (footnote omitted) (quoting In re Appraisal of Metromedia Int’l Grp., 971
A.2d 893, 900 (Del. Ch. 2009), modified on other grounds after rearg., 2009 WL 1509182 (Del.
Ch. May 28, 2009)); id. at 932 (“In the case of an appraisal of preferred stock, therefore, the court
must look at the contract rights granted to the shares being appraised under the relevant certificate
of incorporation or designation in determining fair value.”).
9
See, e.g., Dirienzo v. Steel P’rs Holdgs. L.P., 2009 WL 4652944, at *4 (Del. Ch. Dec. 8, 2009)
(“A waiver may be express or implied, but either way, it must be unequivocal.”) (citing Rose v.
Cadillac Fairview Shopping Ctr. Props. (Del.) Inc., 668 A.2d 782, 786 n.1 (Del. Super. 1995));
see also Bantum v. New Castle Cty. Vo-Tech Educ. Ass’n, 21 A.3d 44, 50 (Del. 2011) (“‘the facts
relied upon to prove waiver must be unequivocal’”) (alteration omitted) (quoting AeroGlobal
Cap. Mgmt., LLC v. Cirrus Indus. Inc., 871 A.2d 428, 444 (Del. 2005)). In Ford Holdings,
Chancellor Allen recognized that, absent “[c]lear and direct drafting,” in a case involving
appraisal rights for preferred shareholders, “the court may not cut stockholders off from a
statutory right.” 698 A.2d at 979.
59
unambiguous.10 If language is susceptible to more than one reasonable interpretation, then
it is ambiguous.11 It follows that our interpretive canons require that waivers of statutory
rights, if they are valid at all, be strictly construed.12
The Refrain Obligation does not satisfy these high bars. For one thing, the Refrain
Obligation conflicts with the Termination Provision. Section 3(e) of the Stockholders
Agreement sets forth the Refrain Obligation. That section reads, in relevant part:
[I]n the event that . . . a Company Sale is approved by the Board and . . . the
Carlyle Majority, each Other Holder shall consent to and raise no objections
against such transaction, and if any such transaction is structured as a sale
of Equity Securities, each Other Holder shall take all actions that the Board
and/or the applicable Carlyle Stockholders reasonably deem necessary or
desirable in connection with the consummation of such transaction. . .
[w]ithout limiting the generality of the foregoing, each Other Holder agrees
that he, she or it shall (i) consent to and raise no objections against such
transaction; . . . and (iv) refrain from the exercise of appraisal rights with
respect to such transaction. . ..13
10
See, e.g., Halpin v. Riverstone Nat’l. Inc., 2015 WL 854724, at *8 (Del. Ch. Feb. 26, 2015) (“A
contractual waiver of a statutory right, where permitted, is effective only to the extent clearly set
forth in the parties’ contract.”).
11
Sunline Com. Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 847 (Del. 2019) (citing
Kaiser Alum. Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996)).
12
See, e.g., Juul Labs, Inc. v. Grove, 238 A.3d 904, 911 (Del. Ch. 2020) (a putative waiver of
inspection rights, if ambiguous, “would be ineffective because it would not be expressed clearly
and affirmatively, which is the standard for waiver of a statutory right”); Metromedia, 971 A.2d
at 900 (“in the case of unclear or indirect drafting, [the Court of Chancery] will not cut
stockholders off from a statutory right to judicial appraisal of their preferred shares”) (quotation
omitted); Kortum v. Webasto Sunroofs Inc., 769 A.2d 113, 125 (Del. Ch. 2000) (“There can be
no waiver of a statutory right unless that waiver is clearly and affirmatively expressed in the
relevant document.”).
13
JA73–74 (Stockholders Agreement § 3(e)).
60
However, Section 12 of the Agreement sets forth a Termination provision.
Pursuant to this provision, all rights and obligations (including Section 3) terminate if and
when a Company Sale is consummated. The Termination Provision states:
This Agreement, and the respective rights and obligations of the Parties,
shall terminate upon the earlier of the[:]
(a) consummation of a Company Sale[;] and
(b) execution of a written agreement of each Party
(other than the Management Holders who are not also
Rollover Stockholders or Reinvesting Stockholders) to
terminate this Agreement;
[P]rovided, however, that Section 2, 3, 4, 6, 7, 8 and 9
hereof shall terminate upon the closing of an IPO.14
It is not disputed that the merger at issue was a Company Sale. The threshold
requirements for invoking the Refrain Obligation were met. In this case, Authentix chose
to proceed with a merger by consent in lieu of a stockholder vote. The Board vote and
shareholder consent approving and consummating the merger both occurred on September
13, 2017. That consummation triggered Section 12’s termination provision. In this
scenario, pursuant to 8 Del. C. § 262(d)(2), every action Petitioners took to seek and
perfect their appraisal rights occurred after the closing of the merger. The question is not
whether the Stockholders Agreement unequivocally and unambiguously bound
Petitioners not to file an appraisal petition. The question is whether that obligation
survived termination upon consummation of the Company Sale.
14
JA89 (Stockholders Agreement § 12) (formatting added).
61
Notably, the parties here chose not to include a savings clause that would have
allowed for survival of the Refrain Obligation. Such savings clauses are common. In fact,
the NVCA Model Agreement, provided to this Court by the parties in their Joint
Appendix, contains such a provision. It states:
Term. This Agreement shall be effective as of the date hereof and shall
continue in effect until and shall terminate upon the earliest to occur of (a)
the consummation of the Company’s first underwritten public offering of its
Common Stock (other than a registration statement relating either to the sale
of securities to employees of the Company pursuant to its stock option, stock
purchase or similar plan or an SEC Rule 145 transaction); (b) the
consummation of a Sale of the Company and distribution of proceeds to or
escrow for the benefit of the Stockholders in accordance with the Restated
Certificate, provided that the provisions of Section 3 hereof will continue
after the closing of any Sale of the Company to the extent necessary to
enforce the provisions of Section 3 with respect to such Sale of the Company;
(c) termination of this Agreement in accordance with Section 7.8 below [;
and (d) , 20 ].15
Section 3(e) in the Stockholders Agreement likewise contrasts with the language
in the Model Agreement. In the Model Agreement, that section provides that “each
Stockholder and the Company hereby agree:. . . to refrain from (i) exercising any
dissenters’ rights or rights of appraisal under applicable law at any time with respect to
such Sale of the Company. . . .”16 The Model Agreement specifically calls attention to the
Riverstone decision and explains how the controlling stockholder’s decision in that case
to approve the merger by consent terminated the agreement and thereby enabled the
15
JA1322–1323 (NCVA Model Agreement § 6).
16
JA1315–16 (NCVA Model Agreement § 3.2(e)) (emphasis added).
62
minority shareholders to pursue appraisal rights.17 It explicitly advises parties to include
express language closing this window.18
Nor was the Termination Provision the only place where such a savings clause
could have occurred. Elsewhere in the Stockholders Agreement, the parties inserted
language into contractual clauses specifying that certain provisions would survive
termination.19 They did not include any such language in Section 3(e).
17
JA1316 (NCVA Model Agreement n.16); see Riverstone, 2015 WL 854724, at *8–10.
18
This footnote in the Model Agreement submitted by the parties in the Joint Appendix bears
quoting in full:
An express waiver of appraisal rights is particularly important in light of the
Delaware Chancery Court’s ruling in Riverstone National Inc. v. Caplan et.al, Case
No. C.A. 9796-NVCG (Del. Ch. Ct. Feb. 26, 2015). In Riverstone, a corporation’s
91% controlling stockholder approved a merger of the corporation by written
consent. When a group of minority stockholders sought statutory appraisal rights,
the controlling stockholder purported to exercise drag-along rights contained in a
stockholders agreement signed by the minority stockholders that contained an
agreement to vote their shares in favor of the merger, but not an express waiver of
appraisal rights. The Court ruled that because the drag-along in question was
limited to a voting agreement (which if enforced would have resulted in a waiver
of appraisal rights), the drag along was only operative and enforceable prior to the
merger’s becoming effective. Once the merger was effective, the voting agreement
had terminated, the minority stockholders who had not voted in favor of the merger
were no longer obligated to vote and thus could exercise their appraisal rights.
Importantly, the Court did not decide whether common stockholders can waive
statutory appraisal rights in advance through a contractual drag-along provision so
the efficacy of this provision is not certain. Including it, however, provides an
argument that appraisal rights have been extinguished even if the drag-along and
related voting agreement are not implemented in connection with a merger.
