Barry M. Klayman and Mark E. Felger

The recent decision by Vice Chancellor Sam Glasscock in Manti Holdings v. Authentix Acquisition, C.A. No. 2017-0887-SG (Del. Ch. Aug. 14, 2019), is noteworthy for two reasons: first, the vice chancellor's comments regarding the utility of motions for reargument, and second, his holding in a case of first impression that the Delaware General Corporation Law does not prohibit sophisticated owners of a corporation from agreeing to bind themselves to a future sale and waive in advance their statutory appraisal rights.

The case involved the sale by merger of Authentix Acquisition Co. to a third party. The petitioners had been the sole owners of the company's predecessor. In 2008, the predecessor was merged into Authentix, and the petitioners became minority stockholders in the new entity. As a condition of the merger, the petitioners entered into a stockholders agreement with the new majority owners that provided for certain contractual rights and duties in the event of a "company sale," as defined therein. In the agreement, the petitioners consented in advance to a contractually compliant sale and agreed that they would "refrain from the exercise of appraisal rights with respect to such transaction." See Manti Holdings v. Authentix Acquisition, C.A. No. 2017-0887-SG (Del. Ch. Oct. 1, 2018). After Authentix was sold, the cash consideration was distributed to the various categories of stock in accordance with the waterfall provisions of the company's certificate, and the petitioners and other common stockholders received little or nothing for their equity interest in the company.

In his October 2018 opinion, Glasscock held that the parties' contractual rights and obligations continued post-merger, that the transaction at issue triggered those contractual rights and obligations, including the obligation to refrain from seeking appraisal, and that the company had the authority to enforce the stockholders agreement.

The petitioners sought reargument of the October 2018 opinion. Among other issues they raised in their motion, the petitioners argued that under Delaware law, statutory appraisal rights cannot be waived by contract. Glasscock directed the parties to address one narrow issue: whether a contractual undertaking to limit or waive future appraisal rights, in connection with a transaction that is not yet contemplated, was enforceable.

In addressing the petitioners' motion, Glasscock first offered some general comments regarding motions for reargument. He noted that they are rarely fruitful, and most often result in additional expense for the litigants and effort by the court, to no purpose. Nonetheless, he recognized that reargument can be a useful tool to forestall a final opinion in which the judge has disregarded matters of law or fact, or has inadvertently failed to respond to an argument of counsel. In such cases, motions for reargument can avoid the expense and delay of the matter being reviewed on appeal and remand. Glasscock wrote, "I look on the (rare) well-founded motion for reargument as beneficial to the system of justice—and the time and effort of both bench and appellate judges—as well as to the client."

Glasscock acknowledged that his earlier opinion, finding that the petitioners had waived their appraisal rights, had failed to address a predicate issue that the petitioners had raised, whether a stockholder can validly waive appraisal rights in advance of a transaction by contract. He then addressed the issue, finding that the petitioners' motion for reargument was well-taken, but deciding the ultimate issue against them.

On the merits of the issue, Glasscock held that the DGCL does not prohibit sophisticated owners of a corporation from including provisions in a merger agreement that bind them to a future sale and waiver of statutory appraisal rights. The petitioners had argued that Section 262 is a mandatory provision that cannot be waived ex ante, and that a corporation may not impose an advance waiver of appraisal rights by separate agreement because it would be inconsistent with the DGCL. Because the DGCL, the company's certificate of incorporation, and its by-laws did not expressly allow contractual waivers of appraisal rights, the petitioners contended that the advance waiver of appraisal rights in the stockholders agreement was invalid.

Glasscock relied in part on the decision in Appraisal of Ford Holdings Preferred Stock, 698 A.2d 973 (Del. Ch. 1997), in which the court upheld a contract between a corporation and its preferred stockholders that, in the event of a merger, fixed "fair value" at a set price, effectively waiving the stockholders' right to appraisal. In so holding, Ford Holdings said, "Since Section 262 represents a statutorily conferred right, it may be effectively waived in the documents creating the security only when the result is quite clearly set forth." Although Ford Holdings applied only to preferred stockholders, not common stockholders, Glasscock concluded that the contractual waiver of appraisal rights was permitted under Delaware law as long as the relevant contract provisions were clear and unambiguous. Glasscock noted that the DGCL does not explicitly prohibit contractual modification of appraisal rights, nor does it require a party to exercise its statutory appraisal rights. Such a modification or waiver serves to supplement the DGCL and is not inconsistent with, nor contrary to, the DGCL.

Glasscock emphasized that his decision was based on the facts in the case before him. The Petitioners had been the sole stockholders of the company's predecessor, which was a private company. The petitioners were sophisticated investors who were fully informed and represented by counsel when they entered into the stockholders agreement. Under that agreement, they obtained some rights and relinquished others, and then accepted the benefits of the agreement for a number of years. The agreement itself clearly and unambiguously waived their appraisal rights. Glasscock cautioned, however, that his decision did not mean that a waiver of appraisal rights would be upheld in other circumstances.

Which of these factors must be present if an advance waiver of appraisal rights is contemplated? Clearly the waiver must be express and unambiguous, and supported by consideration of some type. Finally, the party waiving its rights should be a knowledgeable party, preferably advised by counsel. Absent one or more of these features, it is uncertain whether an advance waiver of appraisal rights will be enforced.

Barry M. Klayman is a member in the commercial litigation group and the bankruptcy, insolvency and restructuring practice group at Cozen O'Connor. He regularly appears in Chancery Court.

Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring practice group at the firm.