- Appraisal Proceedings & Recent Trends Pertaining to Waivers
In business acquisitions and related corporate transactions, an important consideration is the possibility of appraisal proceedings. In Delaware, where over half of the Fortune 500 companies are incorporated,[1] appraisal rights are more narrowly proscribed [2] and are laid out in Delaware General Corporation Law (“DGCL”) § 262. In this process, the court “shall determine the fair value of the shares,” exclusive of elements of future value pertaining to the merger.[3] The judge has a “statutory obligation to engage in an independent valuation exercise” which can include analyzing discounted cash flow, comparable companies, deal price, or market price approaches.[4] Because of all the stock valuations and testimony necessary, “appraisal actions often become battles of valuation experts.”[5] With numerous other procedural hurdles to overcome, appraisal proceedings can make a merger transaction much more complicated and costly for the acquirer.[6]
As a way to mitigate the costs associated with anticipated appraisal actions, private equity and venture capital companies have included waivers of appraisal rights in stockholders’ agreements as drag-along rights (“DAR”), forcing minority stockholders to consent to the pertinent transaction.[7] Delaware courts have long recognized that appraisal rights for preferred stockholders could be waived,[8] particularly because those rights are based on contract law and not the DGCL.[9] The enforceability of ex ante appraisal rights waivers for common stockholders, however, was not examined in Delaware courts until 2015.[10]
- Delaware Courts Examine Waivers for Minority Common Stockholders
In Halpin v. Riverstone National, minority stockholders sought judicial appraisal in a squeeze-out merger where the stockholders’ agreement contained a DAR provision giving the corporation, Riverstone, the right to force minority stockholders to vote in favor of certain change-in-control transactions.[11] While the stockholders’ agreement requires that Riverstone give minority stockholders advance written notice of the proposal’s existence for the merger, Riverstone did not provide notice until after the merger was consummated.[12] The court focused on the particular language of the waiver provision, noting that the company did not correctly apply the DAR provision.[13] As such, the DAR provision was unenforceable because “construction of the unambiguous contract provision did not clearly demonstrate that the Company is entitled to force a waiver of appraisal.”[14] While Vice Chancellor Glasscock assumed that a common stockholder may waive its appraisal rights ex ante, he did not expand further because Riverstone’s failure to comply with the DAR terms was sufficient to preserve the appraisal rights.[15]
A few years later, Manti Holdings, LLC v. Authentix Acquisition Co., also decided by Vice Chancellor Glasscock, was the first time a Delaware court held that common stockholders’ appraisal rights could be contractually waived.[16] Here, Authentix was sold as a merger with another company, triggering an appraisal claim brought by the minority stockholders. The stockholders’ agreement stated that in the event of a company sale, stockholders are to “refrain from the exercise of appraisal rights with respect to such transaction.”[17] The court, taking a similar approach to Halpin and applying principles of contract interpretation, noted that a waiver provision must be unambiguous to be enforceable.[18] Finding that the pertinent language was clear, Vice Chancellor Glasscock held that the petitioners agreed to not exercise their appraisal rights through the stockholders’ agreement.[19]
- Practical Implications
While these appraisal rights waivers for common stockholders are enforceable and can make companies more valuable to potential buyers,[20] these provisions must be carefully drafted to avoid ambiguities. Even if a waiver provision exists in a stockholders’ agreement, minority stockholders can still argue that the contractual language is unclear and thus unenforceable.[21] These waivers can also be used to effectively counteract the recent rise of appraisal arbitrage, where investors purchase shares in the target company after the merger’s announcement and engage in appraisal proceedings.[22] The petitioning stockholders in these actions are generally sophisticated institutions such as mutual funds and hedge funds that obtain large stakes in the target company.[23] Following the Manti decision, there may likely be fewer appraisal proceedings because sophisticated investors are less incentivized to engage in appraisal arbitrage when a stockholders’ agreement includes an unambiguous waiver of appraisal rights for common stockholders.