JA1316 1316 (NCVA Model Agreement n.16) (emphasis added).
19
JA88 (Stockholders Agreement § 10(h)) (dealing with contribution and indemnification
provisions, “The obligations of the Company and the Registering Stockholders under this Section
10 shall survive the completion of any offering of Registrable Common Stock in a registration
statement, including the termination of this Agreement.”) (underline in original).
63
The Court of Chancery made much of the fact that the parties to the Stockholders
Agreement were sophisticated.20 The parties were obviously familiar with such savings
clauses. Authentix, simply put, did not negotiate for an express term specifying that the
Refrain Obligation survived termination despite the parties demonstrating a clear
understanding of how to craft such a provision.21
Nor does the language of Section 3(e) render such a continuing obligation implicit.
Words should be given their “plain, ordinary meaning.”22 Refrain is not a technical word
of the legal profession.23 As a question of ordinary language, to refrain from an act tends
to imply a forbearance that is temporary or conditional rather than permanent.24 Indeed,
the Court of Chancery noted an example of refrain used lyrically in precisely this
20
Manti Holdings, LLC v. Authentix Acq. Co. (Manti III), 2020 WL 4596838, at *2 (Del. Ch.
Aug. 11, 2020) (“there is no record evidence that the Petitioners were not fully informed; to the
contrary, there is evidence that the Petitioners are sophisticated investors who were fully informed
and represented by counsel when they signed the [Stockholders Agreement], under which they
obtained some rights and relinquished others.”).
21
Metromedia, 971 A.2d at 900 (“[I]n the case of unclear or indirect drafting, this Court will not
cut stockholders off from a statutory right to judicial appraisal of their preferred shares.”).
22
Alta Berkeley VI C.V. v. Omneon Inc., 41 A.3d 381, 385 (Del. 2012).
23
There is no entry for “refrain” in BLACK’S LAW DICTIONARY (11th ed. 2019); nor
BALLENTINE’S LAW DICTIONARY (3d ed. 1969); nor BOUVIER LAW DICTIONARY DESK EDITION
(2012).
24
See Refrain, WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE,
1909 (2002) (distinguishing refrain from its synonyms by explaining “REFRAIN is more suitable
than ABSTAIN or FORBEAR to indicate checking or inhibiting an inclination or impulse, especially
a momentary or passing one”); see also “Refrain,” MERRIAM-WEBSTER ONLINE DICTIONARY, (“to
keep oneself from doing, feeling, or indulging in something and especially from following a
passing impulse”) (emphasis added), https://www.merriam-webster.com/dictionary/refrain.
64
transitory sense in popular music.25 “Refrain” in that sense implies continuation of the
right and its later availability when the requirement to refrain has passed.
“Waive,” by contrast, is a word implying greater permanence.26 This distinction is
especially true in the legal profession, where practitioners well-recognize the longstanding
technical definition of waiver, “an intentional relinquishment or abandonment of a known
right or privilege.”27 That definition is so well-established28 as to be recognized in lay
dictionaries.29 Nor must the Court rely on inference to know that the sophisticated parties
25
See Manti I, 2018 WL 4698255, at *3 n.16 (citing Arlo Guthrie, City of New Orleans (Reprise
Records 1972) and remarking that “[t]he Petitioners make a valiant attempt to freight the term
‘refrain’ with more ambiguity than anyone since Arlo Guthrie.”). Steve Goodman wrote the song,
later popularized by Guthrie, about and while aboard the eponymous Chicago-to-New Orleans
passenger rail route. See generally, Craig Sanders, Writing of City of New Orleans, TRAINS, Sept.
2017, at 34–39 (describing the history of the song and its many covers by other musicians),
https://www.trains.com/trn/magazine/archive-access/trains-september-2017/. The relevant lyric,
“the passengers will please refrain” references signage on passenger rail lavatories which
commonly instructed passengers to “refrain from flushing toilets while the train is standing in the
station.” Jack Smith, Train Sign Fits an Old Song in a Fine Meter, LOS ANGELES TIMES, Sept.
10, 1987 (emphasis added), https://www.latimes.com/archives/la-xpm-1987-09-10-vw-6928-
story.html. Far from being an ambiguous lyric, refrain in this context only makes sense as a
transitory obligation that lapses once the circumstance giving rise to the obligation ceases to
apply. In other words, once the merger closed, the train had left the station so to speak, and the
obligation to refrain no longer applied.
26
See Waiver, 2 BOUVIER LAW DICTIONARY DESK EDITION, 2970 (2012) (“Waiver is an act by
which a person or entity holding a right, privilege, claim, or any other interest in law or equity
that may be asserted or defended in any forum elects not to assert it or defend it, electing not to
do so in some manner that makes the election final.”) (emphasis added).
27
Johnson v. Zerbst, 304 U.S. 458, 464 (1938).
28
E.g., College Sav. Bank v. Fl. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 682
(1999) (quoting Johnson, 304 U.S. at 464); Minnick v. Mississippi, 498 U.S. 146, 159 (1990)
(same); Pellaton v. Bank of New York, 592 A.2d 473, 46 (Del. 1991) (same); Lewis v. State, 757
A.2d 709, 714 (Del. 2000) (same).
29
See Waiver, WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE,
at 2570 (“the act of waiving or intentionally relinquishing or abandoning a known right, claim, or
privilege”). Other dictionaries do the same, e.g., Waive, MERRIAM-WEBSTER ONLINE
65
in this case parsed the distinction between “waive” versus other words of forbearance
since they used “waive” elsewhere in the Stockholders Agreement.30 The meaning of
waive has some overlap with refrain,31 but where sophisticated parties use both terms in a
single document we should assume that the usage of distinct terms was intended by the
parties and we should give that distinct usage meaning.32 Understanding the Refrain
Obligation to use refrain as a narrower restriction than waive is consistent with both
Section 3(e) and the Termination Provision, gives effect to both provisions, and defers to
the parties’ own choice of contractual language.
DICTIONARY (“to relinquish (something, such as a legal right) voluntarily”), https://www.
merriam-webster.com/dictionary/waive.
30
For example, Section 13(d) provides that “[e]ach Party waives any right to a trial by jury in any
such suit or proceedings.” A90 (emphasis added); see also id. at A81 § 10(a) (“the Carlyle
Majority may waive, on behalf of all holders of Registrable Common Stock, any right to
participate in or receive notice of any registration of Common Stock. . .”) and A88 § 10 (i)
(“Waiver of Registration Rights”).
31
See Waive, Black’s Law Dictionary (11th ed. 2019) (giving a second definition, “To refrain
from insisting on (a strict rule, formality, etc.); to forgo.”); Waive, New Oxford American
Dictionary, 1943 (3d ed. 2010) (“refrain from insisting on or using (a right or claim): he will waive
all rights to the money.”). We have likewise held that waiver “implies knowledge of all material
facts and an intent to waive, together with a willingness to refrain from enforcing those rights.”
Bantum, 21 A.3d at 50 (emphasis added). That is, waiver includes the obligation to refrain but
goes further, requiring a showing that the party specifically intended to pledge permanent rather
than temporary forbearance. The Bantum Court likewise cited the traditional definition of waiver,
“the voluntary and intentional relinquishment of a known right.” The word “relinquishment”
carries with it this same connotation of definitiveness or permanence. See Relinquishment,
WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE, at 1919 (“the
act of relinquishing : a giving up : surrender, renunciation.”); see also id. at 1918 (listing the
synonyms for “relinquish” as “LEAVE, ABANDON, WAIVE, RESIGN, CEDE, YIELD, SURRENDER.”).
32
Davis Broad. of Atlanta LLC v. Charlotte Broad., LLC, 134 A.3d 759, 2016 WL 837367, at *1
(Del. 2016) (TABLE) (when a contract used “date of filing” instead of the defined term “Filing
Date” used elsewhere in the contract, “[a]lthough not dispositive, that intentional choice must
incline the interpretative process toward giving the distinct usage meaning.”).
