The Court of Chancery’s latest decision in the Manti Holdings, LLC, et al. v. Authentix Acquisition Company, Inc., C.A. No. 2017-0887-SG (Del. Ch. 8/11/20) stockholder appraisal litigation provides additional clarity about the ability of corporate constituents to modify by agreement the rights associated with the statutory appraisal remedy, 8 Del. C. § 262. In a previous decision in the case Vice Chancellor Glasscock denied a stockholder’s appraisal petition holding that an advance waiver of statutory appraisal rights in a stockholder agreement is permitted under Delaware law as long as the relevant contractual provisions are clear and unambiguous. In its latest decision, the court ruled that a prevailing party fee-shifting provision in the stockholder agreement did not contravene Delaware law and was likewise enforceable.
The petitioning stockholders previously held all of the stock of a predecessor entity Authentix, Inc. In connection with a 2008 merger of the entity into a successor Authentix entity with two new stockholders, petitioners entered into a stockholders agreement with the new stockholders as a condition of the merger. Under the stockholders agreement, petitioners agreed that “in the event that … a Company Sale is approved by the Board” they would “consent to and raise no objection against such transaction … and … refrain from the exercise of appraisal rights with respect to such transaction.” Petitioners also agreed to a “loser pays” provision;
“In the event of any litigation or other legal proceedings involving the interpretation of this [Stockholders] 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.”
In 2017 the Authentix board of directors approved a merger agreement with a third party. Petitioners refused to consent to the merger, sent appraisal demands, refused to withdraw their demands and filed an action seeking appraisal under 8 Del. C. § 262.
Following a grant of summary judgment in favor of the surviving corporation because petitioners had validly waived their appraisal rights in the Stockholders Agreement, the surviving corporation sought, and the court granted, enforcement of the prevailing party fee provision to recover its attorney’s fees.
Acknowledging the contractual fee-shifting provision, the petitioners argued that it was unenforceable for reasons of statutory procedure, public policy and equity. The court first addressed petitioners’ argument that the Delaware legislature’s enactment of 2015 amendments to §§ 102(f) and 109(b) of the Delaware General Corporation Law (DGCL) to proscribe fee-shifting provisions in corporate charters and bylaws for intracorporate litigation, established statutory norms that lower order documents such as stockholder agreements could not contravene. The Court rejected this argument because:
- neither statutory provision specifically addressed stockholder agreements, and
- the legislative history evidenced an intent to carve-out stockholder agreements from the fee-shifting prohibitions.
The court reasoned that the legislative amendment addressed the concern that corporate charters and bylaws, to the extent contractual, are analogous to contracts of adhesion. In contrast, stockholder agreements “signed by the stockholder against whom the provision is to be enforced” fall outside the intended prohibition of the section 102(f) and 109(b) amendments to the DGCL.
Further, the court observed that the animating concern of the statutory amendments prohibiting fee-shifting was the perverse chilling effect of such provisions on stockholders’ ability to assert and enforce breach of fiduciary duty claims. Noting that breach of fiduciary duty claims were not before him in the appraisal litigation, the court cited the difference between limiting fiduciary duties and waiving statutory appraisal rights as an additional justification for upholding the fee-shifting provision when only appraisal rights are at stake.
Case law interpreting the DGCL affords corporations and stockholders considerable flexibility privately to order their affairs with respect to the availability of the appraisal remedy and associated rights. To do so effectively, however, involves knowing and voluntary contractual agreements signed by the parties to be bound. Despite the contractual characteristics of corporate charters and bylaws and case law binding stockholders to such documents, they cannot provide a reliable basis to waive a statutory appraisal remedy or impose fee-shifting.
Delaware Business Court Insider l August 26, 2020