COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: June 27, 2018
Date Decided: October 1, 2018
John L. Reed, Esquire Samuel A. Nolen, Esquire
Peter H. Kyle, Esquire Sarah A. Galetta, Esquire
Harrison S. Carpenter, Esquire Richards, Layton & Finger, P.A.
DLA Piper, LLP 920 North King Street
1201 North Market Street Wilmington, DE 19801
Wilmington, DE 19801
Re: Manti Holdings, LLC et al. v. Authentix Acquisition Co., Civil
Action No. 2017-0887-SG
Dear Counsel:
This matter involves the sale via merger of Authentix Acquisition Co. (the
“Company”) by written consent, to a third-party Guernsey1 entity. The Petitioners
seek a statutory appraisal under Section 262 of the DGCL. This brief Letter
Opinion will address a narrow predicate issue: whether the Petitioners are barred
by contract from exercising their appraisal rights.
The Petitioners are among the stockholders of the Company who lost their
shares via the merger. The Company has moved for a judgment under the terms of
a stockholders’ agreement (the “SA”), to which the Petitioners and the Company
1
The reference is archipelagic, not bovine.
were parties. The SA was entered in 2008 (and amended in 2009) to induce
investment in the Company by investors, to whom I will refer collectively as the
“Carlyle Group.”2 The Carlyle Group was the majority stockholder and controller
of the Company.3 According to Authentix, the Petitioners are barred contractually
from asserting appraisal rights.4 The Petitioners read the contract differently.5
After Authentix was sold, the cash consideration was (or will be) distributed
to the various categories of stock via the waterfall provision of the Certificate of
Incorporation.6 The Petitioners and other common stockholders (including the
Carlyle Group) will, it appears, receive little or nothing for their equity interest in
the Company.
On January 17, 2018, the Petitioners filed a Motion to Dismiss the
Respondent’s counterclaims, and on January 24, 2018, the Respondents filed a
Motion for Partial Summary Judgment on Entitlement Issues. At oral argument, the
parties agreed to consider the matter of waiver or estoppel of Petitioner’s right to
appraisal as submitted on a stipulated record.7 The facts are undisputed; it remains
only to apply the law and the language of the SA to the facts. The nature of the
2
See Pet’rs’ Opening Br. in Support of their Mot. to Dismiss Ex. A, Stockholder Agreement
[hereinafter, “Stockholder Agreement”].
3
Id. at 21; June 13, 2018 Hr’g Tr. at 69:24–70:1.
4
See Resp’t’s Answering Br. to Pet’rs Mot. to Dismiss at 10–11.
5
See Pet’rs’ Opening Br. in Support of their Mot. to Dismiss at 22.
6
See Pet’rs’ June 20, 2018 Letter Ex. D at 7.
7
June 13, 2018 Hr’g Tr. at 3:12–4:2.
2
motion practice—cross motions and briefing, cross openings and answers—led to
the parties’ issues and grounds for relief being less than perfectly congruent.
Counsel raised issues at argument that were not clearly presented in the briefs, and
other issues that were briefed were never mentioned. Accordingly, I allowed short
post-argument submissions. I address here only those issues presented at oral
argument and in the supplemental submissions; issues not so presented I deem
waived.8
Because I find the Petitioners contractually bound to refrain from seeking
appraisal, the Company’s motion is granted, and that of the Petitioners is denied.
My reasoning follows.
I. BACKGROUND
I will recite in this Letter Opinion only those facts and contractual provisions
necessary to my decision. Section 3(e) of the SA provides certain contractual
rights and duties arising in the context of a “Company Sale”—a defined term that
all parties agree occurred here.9 Section 3(e) provides generally that parties agree
to consent to such a sale. It also imposes specific duties. One such duty that a
contractually-compliant sale imposes on the Petitioners is set out at Section
8
See In re Crimson Exploration S’holder Litig., 2014 WL 5449419, at *26 (Del. Ch. Oct. 24,
2014) (waiving the plaintiffs’ claim where they “did not mention [the claim] in their Opposition
Brief or at the Argument.”) (citing Emerald Partners v. Berlin, 2003 WL 21003437, at *43 (Del.
Ch. Apr. 28, 2003)).
9
Stockholder Agreement at 12.
3
3(e)(iv): to “refrain from the exercise of appraisal rights with respect to such
transaction.” I may state, therefore, two principles that must guide my decision: 1)
Assuming that Section 3(e)(iv) is both enforceable and unambiguously applicable
under these facts, the Company is entitled to Summary Judgement; and 2) if
ambiguities lurk in the SA such that I cannot find it applicable on its face, the SA
cannot be construed to bar the Petitioners’ right to appraisal. Demonstrating a
waiver of the statutory right to appraisal requires language evincing the clear intent
to waive10—evidence that is not present on this stipulated record outside the
language of the SA itself. I turn, then, to the Petitioners’ various arguments
negating the applicability of Section 3(e)(iv).