66
Finally, Authentix argues that applying the Termination Provision as written
renders the Refrain Obligation “a nullity” or at least “commercially unreasonable.”33 I
disagree. When a merger is subject to a vote at a meeting of stockholders, those owners
who wish to seek appraisal in lieu of merger consideration must take steps to perfect their
appraisal rights before the meeting and vote.34 Proceeding in that fashion would have
forced Stockholders either to breach their obligations prior to termination or forfeit the
opportunity to perfect their appraisal rights. Carlyle freely chose to proceed differently.35
In sum, for the Stockholders Agreement to cut off Petitioners’ statutory appraisal
rights Authentix needs to show at the very least it provides for such a derogation in
unambiguous terms and in language that is unquestionably and unequivocally clear. This
Stockholders Agreement, which unambiguously terminated before any of the complained-
of conduct, and with a savings clause for other sections but pointedly not for the Refrain
Obligation, does not do so.36 Given that there is a reasonable reading of these provisions
33
Ans. Br. at 25–26.
34
E.g., 8 Del. C. § 262(d)(1) (“If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of stockholders. . .
[e]ach stockholder electing to demand the appraisal of such stockholder's shares shall deliver to
the corporation, before the taking of the vote on the merger or consolidation, a written demand
for appraisal of such stockholder's shares. . .”).
35
See e.g., Riverstone, 2015 WL 854724, at * 10 (“Both Riverstone and the Minority Stockholders
are sophisticated parties, and both are charged with knowledge as to the various ways Riverstone
could have carried out a merger under Delaware law, including by written consent pursuant to
Section 228. Yet, with full awareness that it could consummate a merger by written consent,
without the Minority Stockholders’ knowledge or involvement, Riverstone agreed to a drag-along
rights that by their unambiguous terms did not apply to this retrospective scenario.”).
36
See O’Brien v. Progressive N. Ins. Co., 785 A.2d 281, 288 (Del. 2001) (defining an ambiguous
contract as one where “the provisions in controversy are reasonably or fairly susceptible to
67
in Petitioners’ favor, I would find the Stockholders Agreement’s unclear drafting renders
it at least ambiguous, and so not sufficiently clear to divest Petitioners of their statutory
right to appraisal. Reversal is justified on that ground alone.
But there are two more bases for reversal.
II. Appraisal Rights Are Fundamental Features of Corporate Governance, and
Modifications Should Be Permitted Only in the Corporate Charter.
The second reason to reverse the Court of Chancery is that even if the “waiver”
were sufficiently clear and unambiguous, permitting waiver of fundamental corporate
governance rights in a stockholders agreement as opposed to in the corporation’s
constitutive documents,37 is problematic. Here the issue is: to what extent can a waiver
of statutory rights be effectuated via a stockholders agreement, and what are the limiting
principles on such private ordering for Delaware corporations?
As this Court recognized in Salzberg v. Sciabacucchi,38 the DGCL allows for
substantial private ordering. We said:
[T]he DGCL allows immense freedom for businesses to adopt the most
appropriate terms for the organization, finance, and governance of their
enterprise. “At its core, the [DGCL] is a broad enabling act which leaves
latitude for substantial private ordering, provided the statutory parameters
and judicially imposed principles of fiduciary duty are honored.” In fact,
“Delaware’s corporate statute is widely regarded as the most flexible in the
nation because it leaves the parties to the corporate contract (managers and
stockholders) with great leeway to structure their relations, subject to
different interpretations or may have two or more different meanings.”) (citing Rhone–Poulenc
Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992)).
37
That is, the bylaws or, preferably, the charter.
38
227 A.3d 102 (Del. 2020).
68
relatively loose statutory constraints and to the policing of director
misconduct through equitable review.”39
In Salzberg, we considered the validity of a provision in a Delaware certificate of
incorporation requiring actions arising under the federal Securities Act of 1933 to be filed
in a federal court. We held that such a charter provision was facially valid and within the
parameters of Section 102(b)(1). But we also observed that Section 102(b)’s broad
authorization was constrained by the phrase, “if such provisions are not contrary to the
laws of this State.”40 We held that federal forum provisions “do not violate the policies or
laws of this State.”41
We further observed that although “Section 102(b)(1)’s scope was broadly
enabling,” additional limits are imposed by public policy:
First, Section 102(b)(1)’s scope is broadly enabling. For example, in Sterling
v. Mayflower Hotel Corp., this Court held that Section 102(b)(1) bars only
charter provisions that would “achieve a result forbidden by settled rules of
public policy.” Accordingly, “the stockholders of a Delaware corporation
may by contract embody in the certificate of incorporation a provision
departing from the rules of common law, provided that it does not transgress
a statutory enactment or a public policy settled by the common law or implicit
in the General Corporation Law itself.”42
Salzberg addressed private ordering through a charter provision. By contrast, the
phenomenon we address here has largely evolved in the private company realm by start-
up companies and venture capital firms who have developed a practice of using
39
Id. at 116 (citations omitted).
40
Id. at 115 (citing 8 Del. C. § 102(b)(1)).
41
Id.
42
Id. at 115–16 (emphasis added) (alteration omitted).
69
stockholder agreements to structure significant aspects of their corporation’s corporate
governance. This practice apparently has become fairly commonplace in that sector. In
fact, commentators have observed that private equity transactions for years have been
including drag-along rights that include waivers of statutory rights such as appraisal.43
The Majority is, no doubt, concerned about upsetting what has, or is becoming, an
established practice in that sector.
I appreciate that “our DGCL was intended to provide directors and stockholders
with flexibility and wide discretion for private ordering and adaption to new situations.”44
The use of stockholder agreements to (purportedly) effectuate waivers of Section 262
rights is evidence that such waivers, at least in that sector of the capital markets, may be
achieving efficiencies beneficial to the parties. But the question that this Court must
answer is whether that is a practice that is consistent with the DGCL and relevant public
policy.
Why should the use of stockholder agreements, as opposed to the corporation’s
constitutive documents, as the vehicle for effectuating such waivers matter? After all, this
Court recently has reiterated its view that private ordering through binding contracts ought
to be respected. For example, in ev3, Inc. v. Lesh, we stated that “[w]hen parties have
43
See, e.g., Drag-along Rights and Appraisal Remedies in Stockholders Agreements, PRACTICAL
LAW CORPORATE & SECURITIES (Mar. 26, 2015) (“The ability to contractually waive the appraisal
remedy has not typically been thought of as controversial. . ..”), https://1.next.westlaw.com/4-
523-5341.
44
Salzberg, 227 A.3d at 137 n.169 (“[Delaware corporations have] the broadest grant of power
in the English-speaking world to establish the most appropriate internal organization and structure
for the enterprise.”) (alteration in original) (quoting Jones Apparel Grp. v. Maxwell Shoe Co.,
Inc., 883 A.2d 837, 845 (Del. Ch. 2004)).
70
ordered their affairs voluntarily through a binding contract, Delaware law is strongly
inclined to respect their agreement and will only interfere upon a strong showing that
dishonoring the contract is required to vindicate a public policy interest even stronger than
freedom of contract.”45 And in Salzberg, we agreed that freedom of contract is a public
policy of paramount importance in Delaware.46 But again, as in ev3, Inc. and Salzberg,
we have acknowledged public policy and statutory limitations.
I believe the use of stockholder agreements to effect ex ante waivers of governance
rights of common stockholders is problematic. The Petitioners challenge the use of
stockholder agreements for effectuating such waivers and argue that the Stockholders
Agreement “operates as a de facto charter that supersedes Delaware’s hierarchical
45
114 A.3d 527, 529 n.3 (2014) (quoting Libeau v. Fox, 880 A.2d 1049, 1056–57 (Del. Ch. 2005),
aff’d in relevant part 892 A.2d 1068 (Del. 2006)). In ev3, former shareholders of an acquired
corporation sued for breach of an earn-out milestone provision, arguing that the buyer violated its
obligation to adequately fund pursuit of the milestones. Id. at 529. The contract provided that
funding would be in the buyer’s sole discretion, exercised in good faith. Id. Although the contract
also partially incorporated a letter of intent from the negotiation phase which specified that the
buyer should provide funding to pursue the milestones, the final contract included an express
clause by which the final agreement overrode contrary provisions as to funding. Id. at 529–30.
Where two contractual clauses appear to be in conflict, another clause specifying which takes
priority provides a simple mechanism for resolving the tension without resort to questions of
public policy. That circumstance contrasts with cases where a contractual clause conflicts with a
statutory right, as with the Libeau case which ev3 cited and which addressed whether a contract
had waived the statutory right to partition of real property. Libeau, 880 A.2d at 1058 (requiring
waiver “‘by clear affirmative words or actions’” for a contract to eliminate a right conferred by
statute) (citing Ford Holdings, 698 A.2d at 979).
