Background

In 2008, Authentix Acquisition Co., Inc. (the Company) became the parent company of Authentix, Inc. Through the 2008 transaction, the petitioners, who previously held a majority of Authentix, Inc.’s stock, received rollover equity in the Company, becoming minority stockholders, and the Carlyle Group (Carlyle) became the majority stockholder. The petitioners were also required to enter into a stockholders agreement (the Stockholders Agreement) that stated if a sale of the Company was approved by the board of directors (the Board) and Carlyle, the minority stockholders waived their right to object to the sale and their right to appraisal. Specifically, the Stockholders Agreement stated:

In 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.

In 2017, the Board approved a merger with a third party, and Carlyle approved the merger. The merger consideration was paid out through a waterfall provision, allocating nearly all of the proceeds to the holders of preferred stock. The petitioners, all of whom held common stock, would receive little to no consideration as a result of the merger. The petitioners demanded appraisal, but the Court of Chancery dismissed the petitioners’ complaint on summary judgment and held they had waived their appraisal rights.

Analysis

The Delaware Supreme Court agreed with the Court of Chancery decision and held that the petitioners had waived their statutory appraisal rights in the Stockholders Agreement. Importantly, the court found that the waiver applied post-merger when the Stockholders Agreement self-terminated because, reading the agreement in its entirety, the court reasoned that stockholders could not refrain from exercising appraisal rights pre-termination because those appraisal rights were not yet ripe.

The court also held that, post-merger, the Company could enforce the Stockholders Agreement because the change of control did not change the fact that the Company was a party to the Stockholders Agreement. Moreover, the court reasoned that if anyone were to be an intended beneficiary of a waiver of those appraisal rights, it would be the surviving company.

The court also determined that the ability to waive appraisal rights is permissible as a matter of Delaware law. Citing its recent decision in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the court reiterated that the Delaware General Corporation Law (the DGCL) “is a broad enabling act that allows immense freedom for private ordering,” and is only limited by certain mandatory terms such as those limiting the liability of a director for breaches of loyalty. The court reasoned that because “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 . . . [a]nd the [appraisal waiver] was not a ‘midstream amendment’ that was forced upon the Petitioners without their express consent,” the appraisal rights did not have the qualities of an essential feature of the corporate form that cannot be waived.

Importantly, the court also held any appraisal waiver is not a stock restriction that must be included in the certificate of incorporation under section 151(a). The court made this finding “because the Stockholders Agreement imposed personal obligations on the stockholders rather than encumbrances on the property rights that run with the stock.”