II. ANALYSIS
A. The Termination of the SA As Of The Time Of Sale
The Petitioners point to Section 12 of the SA, which provides,
unremarkably, that “[t]his agreement, and the respective rights and obligations of
the Parties, shall terminate upon the . . . consummation of a Company Sale. . . .”11
The parties agree that rights vested before termination are not extinguished by such
a provision, but the Petitioners argue strenuously that the SA did not vest a right, or
concomitant obligation, to refrain from appraisal, post-close. The rights and duties
10
Halpin v. Riverstone Nat’l, Inc. 2015 WL 854724, at *8 (Del. Ch. Feb. 26, 2015).
11
Stockholder Agreement at 27.
4
of Section 3(e) arise at the time of (and “in the event that”) “a Company Sale is
approved by the Board.”12 The Board approved the transaction at issue at a time
when the SA was unquestionably in effect. Nonetheless, the Petitioners contend
that the explicit language of Section 3(e)(iv) compels the conclusion that their right
to appraisal was not extinguished, but was only in abeyance, as of the time of sale.
Per Petitioners, once the Company Sale was “consummated,” the duty to refrain
from appraisal terminated, leaving the Petitioners free to pursue this appraisal
action. The Petitioners point out that the SA could have, but did not, use language
that the right to exercise appraisal was “waived” or “void” as of the time of Board
approval of the sale; instead, Section 3(e)(iv) imposes a duty on Petitioners to
“refrain” from “exercise” of those rights.13 According to the Petitioners, “refrain”
implies live—non-extinguished—rights from which to refrain, and thus cannot
refer to irrevocably waived rights.14 At the least, according to the Petitioners, the
language is ambiguous, and thus insufficient to support a finding of waiver.15
The Petitioners make a valiant attempt to freight the term “refrain” with
more ambiguity than anyone since Arlo Guthrie.16 Nonetheless, to my mind, the
SA is clear. No contracting party, agreeing to the quoted language, would consider
12
Id. at 12.
13
Id. (emphasis added).
14
Pet’rs’ Opening Br. in Support of their Mot. to Dismiss at 19.
15
June 13, 2018 Hr’g Tr. at 9:5–6.
16
See Arlo Guthrie, City of New Orleans (Reprise Records 1972).
5
itself free to exercise appraisal rights in light of Board approval of a contractually-
compliant Company Sale. In that case, the contracting parties were bound to
“assent to” and to “raise no objections against” the sale, and specifically to refrain
from exercise of appraisal rights. This language is not ambiguous.
My finding is bolstered by the obvious fact that the “exercise of appraisal
rights” with respect to a transaction is meaningless until the transaction is
accomplished: under the Petitioners’ reading, subsection (iv) is a nullity. That is
because, in the Petitioners’ view, parties must “refrain” from exercise of appraisal
rights only pre-close, but at the same time, the exercise to be refrained from could
only be consummated in the post-sale period in which, per Petitioners, the
enforcement of parties’ rights and duties is foreclosed. This is not a reasonable
reading of the quoted language, which, again, I find unambiguous.17
For the foregoing reasons, I find the termination of rights and obligations set
out in Section 12 is no bar to the Company’s motion.
17
I am unpersuaded by the Petitioners’ argument that perhaps the parties meant to exclude
appraisal only where approval of the transaction was by stockholder vote, and not by consent.
They argue that satisfying the demand requirement of Section 262(d) of the statute, which occurs
pre-close, must be the “exercise” of appraisal “rights” referred to, preventing the perfection of
appraisal rights, but only if Section 262(d) is implicated. I do not, however, think any reasonable
reader of the language here would so conclude.
6
B. Petitioners’ Contention That The Sale Is Not Contractually Compliant So
As To Trigger Waiver Of Appraisal Rights
The Petitioners contended at oral argument that the duty to refrain from
appraisal, and other “Bring Along” duties imposed by the SA on the Petitioners in
case of a Company Sale, are conditioned on the “acquisition of Petitioners’
[Equity] Securities [being] on the Same Terms and Conditions as the [Equity]
Securities held by the Carlyle [Group]” in connection with such transaction.18 The
SA defines “Terms and Conditions” to mean price.19 Since preferred and common
shares did not receive the same value in the distribution of the merger proceeds,
Petitioners argue, and because the mix of preferred and common shares held by the
parties was dissimilar, the price paid the Carlyle Group and the Petitioners, per
share, was not the same. Thus, argue the Petitioners, the Bring Along duties were
never triggered. The same-price condition could have been satisfied, again per the
Petitioners, by a pre-close conversion of all preferred into common stock. This
contention was the subject of supplemental letter briefing by counsel. The parties
contest whether the “Same Terms and Conditions” provision, if applicable,
operates in the way the Petitioners advocate. I find the Petitioners’ reading
doubtful. Nonetheless, I need not reach their contention because, even if they read
the provision correctly, I find it inapplicable here.
18
Pet’rs’ June 20, 2018 Letter at 5.
19
Stockholder Agreement at 7.