46
See, e.g., Salzberg, 227 A.3d at 116 (“Delaware’s corporate statute . . . leaves the parties to the
corporate contract (managers and stockholders) with great leeway to structure their relations,
subject to relatively loose statutory constraints. . ..”); NAF Hldgs., LLC v. Li & Fung (Trading)
Ltd., 118 A.3d 175, 180 n.14 (Del. 2015) (“Delaware upholds the freedom of contract and
enforces as a matter of fundamental public policy the voluntary agreements of sophisticated
parties.”) (quoting NACCO Indus. v. Applica Inc., 997 A.2d 1, 35 (Del. Ch. 2009)).
71
corporate contract.”47 It is undisputed that the Stockholders Agreement bound all
outstanding shares of Authentix stock.48 Further, Section 13(b) provides that it “shall be
binding upon . . . assigns and any other transferee and shall also apply to any securities
acquired by a Holder after the date hereof.”49 Section 2 likewise purports to require that
all future transferees must execute and join the Stockholders Agreement.50 Because of
this, Petitioners argue that this arrangement is akin to a de facto charter.51 It is also
undisputed that none of the Stockholders Agreement’s restrictions and obligations at issue
is in the Company’s charter. They further argue that the decision to permit this use of a
stockholders agreement violates this hierarchy. Specifically, they contend that a
stockholder agreement (to which the corporation is a party) sits at the bottom of the
47
Op. Br. at 4. They expound further on this point:
[I]f such an agreement is enforceable stockholder-to-stockholder, permitting
creation and enforcement by the corporation itself against its own stockholders
would mean that no principled barrier would prevent a Delaware corporation from
using a separate agreement to create for itself second-class stockholders with rights
not set forth in the charter (because it would be illegal to put them in the charter).
Id. at 5 (alteration added) (emphasis in original).
48
It was binding upon all the Company’s then-stockholders at the time of its execution in 2008.
49
JA89 (Stockholders Agreement § 13(b)).
50
JA72 (Stockholders Agreement § 2).
51
Op. Br. at 4 (“If affirmed, [the Court of Chancery’s decision] would mean that a prospective
investor/controller could be offered by a corporation as an incentive -- or could demand (like
here) that a corporation obtain -- an agreement from all of the corporation’s stockholders
(enforceable by the corporation) that waives ex ante mandatory provisions of the DGCL and
operates as a de facto charter that supersedes Delaware’s hierarchical corporate contract.”)
(alteration added) (emphasis in original).
72
hierarchy. To the extent stockholder agreements are being utilized to effectuate what
would be restricted in charters and bylaws, this point has merit.52
This Court has long observed that the certificate of incorporation, together with
bylaws and the DGCL form part of a flexible contract between a corporation and its
stockholders. “The components of [the corporate] contract form a hierarchy, comprising
from top to bottom (i) the [DGCL], (ii) the certificate of incorporation, and (iii) the
bylaws.”53 “Each of the lower components of the contractual hierarchy must conform to
the higher components.”54 And “[a] bylaw that conflicts with the charter is void, as is a
bylaw or charter provision that conflicts with the DGCL.”55
Petitioners argue that ancillary agreements to which the corporation is a party are
not exempt from having to conform to this hierarchy. Support exists for that proposition.
For example, the Court of Chancery has observed that:
When evaluating corporate action for legal compliance, a court examines
whether the action contravenes the hierarchical components of the entity-
52
See, e.g., Ford Holdings, 698 A.2d at 976 (“Generally, these mandatory provisions may not be
varied by terms of the certificate of incorporation or otherwise.”) (emphasis added).
53
Sinchareonkul v. Fahnemann, 2015 WL 292314, at *6 (Del. Ch. Jan. 22, 2015).
54
Id. Thus, for example, a corporate charter can confer onto the board of directors the power to
alter the bylaws beneath it (8 Del. C. § 109(a)), but the bylaws cannot derogate the corporate
charter that sits above it (8 Del. C. § 109(b)). See, e.g., Centaur Partners IV v. Nat’l Intergroup,
Inc., 582 A.2d 923, 929 (Del. 1990) (“Where a by-law provision is in conflict with a provision of
the charter, the by-law provision is a ‘nullity.’”) (quoting Burr v. Burr Corp., 291 A.2d 409, 410
(Del. Ch. 1972)); 8 Del. C. § 109(b) (“The bylaws may contain any provision, not inconsistent
with law or with the certificate of incorporation, relating to the business of the corporation, the
conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors,
officers or employees.”) (emphasis added). Likewise, the DGCL and all of its amendments “shall
be a part of the charter or certificate of every corporation,” and thus the General Assembly through
its power to amend the DGCL sits at the top of the hierarchy. 8 Del. C. § 394.
55
Sinchareonkul, 2015 WL 292314, at *6.
73
specific corporate contract, comprising (i) the Delaware General Corporation
Law, (ii) the corporation’s charter, (iii) its bylaws, and (iv) other entity-
specific contractual agreements, such as a stock option plan, other equity
compensation plan, or, as to the parties to it, a stockholder agreement.56
In addition to case law support, I note that the General Assembly has expressly
indicated when certain actions not permitted to be taken in charters may be effectuated in
stockholders agreements. For example, Section 115 of the DGCL deals with forum
selection clauses for internal corporate claims, and specifies that “no provision of the
certificate of incorporation or the bylaws may prohibit bringing such claims in the courts
of this State.”57 The synopsis of the bill enacting Section 115 expressly provides that
“Section 115 is not intended . . . to prevent any such provision in a stockholders agreement
. . . signed by the stockholder against whom the provision is to be enacted.”58
There are some valid policy concerns with using stockholder agreements to effect
ex ante waivers of appraisal rights for common stockholders. For example, some
commentators have pointed out the dangers of “stealth governance” and have argued that
“using shareholder agreements for corporate governance . . . sacrifices critical corporate
56
Quadrant Structured Prod. Co. v. Vertin, 2014 WL 5465535, at *3 (Del. Ch. Oct. 28, 2014);
see also Marmon v. Arbinet-Thexchange, Inc., 2004 WL 936512, at *5 (Del. Ch. Apr. 29, 2004)
(holding that the company’s directors “were not free to contract away disclosure obligations that
they had a fiduciary duty to observe,” and that “[n]or could they rely upon a certificate provision
prohibiting disclosure to avoid a shareholder’s inspection right conferred by statute,” and by doing
so, the “directors and management made the corporation complicit in their violations of fiduciary,
as well as statutory, law.”).
57
8 Del. C. § 115.
58
Del. S.B. 75 syn.
74
law values.”59 The scope of these stockholder agreements now includes (putative)
restrictions or waivers of inspection rights, appraisal rights and fiduciary duties of
directors.60
No doubt, the sophisticated parties entering into these agreements have found them
to be beneficial. 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
59
See generally, Fisch, Jill E., Stealth Governance: Shareholder Agreements and Private
Ordering, FACULTY SCHOLARSHIP AT PENN LAW (2021) (arguing that “stealth governance is
inappropriate for corporations and instead advocates a uniform structural approach to corporate
law that would limit private ordering to the charter and bylaws.”), https://scholarship.law.upenn.
edu/faculty_scholarship/2199. As Professor Fisch notes, shareholder agreements purporting to
derogate critical rights afforded to shareholders under the DGCL are apparently common among
startup companies that have not gone public. Id. at 5. Precisely because they are not part of the
incorporating documents filed with the Secretary of State, the public can become aware of them
only when they are litigated.
60
See Fisch at 5 n.15 (“Both appraisal waivers and inspection rights waivers are part of the most
recent versions of the National Venture Capital Association’s model documents.”) (citing NVCA,
Voting Agreement, at 7 (July 2020), https://nvca.org/recommends/nvca-2020-voting-agreement-
2/; NVCA, Investors’ Rights Agreement, at 24–25 (September 2020), https://nvca.org/
recommends/nvca-2020-investors-rights-agreement-2/). As Professor Fisch notes, the NVCA
model documents also purport to waive the right to assert post-merger claims for breaches of
fiduciary duties. Id. Further in this regard, I note that a footnote to Section 3(e) of the Model
Agreement submitted by the parties states that:
Even if appraisal rights are waived, common and subordinate preferred
stockholders are increasingly filing breach of fiduciary duty claims seeking quasi-
appraisal – i.e., damages that mirror the recovery available in an appraisal suit – in
transactions subject to drag along provisions where the junior preferred or common
shareholders are to receive no consideration for their shares. Because the directors
are often representatives of the senior preferred holders, these suits are difficult to
dismiss at an early stage. Accordingly consideration should be given to expanding
the agreement to include an agreement not to file appraisal actions to cover breach
of fiduciary suits in transactions subject to the drag along.