Maryland has also recognized instances where minority stockholders’ statutory appraisal rights can be eliminated by charter provisions implemented prior to a merger transaction.[24] Because waivers in a stockholders’ agreement are likely not negotiated by minority stockholders, whose recourse to obtain fair value during a squeeze-out is already limited, there could be some pushback against the proliferation of these provisions. For example, Institutional Shareholder Services, a proxy advisory and corporate governance firm, recommends voting for proposals to provide stockholders with appraisal rights.[25] Appraisal proceedings can serve as an important way to inhibit corporate mismanagement and provide fair value to those stockholders who likely had no say in the merger transaction.[26] Thus, it is important to balance adhering to unambiguous contract terms in stockholders’ agreements that create waivers and ensuring that minority stockholders are aware of the loss of their statutory appraisals rights.
[1] Darren Weaver, This Tiny Building in Wilmington, Delaware is Home to 300,000 Businesses, Business Insider, https://www.businessinsider.com/building-wilmington-delaware-largest-companies-ct-corporation-2017-4 (last visited Mar. 18, 2019).
[2] John Jenkins et al., Appraisal Rights: The Complicated World of Corporate Law’s Consolation Prize, 5 Deal Law.1, 1 (May-June 2011), https://www.deallawyers.com/newsletters/blur/2011_mayjune.pdf.
[3] Del. Code Ann. tit. 8 § 262(h) (2019).
[4] Gonsalves v. Straight Arrow Publishers, Inc., No. 232, 1998, 1999 WL 87280, at *1 (Del. Jan. 5, 1999).
[5] Claire Hill et al., Mergers and Acquisitions: Law, Theory, and Practice 61 (2016).
[6] Charles R. Korsmo et al., Appraisal Arbitrage and the Future of Public Company M&A, 72 Wash. U.L. Rev. 1551, 1561 (2015); Philip Richter et al., Why Delaware Appraisal Awards Exceed the Merger Price, Harvard L. Sch. Forum on Corp. Gov. & Fin. Reg. (Sept. 23, 2014).
[7] Morgan Mordecai et al., Common Stockholders Can Wa[i]ve Appraisal Rights Goodbye, Law360, https://www.law360.com/articles/1116588/common-stockholders-can-wa-i-ve-appraisal-rights-goodbye (last visited Mar. 18, 2019).
[8] In re Appraisal of Fold Holdings, Inc. Preferred Stock, 698 A.2d 973, 976–77 (Del. Ch. 1997).
[9] See Shiftan v. Morgan Joseph Holdings, Inc., 57 A.3d 928, 942 (Del. Ch. 2012).
[10] Halpin v. Riverstone Nat’l, Inc., C.A. No. 9796-VCG, 2015 WL 854724, at *1 (Del. Ch. Feb. 26, 2015).
[11] Id.
[12] Id. at *3.
[13] Id. at *6
[14] Id. at * 8 (emphasis added).
[15] Id.
[16] Manti Holdings, LLC v. Authentix Acquisition Co., C.A. No. 2017-0887-SG, 2018 WL 4698255 (Del. Ch. Oct. 1, 2018).
[17] Id. at *2.
[18] Id.
[19] Id. at *4.
[20] Id.
[21] See, e.g., id. at *2 (noting that “[d]emonstrating a waiver of the statutory right to appraisal requires language evincing the clear intent to waive) (emphasis added).
[22] Keeping Current: Delaware Appraisal: Practical Considerations, ABA, https://www.americanbar.org/groups/business_law/publications/blt/2014/10/keeping_current_epstein/ (last visited Mar. 18, 2019).
[23] Korsmo, supra note 6, at 1553.
[24] See, e.g., Egan v. First Opportunity Fund, Inc., Case No. 24-C-14-008132 (Cir. Ct. Balt. City, Apr. 22, 2016); Ryan Stoker, Guest Post: Minority Stockholders Beware – Disappearing Appraisal Rights in Maryland, Appraisal Rights Litig. Blog, https://www.appraisalrightslitigation.com/2019/02/19/guest-post-minority-stockholders-beware-disappearing-appraisal-rights-in-maryland/ (last visited Mar. 18, 2019).
[25] United States Taft-Hartley Proxy Voting Guidelines: 2019 Policy Recommendations, Inst. S’holder Servs.(Jan. 28, 2019), https://www.issgovernance.com/file/policy/active/specialty/Taft-Hartley-Advisory-Services-US-Guidelines.pdf.
[26] Korsmo, supra note 6, at 1612.