7
The pertinent facts are that the sale was by merger, and that the merger
agreement did not address distribution, which instead was, or is to be, pursuant to a
waterfall provision in the company charter.20 As the Respondents point out, under
the SA, a “Company Sale” of the type at issue here may be either by “merger” or
by “sale or transfer of the Company’s capital stock.”21 “Equity Securities” is
defined as company stock or options.22 Where, as here, the Board has approved a
Company Sale, the Petitioners are bound to consent to the transaction. In addition,
where “any such transaction is structured as a sale of Equity Securities”—that is,
as a sale of stock—the non-Carlyle stockholders must “take all action” to assist the
consummation of the transaction required by the Carlyle Group or the Board. The
latter requirement is conditioned, however, on the sale of Equity Securities being at
the same price enjoyed by the Carlyle Group. In other words, the SA
differentiates between Company Sales 1) by merger, with the fiduciary protections
that entails, in which case the stockholders must consent and raise no objections to
the Sale, and 2) a Company Sale by transfer of Equity Securities. In the latter case,
the SA imposes an additional affirmative duty on stockholders to take action in aid
of the Sale, so long as the price per share is the same.
20
See Pet’rs’ June 20, 2018 Letter Ex. D at 7.
21
Stockholder Agreement at 4.
22
Id. at 5, 7.
8
I conclude that the plain terms of the SA impose the “same Terms and
Conditions” provision, and the resulting affirmative duty of cooperation, on the
parties only where a sale is accomplished by an agreement by the Carlyle Group to
sell its stock. Such a sale may implicate drag along duties as well as cooperation
duties on the minority stockholders.23 The additional duties are imposed only
where those stockholders are protected by receiving for their shares the same
consideration given for the stock of the Carlyle Group. By contrast, where the
Company Sale is accomplished by merger, the additional duties are not imposed
and the “Same Terms and Conditions” provision is inapplicable. Here, the
Company Sale was by merger approved by the Board.
I conclude that the Petitioners were bound contractually to consent and not
object to the sale, which general duty includes a duty “refrain from exercise of
appraisal rights.”
C. The Company May Enforce The SA
Finally, the Petitioners argue that, even if the SA embodies an enforceable
waiver of appraisal rights, it is nevertheless not enforceable by the Company.24
The Company was made a party to the SA, presumably because of a determination
by the Board that attracting capital was in the interest of the Company. The Board
23
Id. at 10–12.
24
See Pet’rs’ Answering Br. in Opp’n to Resp’t Mot. for Partial Summ. J. at 20.
9
approved this merger as a Company Sale, and notably, the Petitioners have not
brought an action against the directors for breach of fiduciary duty or breach of
contract. Where, as here, a Company Sale has taken place, none of the signatories
to the SA, other than the Company itself via its purchasers, have an interest in
enforcing the contract. Specifically, should a party violate the duty to refrain from
seeking appraisal, the petition would be filed on, and any duty to pay would fall
on, the Company.25 Presumably, the ability to avoid appraisal would make the
Company more attractive to potential buyers, a consideration surely contemplated
by the parties to the SA. The SA precluded sale of the Petitioners’ stock absent a
Company Transaction, so all the Petitioners, as parties to the SA, knew they would
be bound by the SA at the time of any Company Sale.
Nonetheless, the Petitioners claim the Company is precluded as a matter of
public policy from enforcing obligations under the SA. They argue that DGCL
Section 151(a) requires limitations on classes of stock to be set out in, or derived
from, the corporate charter. Enforcing the SA would, per Petitioners, limit the
rights to appraisal that inhere in shares of Company stock; in other words,
enforcement would impermissibly permit the Board to impose a limitation on
25
See DGCL§ 262(f).
10
classes of stock by contract, in contravention of the intent expressed in the
statute.26
In my view, enforcing the SA is not the equivalent of imposing limitations
on a class of stock under Section 151(a). 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. The parties, including the Company, did not transform the
Petitioner’s shares of stock into a new restricted class via the SA; instead,
individual stockholders took on contractual responsibilities in return for
consideration. One set of these responsibilities was the Bring Along rights through
which the Carlyle Group could facilitate an exit, which included the obligations on
stockholders arising in case of a Company Sale. Those obligations include the
obligation to refrain from appraisal—an obligation only the Company would be in
a position to enforce. The SA, in other words, did not restrict the appraisal rights
of the classes of stock held by the Petitioners; instead, the Petitioners, by entering
the SA, agreed to forbear from exercising that right. I find, therefore, that the
Company, in seeking to enforce the SA, is not in contravention of the DGCL or
public policy under these facts.
26
See Pet’rs’ Answering Br. in Opp’n to Resp’t Mot. for Partial Summ. J. at 22.
11
III. CONCLUSION
The Petitioners agreed in the SA to consent to and not oppose a Company
Sale approved by the Board, a duty that specifically included forbearance from
exercise of appraisal rights. For the forgoing reasons, the Respondent’s Motion for
Determination of Entitlement to Appraisal and Partial Summary Judgment on
Entitlement Issues is granted, and the Petitioners’ cross-motion is denied. The
parties should provide an appropriate form of order, and inform me what issues, if
any, remain.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
12
Manti Holdings, LLC v. Authentix Acquisition Co., Inc.
Combined Opinion