JA1316–17 (NCVA Model Agreement § 3.2(e) n.17) (emphasis added).
75
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.61
The ordinary place for private ordering provisions that alter this balance is in the
charter or bylaws.62 Principles of corporate democracy support this preference.63 If a
61
For example, while the DGCL authorizes mergers approved by a majority vote of the
outstanding shares, 8 Del. C. § 251(c), it permits a corporation to impose a supermajority
provision if it does so in the certificate of incorporation. See Berlin v. Emerald Partners, 552
A.2d 482, 488–89 n.8 (Del. 1988) (“The approval of a merger, under the Delaware General
Corporation Law, requires the affirmative vote of a majority of the outstanding common stock of
the corporations unless the certificate of incorporation provides for a higher percentage.”).
62
In Centaur Partners IV v. Nat’l Intergroup, Inc., this Court stated:
In Standard Power, this Court held that the rules of corporate democracy are based
in large part upon the principle that a majority of the votes cast at a stockholders
meeting is sufficient to elect directors. Although by statute a simple plurality
provision now suffices, the result is the same: a charter or bylaw provision which
purports to alter this principle must be positive, explicit, clear and readily
understandable. This presumption is overcome only by a clear, unambiguous and
unequivocal statement, in the charter or by-laws of a corporation, expressing the
stockholders' desire that a specific percentage of votes be required.
582 A.2d at 927 (emphasis added) (citations and alterations omitted) (citing Std. Power & Light
Corp. v. Invest. Assocs., Inc., 51 A.2d 572, 576 (Del. 1947)).
63
See 8 Del. C. § 141(d) (addressing classified boards). This section allows for a departure from
the default rule of annual elections of the full board in favor of election instead of at most three
classes of director “by the certificate of incorporation or by an initial bylaw, or by a bylaw adopted
by a vote of the stockholders.” Id.; see also Boilermakers Local 154 Ret. Fund v. Chevron Corp.,
73 A.3d 934, 939 (Del. Ch. 2013) (observing that “the certificate of incorporation may authorize
the board to amend the bylaws’ terms and that stockholders who invest in such corporations assent
to be bound by board-adopted bylaws when they buy stock in those corporations”); id. at 958(“Where, as here, the certificate of incorporation has conferred on the board the power to adopt
bylaws, and the board has adopted a bylaw consistent with 8 Del. C. § 109(b), the stockholders
have assented to that new bylaw being contractually binding.”). In Williams v. Geier, this Court
observed for example, that:
At its core, the Delaware General Corporation Law is a broad enabling act which
leaves latitude for substantial private ordering, provided the statutory parameters
76
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.64
and judicially imposed principles of fiduciary duty are honored. Although directors
are given much discretion in managing the business and affairs of the corporation,
some fundamental measures require stockholder action. For example, when the
statutory framework was altered in 1986 to permit some exemptions from personal
liability for directors in 8 Del. C. § 102 (b)(7), it was (and is) the legislative policy
of this State that such exemptions could be enjoyed by directors only if the
stockholders approved such a provision in the certificate of incorporation. Further,
all amendments to certifications of incorporation and mergers require stockholder
action. Thus, Delaware’s legislative policy is to look to the will of the stockholders
in these areas.
671 A.2d 1368, 1381 (Del. 1996). As we further explained, the process of amending certificates
of incorporation enjoys a favored place within that statutory framework because of its procedural
safeguards:
Like the statutory scheme relating to mergers under 8 Del. C. § 251, it is significant
that two discrete corporate events must occur, in precise sequence, to amend the
certificate of incorporation under 8 Del. C. § 242: First, the board of directors must
adopt a resolution declaring the advisability of the amendment and calling for a
stockholder vote. Second, a majority of the outstanding stock entitled to vote must
vote in favor. The stockholders may not act without prior board action. Likewise,
the board may not act unilaterally without stockholder approval. Therefore, the
stockholders control their own destiny through informed voting. This is the highest
and best form of corporate democracy.
Id. (emphasis added).
64
I note that the Maryland Legislature has authorized such waivers but only in a corporation’s
charter. See, e.g., MD CODE, CORP & ASS’NS, § 3-202(c)(4) (“Unless the transaction is governed
by § 3-602 of this title or is exempted by § 3-603(b) of this title, a stockholder may not demand
the fair value of the stockholder’s stock and is bound by the terms of the transaction if. . . [t]he
charter provides that the holders of the stock are not entitled to exercise the rights of an objecting
stockholder under this subtitle; . . .”) (emphasis added). Similarly, the Model Business
Corporation Act authorizes waiver of appraisal rights but only for preferred stock and only in
77
III. Based Upon Statutory Language, the Structure of the Various Entity
Statutory Schemes, and Public Policy, the Better View is That Appraisal
Rights Are Mandatory.
My third concern, which would also be a basis for reversal, is that I do not believe
that such an ex ante waiver of appraisal rights for common stockholders is presently
permissible. I start with the proposition that there are at least some provisions of the
DGCL that are mandatory. This proposition is not all that controversial.65 A consensus
has emerged that at least some provisions of the DGCL are mandatory and simply cannot
be waived.66 In Ford Holdings, Chancellor Allen listed a number of mandatory
provisions:
Thus, unlike the corporation law of the nineteenth century, modern
corporation law contains few mandatory terms; it is largely enabling in
character. It is not, however, bereft of mandatory terms. Under Delaware
law, for example, a corporation is required to have an annual meeting for the
election of directors; is required to have shareholder approval for
charter provisions. MBCA § 13.02(c) (Dec. 2020), https://www.americanbar.org/content/dam/
aba/administrative/business_law/corplaws/2020_mbca.pdf. The Official Comment explains:
Section 13.02(c) permits the corporation to eliminate or limit appraisal rights that
would otherwise be available for the holders of one or more series or classes of
preferred shares provided that the standards in that section are met. Chapter 13
does not permit the corporation to eliminate or limit the appraisal rights of
common shares.
MBCA § 13.02, cmt. 3.
65
I recognize that there has been an ongoing debate as to whether any mandatory provisions are
desirable. See, e.g., Ford Holdings, 698 A.2d at 976–77 (“This question is a specification of the
general question -- which has received a great deal of scholarly attention -- whether, as a matter
of sound policy, mandatory provisions are ever desirable in corporation law.”).
66
See, e.g., Edward P. Welch & Robert S. Saunders, Freedom and its Limits in the Delaware
General Corporation Law, 33 DEL. J. CORP. L. 845 (2008) (arguing that there are a few statutory
provisions that cannot be limited in a certificate of incorporation and identifying, among them,
rights of stockholders to periodically elect directors, to inspect books and records, and directors’
duty of loyalty); see also Rainbow Nav., Inc. v. Pan Ocean Nav., Inc., 535 A.2d 1357, 1359 (Del.
1987) (holding that Section 220 creates mandatory inspection rights that “can only be taken away
by statutory enactment.”).
78
amendments to the certificate of incorporation; must have appropriate
shareholder concurrence in the authorization of a merger; and is required to
have shareholder approval in order to dissolve. Generally, these mandatory
provisions may not be varied by the terms of the certificate of incorporation
or otherwise. Among these mandatory provisions of Delaware law is Section
262, the appraisal remedy.67
But moving from that starting point, there is considerable debate as to which provisions
are mandatory. Resolving that debate is a difficult task.
I submit that the analysis must begin with the text of the statute -- in this case,
Section 262.68 “The ‘most important consideration for a court in interpreting a statute is
the words the General Assembly used in writing it.’”69 “The court must ‘give the statutory
words their commonly understood meanings.’”70 The General Assembly’s use of the word
“shall” in Section 262(a) is significant.71 It suggests that the statutory remedy of appraisal
is mandatory if a stockholder petitions for it.72 Also, Section 262(a), unlike dozens of
67
698 A.2d at 976 (emphasis added) (footnotes omitted).
68
Salzberg, 227 A.3d at 113.
69
Id. (quoting Boilermakers, 73 A.3d at 950).
70
Id. (quoting Kofron v. Amoco Chems. Corp., 441 A.2d 226, 230 (Del. 1982)).
71
See 8 Del. C. § 262(a):
Any stockholder of a corporation of this State who holds shares of stock on the date
of the making of a demand pursuant to subsection (d) of this section with respect to
such shares, who continuously holds such shares through the effective date of the
merger or consolidation, who has otherwise complied with subsection (d) of this
section and who has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to § 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder’s shares of
stock under the circumstances described in subsections (b) and (c) of this section.
72
See, e.g., Arnold v. State, 49 A.3d 1180, 1183 (Del. 2012) (“The mandatory ‘shall’ normally
creates an obligation impervious to judicial discretion.”) (alterations omitted) (quoting Lexecon
Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26, 35 (1998)); H-M Wexford LLC v.
79
other provisions of the DGCL, does not use the phrase “unless otherwise provided in the
certification of incorporation.”
But the text of the statute and the use of the word “shall” may not be determinative.
Further, Petitioners accept that in the DGCL, the lack of a prefatory clause such as “unless
otherwise provided in the certificate of incorporation” is not always determinative of what
is modifiable.73 Indeed, our courts have found certain statutory provisions to be
modifiable even absent these words. For example, in Jones Apparel Group, Inc. v.
Maxwell Shoe Co., the Court of Chancery held that for Section 102(b)(1)74 to have
Encorp, Inc., 832 A.2d 129, 152 (Del. Ch. 2003) (the requirements of Section 228(c) are
mandatory because “the word ‘shall’ is a mandatory term.”).
73
Reply Br. at 22. For example, the General Assembly has made some DGCL provisions
explicitly default. E.g., 8 Del. C. § 212(a) (“Unless otherwise provided in the certificate of
incorporation and subject to § 213 of [the DGCL], each stockholder shall be entitled to 1 vote for
each share of capital stock held by such stockholder.”) (alteration added); 8 Del. C. § 223(a)
(providing rules for filling vacancies on the board of directors which apply “[u]nless otherwise
provided in the certificate of incorporation or bylaws”); 8 Del. C. § 273(a) (allowing either
stockholder of a corporation owned by exactly two owners in equal shares to petition for
dissolution “unless otherwise provided in the certificate of incorporation of the corporation or in
a written agreement between the stockholders”). One might argue that inclusion of such clauses
implies that some provisions of the DGCL not so designated cannot be so derogated, because
“[w]here the General Assembly prescribes a form of conduct, the manner of its performance and
operation, and the persons and things to which it refers are affirmatively or negatively designated,
there is an inference that all omissions were intended by the legislature.” Leatherbury v.
Greenspun, 939 A.2d 1284, 1291 (Del. 2007) (quoting and adding emphasis to Norman J. Singer,
SUTHERLAND STATUTES AND STATUTORY CONSTRUCTION, § 4915 (3d Ed.)). But Jones Apparel,
discussed next, provides an effective rebuttal that these “magic words” are not dispositive.
74
Section 102(b)(1) provides:
In addition to the matters required to be set forth in the certificate of incorporation
by subsection (a) of this section, the certificate of incorporation may also contain
any or all of the following matters:. . . [a]ny provision for the management of the
business and for the conduct of the affairs of the corporation, and any provision
creating, defining, limiting and regulating the powers of the corporation, the
directors, and the stockholders, or any class of the stockholders, or the governing
80
meaning, it must not be limited to modifying default provisions of the DGCL that contain
“magic words” permitting contrary provisions.75 Otherwise, “there is no independent
utility to [section] 102(b)(1).”76 Rather, a court must determine, based upon a careful and
specific review, whether a particular certificate provision contravenes Delaware public
policy in the form of statutory or common law.77
Adding to the difficulty here is that our courts have not yet established a clear
analytical framework to discern where the dividing line is. 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.78
body, members, or any class or group of members of a nonstock corporation; if
such provisions are not contrary to the laws of this State.
8 Del. C. s 102(b)(1).
75
883 A.2d at 847–48; see id. at 845 (“Currently, our corporate code contains 48 separate
provisions expressly referring to the variation of a statutory rule by charter. Those provisions
generally lay out various statutory rules, but include prefatory language such as ‘unless otherwise
provided in the certificate of incorporation.’”) (footnote omitted).
76
Id. at 848.
77
Id. As then-Vice Chancellor Strine noted, while Section 102(b)(1) and Section 141(a) are
“important expressions of the wide room for private ordering authorized by the DGCL,” that wide
room is provided “when such private ordering is reflected in the corporate charter.” Id. at 839(emphasis added).
78
See Leo E. Strine Jr., & J. Travis Laster, The Siren Song of Unlimited Contractual Freedom,
HARVARD L. SCHOOL JOHN M. OLIN CENTER DISCUSSION PAPER NO. 789, at 6 (Aug. 1, 2014)
(noting that “[a]fter all, American corporate law statutes have few mandatory requirements” and
that “the notion that American corporate statutes contain burdensome and non-waivable
provisions that hamper managerial effectiveness is not an intuitively obvious one.”),
https://ssrn.com/abstract=2481039; id. (“[t]o the contrary, the DGCL and its counterparts
predominantly offer default rules that can be altered through private ordering via the corporation’s
certificate of incorporation and bylaws.”). Further, at the comprehensive reversion in 1960:
81
That certain mandatory provisions in the DGCL are not waivable by contract is
also suggested by comparing the DGCL with Delaware’s alternative entity statutes.
Despite the broad freedom of contract afforded to Delaware corporations, unlike the
alternative entity statutes the DGCL does not contain a provision endorsing freedom of
contract to “maximum effect.” As this Court recently noted in United States v. Sanofi-
Aventis U.S. LLC, the function of the ‘maximum effect’ clause as it appears in the DRUPA
is that a partnership agreement “controls in most circumstances,” and the DRUPA itself
“consist[s] largely of default ‘gap-filler’ provisions that govern when a partnership
agreement is silent on an issue.”79 Although the DGCL is broadly an enabling act that
The distinguished group of experts who carefully examined and rewrote the
DGCL, section by section, had the opportunity to craft statutory language that, if
followed, would conclusively resolve the competing interests of managers and
investors and foreclose any judicial inquiry under equitable principles. They
declined to take that approach, recognizing that a rigid set of statutory rules could
not properly balance the interests of managers and investors and achieve both
efficiency and . . . opted instead to maintain corporate law’s two-fold tradition:
first, a broadly enabling statute that nevertheless contains important and fairness-
enhancing mandatory rules, such as requirements for the regular election of
directors, stockholder votes on major transactions like mergers and sales of
substantially all assets, and a stockholder right to access corporate books and
records for a proper purpose; and second, an equitable overlay of fiduciary duties,
enforced primarily by the ability of stockholders to sue directors in the courts for
breach of their duty of loyalty.
Id. at 10–11 (Emphasis added).
79
226 A.3d 1117, 1127 (Del. 2020) (citing 6 Del. C. § 15-103(d)). This Court has also stated in
the context of the Delaware Limited Liability Company Act (noting that, “the following
observations relating to limited partnerships applies as well to limited liability companies”):
The Act’s basic approach is to permit partners to have the broadest possible
discretion in drafting their partnership agreements and to furnish answers only in
situations where the partners have not expressly made provisions in their
partnership agreement. Truly, the partnership agreement is the cornerstone of a
Delaware limited partnership, and effectively constitutes the entire agreement
among the partners with respect to the admission of partners to, and the creation,
operation and termination of, the limited partnership. Once partners exercise their
82
establishes default rules,80 by not including such a provision in the DGCL, it is logical to
infer that the General Assembly was drawing at least some distinction with other statutory
business entity schemes. I believe this difference in the statutory structure reflects the
General Assembly’s intent to create different “brands” among the entity types and signals
that Delaware corporations have at least a few features imposed by the DGCL that cannot
be modified.81
A further comparison of these statutory schemes may hint at what some of these
immutable features are. For example, the DRULPA and LLC Act authorize provisions
that managers or partners will not owe fiduciary duties of loyalty to members or partners.82
The statutes expressly authorize restriction on inspection rights.83 Those entities need not
contractual freedom in their partnership agreement, the partners have a great deal
of certainty that their partnership agreement will be enforced in accordance with
its terms.
Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 291 (Del. 1999) (quoting Martin I. Lubaroff &
Paul Altman, Delaware Limited Partnerships § 1.2 (1999)). See also 6 Del. C. § 17-1101(c) (“It
is the policy of [the Limited Partnership Act] to give maximum effect to the principle of freedom
of contract and to the enforceability of partnership agreements.”); 6 Del. C. § 18-1101(b) (“It is
the policy of [the LLC Act] to give the maximum effect to the principle of freedom of contract
and to the enforceability of limited liability company agreements.”); 12 Del. C. § 3825(b) (“It is
the policy of [the Trust Act] to give the maximum effect to the principle of freedom of contract
and to the enforceability of governing instruments.”).
80
E.g., Shintom Co., Ltd. v. Audiovox Corp., 888 A.2d 225, 227 (Del. 2005) (“The Delaware
General Corporation Law is an enabling statute that provides great flexibility for creating the
capital structure of a Delaware corporation.”).
81
See, e.g., Welch & Saunders, supra note 66, at 846–47 (“mandatory terms guarantee that certain
core qualities are associated with the particular ‘brand’ of business entity called a ‘Delaware
corporation.’”).
82
See 6 Del. C. § 18-1101(d); 6 Del. C. § 17-1101(e).
83
See 6 Del. C. § 18-305(g); 6 Del. C. § 17-305(j).
83
have periodic elections of managers or general partners.84 That the General Assembly
saw fit to include these provisions suggest at least some support for the proposition that
corresponding provisions in the DGCL are mandatory. For example, a Delaware
corporation cannot eliminate the duty of loyalty or the periodic election of directors.85
The narrower question presented here is whether appraisal is among the mandatory
provisions. The Court of Chancery rejected Petitioners’ contention that Section 262
appraisal rights are mandatory. It held that “the DGCL does not explicitly prohibit
contractual modifications or waiver of appraisal rights, nor does it require a party to
exercise its statutory appraisal rights.”86 But I believe that there is more support for the
84
See 6 Del. C.§ 18-402; 6 Del. C. § 17-402.
85
See 8 Del. C. § 102(b)(7) (allowing for a corporate charter to exculpate the personal liability of
a director for some breaches of fiduciary duty, but not for violations of “the director’s duty of
loyalty to the corporation or its stockholders” or for “knowing violation of law”). This Court long
ago explained the importance of the duty of loyalty as a matter of public policy:
If an officer or director of a corporation, in violation of his duty as such, acquires
gain or advantage for himself, the law charges the interest so acquired with a trust
for the benefit of the corporation, at its election, while it denies to the betrayer all
benefit and profit. The rule, inveterate and uncompromising in its rigidity, does
not rest upon the narrow ground of injury or damage to the corporation resulting
from a betrayal of confidence, but upon a broader foundation of a wise public
policy that, for the purpose of removing all temptation, extinguishes all possibility
of profit flowing from a breach of the confidence imposed by the fiduciary relation.
Guth v. Loft, Inc., 5 A.2d 503, 270 (Del. 1939). Where it has deemed it desirable, the General
Assembly has carved out areas where interested transactions implicating the duty of loyalty are
permitted. See 8 Del. C. § 144(a) (addressing corporate transactions involving interested
directors); 8 Del. C. § 122(17) (permitting a corporation, “in its certificate of incorporation or by
action of its board of directors” to renounce interest in business opportunities that would otherwise
accrue to it).
86
Manti Holdings, LLC v. Authentix Acq. Co. (Manti II), 2019 WL 3814453, at *4 (Del. Ch. Aug.
14, 2019). Indeed, there are provisions of the DGCL containing express prohibitions on private
ordering. See, e.g., 8 Del. C. §§ 102(b)(7), 102(f). Thus, Section 262’s lack of an express
prohibition could be viewed as some support to find Section 262 waivers to be permissible.
However, I believe the weight of the text of Section 262 and public policy underlying Section
84
argument that Section 262 appraisal rights are a mandatory feature of Delaware corporate
law than against it. Aside from Chancellor Allen’s statement in Ford Holdings that
appraisal rights were “mandatory” and could not be modified in a charter or otherwise,87
Section 262’s use of the word “shall” suggests the General Assembly’s intent.
In addition to the statutory textual evidence, the public policy underlying the
purpose of Section 262 adds support to the view that its appraisal rights are mandatory. If
one of the guideposts, in addition to the statutory test, is whether a provision is central to
maintaining that delicate balance of power and checks and balances among the
corporation’s constituencies as I suggest, then consideration should be given to whether
there is a public policy embedded in that provision that encompasses such checks and
balances.88 There is a case to be made that the statutory appraisal remedy falls into this
262 point towards prohibition. Further, Section 115’s express permission of private ordering
complicates the analysis and could cut against implying private ordering via stockholders
agreements elsewhere. Just as in Jones Apparel, a “context- and statute-specific approach to
police horribles” is preferable to a “sweeping rule” drawn from the presence of lack of magic
words. 883 A.2d at 852 (internal quotation omitted).
87
698 A.2d at 976 (emphasis added).
88
Many prior rulings from Delaware courts have taken great care to preserve these interlocking
checks and balances. See e.g. Seinfeld v. Verizon Commc’ns., Inc., 909 A.2d 117, 122 (Del. 2006)
(“The evolution of Delaware’s jurisprudence in section 220 actions reflects judicial efforts to
maintain a proper balance between the rights of shareholders to obtain information based upon
credible allegations of corporation mismanagement and the rights of directors to manage the
business of the corporation without undue interference from stockholders.”). As we recently
explained:
Delaware law recognizes that the stockholder franchise is the ideological
underpinning upon which the legitimacy of the directors[’] managerial power
rests. Keeping a proper balance in the allocation of power between the
stockholders’ right to elect directors and the board of directors’ right to manage
the corporation is dependent upon the stockholders’ unimpeded right to vote
effectively in an election of directors.
85
category. We recently recounted a brief history of the appraisal statute in In re Solera
Insurance Coverage Appeals, 240 A.3d 1121 (Del. 2020). Before its 1899 enactment,
mergers required shareholder unanimity, an “unworkable” mechanism:
At common law, before the Delaware appraisal statute was enacted, no
consolidation or merger of corporations could be effected except with the
consent of all the stockholders. That scheme proved unworkable since one
or more minority stockholders, if he or they desired to do so, could impede
the action of all the other stockholders.
The Delaware General Assembly created the appraisal remedy in 1899 to
allow the sale of a corporation upon the consent of a majority of its
stockholders rather than upon unanimous approval. As we said in Dell,
given that a single shareholder could no longer hold up the sale of a
company, the General Assembly devised appraisal in service of the notion
that the stockholder is entitled to be paid for that which has been taken from
him. Minority shareholders who disagree with the sale or who view the sale
price as inadequate can seek an independent judicial determination of the
fair value of their shares rather than accept the per-share merger
consideration. Accordingly, appraisal is a limited legislative remedy
developed initially as a means to compensate shareholders of Delaware
Coster v. UIP Cos., Inc., --- A.3d ----, 2021 WL 2644094, at *7 (Del. June 28, 2021) (quotations
omitted). Similarly, corporate bylaws cannot divest shares of their statutory power to remove
directors, such as by imposing supermajority requirements or requiring cause. Frechter v. Zier,
2017 WL 345142, at *4 (Del. Ch. Jan. 24, 2017) (citing 8 Del. C. § 141(k) and In re Vaalco
Energy, Inc. S’holder Litig., C.A. No. 11775-VCL (Del. Ch. Apr. 20, 2016)). Likewise, aside
from interim appointments to vacancies arising between annual meetings, directors cannot
remove other directors -- that is, directors hold their positions due to the vote and under the
authority of the shareholders, not each other:
For 89 years, Delaware law has barred directors from removing other directors. In
1974, when the stockholders’ power to remove directors was confirmed and
addressed through the adoption of Section 141(k), two leading authorities on the
DGCL wrote that “by negative implication intended by the draftsmen, directors do
not have the authority to remove other directors.” I do not believe the DGCL
contemplates a bylaw amendment could overturn this rule.
Kurz v. Holbrook, 989 A.2d 140, 157 (Del. Ch. 2010) (footnote omitted) (citations omitted)
(quoting S. Samuel Arsht & Lewis S. Black, ANALYSIS OF THE 1974 AMENDMENTS TO THE
DELAWARE GENERAL CORPORATION LAW 378 (1974)), aff'd in part, rev'd in part sub nom. Crown
EMAK P'rs, LLC v. Kurz, 992 A.2d 377 (Del. 2010).
86
corporations for the loss of their common law right to prevent a merger or
consolidation by refusal to consent to such transactions.89
Thus, the trade-off for stockholders giving up the common law right to a unanimous
vote, and thus a veto over mergers, was the statutory right to dissent and seek appraisal of
their shares.90 Viewed in this fashion, the appraisal remedy was a statutorily created right
and remedy to compensate stockholders for the loss of a veto or blocking power over a
transaction, and a check on the power to effectuate certain qualifying corporate
transactions at an unfair price.
89
Solera, 240 A.3d at 1133 (footnotes and alterations omitted) (citing Dell, Inc. v. Magnetar
Global Event Driven Master Fund Ltd., 177 A.3d 1, 19 (Del. 2017)).
90
Id. Both the Court of Chancery and this Court repeatedly have explained the important
historical and analytical connection between appraisal rights and the derogation of the common
law unanimity requirement:
At common law no consolidation or merger of corporations could be effected
except with the consent of all the stockholders. This, at times, brought about an
intolerable situation, since one or more minority stockholders, if he or they desired
to do so, could impede the action of all the other stockholders. When this situation
was changed by statute in Delaware, to permit the consolidation or merger of two
or more corporations without the consent of all the stockholders, it became
necessary to protect the contractual rights of such stockholders—who by reason
of the statute lost their common law right to prevent a merger—by providing for
the appraisement of their stock and the payment to them of the full value thereof
in money
Schenley Indus., Inc. v. Curtis, 152 A.2d 300, 372–73 (Del. 1959) (citing Chicago Corp. v. Munds,
172 A. 452, 455 (Del. Ch. 1934) and 15 FLETCHER CYC. CORP. § 7165); see also Salomon Bros.
Inc. v. Interstate Bakeries Corp., 576 A.2d 650, 651–52 (Del. Ch. 1989) (explaining that “[t]he
judicial determination of fair value pursuant to § 262 is a statutory right given the shareholder as
compensation for the abrogation of the common law rule that a single shareholder could block a
merger” and that “appraisal rights were provided as a quid pro quo for the minority’s loss of its
veto power”) (citations and alterations omitted).
87
IV. Conclusion
No doubt, the question of whether Section 262 appraisal rights are waivable, and if
so, under what circumstances, is fraught with public policy issues. On the one hand, the
DGCL affords immense respect for freedom of contract and private ordering.91 On the
other, there are public policy limitations imbedded in the text of the appraisal statute itself
(“shall”) and other public polices pertaining to appraisal rights in general, and maintaining
the delicate balance of power among the Delaware corporation’s constituencies. There is
also the notion that a Delaware corporation is a different “brand” of entity, as compared
with alternative entities, and is known to have certain key features.92 Public policy
determinations are quintessentially a legislative judgment.93 This is particularly so when
the determination to be made hinges on the comparative weighing of polices in tension
with one another.
91
See Salzberg, 227 A.3d at 116 (“At its core, the DGCL is a broad enabling act which leaves
latitude for substantial private ordering, provided the statutory parameters and judicially imposed
principles of fiduciary duty are honored.”) (alteration omitted) (emphasis added) (quoting
Williams, 671 A.2d at 1381); Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032,
1059–60 (Del. Ch. 2006) (“There is . . . a strong American tradition of freedom of contract, and
that tradition is especially strong in our State, which prides itself on having commercial laws that
are efficient.”).
92
See, e.g., CML V, LLC v. Bax, 28 A.3d 1037, 1043 (Del. 2011) (“[u]ltimately, LLCs and
corporations are different; investors can choose to invest in an LLC, which offers one bundle of
rights, or in a corporation, which offers an entirely separate bundle of rights,” and that “in the
LLC context specifically, the General Assembly has espoused its clear intent to allow interested
parties to define the contours of their relationships with each other to the maximum extent
possible.”).
93
Sternberg v. Nanticoke Mem. Hosp., Inc., 62 A.3d 1212, 1217 (Del. 2013) (“[q]uestions of
public policy are best left to the legislature”) (citing Shea v. Matassa, 918 A.2d 1090, 1092 (Del.
2007) and Moss Rehab v. White, 692 A.2d 902, 909 (Del. 1997)).
88
Although it is a close call, I believe the better view is that appraisal rights are
mandatory. If the General Assembly disagrees, it can amend Section 262 to make clear
that waivers are permissible and under what circumstances.94 Our DGCL is routinely
revised and updated through the work of the Corporation Law Council of the Corporation
Law Section of the Delaware State Bar Association and the General Assembly. I believe
that if such waivers are to be permitted, that any such waiver should be in the corporation’s
certificate of incorporation (which is publicly filed with the Secretary of State and which
requires both stockholder and board approval).95
94
The Majority cites the de minimis exception from appraisal rights for stockholders of public-
traded corporations. They then argue that if appraisal rights are “sacrosanct to the corporate
form,” then it would make little sense for the General Assembly to adopt this exception. I think
the 2016 de minimis amendment proves just the opposite. The amendment to Section 262(g) was
designed to address the concern that certain potential appraisal petitioners were targeting
corporations and demanding settlements to address threatened appraisal claims, even non-
meritorious claims. Some referred to this phenomenon as “appraisal arbitrage.” A settlement
made economic sense if it were less than estimated defense costs. The synopsis to the 2016
amendments stated that “appraisal rights are essentially precluded unless the dispute with regard
to valuation is substantial and involves little risk that the petition for appraisal will be used to
achieve a settlement because of the nuisance value of discovery and other burdens of litigation.”
Notably, the ban on de minimis claims does not apply to short-form mergers effected pursuant to
Sections 253 or 267, because there, appraisal rights may be the only remedy available to
stockholders in a short-form merger transaction. See H.371, 148th Gen. Assembly, 80 Del. Laws
c. 265, § 10 (2016). My point is that it took an act of the General Assembly to carefully craft a
restriction on appraisal rights, and it was done for the purpose of addressing an imbalance of
corporate power resulting from the practice of using the appraisal statute to leverage settlements
for non-meritorious claims. Consistent with this approach, I believe any restriction on appraisal
rights now sanctioned by the Majority should be effected by the General Assembly, if at all, and
only after careful, deliberate debate informed by input from all relevant constituencies as is our
typical practice in amending the DGCL.
95
See, e.g., Jones Apparel, 883 A.2d at 846 (“Although the identification of what is a mandatory
right might at times be difficult, the Sterling approach leaves the space for private ordering that
the General Assembly’s adoption of §§ 102(b)(1) and 141(a) clearly contemplated.”).
89
The Majority tries to limit its holding to the facts presented. The Court of Chancery
tried to do the same.96 Authentix also suggests that “[t]his Court need not decide that
appraisal rights can always be waived by common stockholders, or that agreement not to
exercise appraisal rights are always permissible, but can instead limit its holding to the
undisputed facts of this case.”97 Perhaps the use of a stockholders agreement is not of
concern to them because of the difficulties and impracticality of using such an agreement
in a public company setting. And perhaps they do not fear pressure to expand such waivers
to encompass other statutory rights such as inspection rights. But the inevitable
consequence of affirmance here is to create one set of rules for such private start-up
companies and another for public companies. This is not a desirable outcome. Given the
availability and the flexibility afforded by Delaware’s alternative entity statutes, I am not
ready to endorse ex ante waivers effectuated in stockholders agreements barring common
stockholders from exercising mandatory provisions of the DGCL.
In sum, I would hold that the Stockholders Agreement fails to set forth an
obligation from Petitioners to Authentix requiring them to refrain from seeking appraisal
in all future mergers ex ante that unambiguously and unequivocally survives termination.
Even if it had, I would hold that such a term goes to the heart of corporate governance and
can only be contained in a corporate charter, not a bylaw or stockholders agreement. Even
if it had been contained in a charter amendment, I would hold that such an amendment
96
Manti II, 2019 WL 3814453, at *4 (“I need not decide whether a waiver of appraisal rights
would be upheld in other circumstances.”).
97
Ans. Br. at 46.
90
contravenes the DGCL and cannot be valid without authorization from the General
Assembly.
For these reasons, I respectfully dissent.
91