Manti Holdings, LLC v. Authentix Acquisition Co.

261 A.3d 1199

MANTI HOLDINGS, LLC, Malone Mitchell, Winn Interests, Ltd., Equinox I. A Tx, Greg Pipkin, Craig Johnstone, Tri-C Authentix, Ltd., David Moxam, Lal Pearce, and Jim Rittenburg Petitioners Below, Appellants/Cross-Appellees,

v.AUTHENTIX ACQUISITION COMPANY, INC., Respondent Below, Appellee/Cross-Appellant.

No. 354, 2020

Supreme Court of Delaware.

Submitted: May 12, 2021

Decided: September 13, 2021

Reargument Denied: October 1, 2021

John L. Reed, Esquire (argued), Peter H. Kyle, Esquire, Kelly L. Freund, Esquire, DLA PIPER LLP (US), Wilmington, Delaware; for Appellants/Cross-Appellees Manti Holdings, LLC, Malone Mitchell, Winn Interests, Ltd., Equinox I. A Tx, Greg Pipkin, Craig Johnstone, Tri-C Authentix, Ltd., David Moxam, Lal Pearce, and Jim Rittenburg.

Samuel A. Nolen, Esquire (argued), RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Andrew Hammond, Esquire, Michelle Letourneau-Belock, Esquire, Bryan Beaudoin, Esquire, WHITE & CASE LLP, New York, New York; for Appellee/Cross-Appellant Authentix Acquisition Company, Inc.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR and MONTGOMERY-REEVES, Justices.

MONTGOMERY-REEVES, Justice, for the Majority:

In 2017, a third-party entity acquired Authentix Acquisition Company, Inc. ("Authentix"). The cash from the merger was distributed to the stockholders pursuant to a waterfall provision. The Authentix common stockholders received little to no consideration. A group of common stockholders filed a petition for appraisal in the Court of Chancery under Section 262 of the Delaware General Corporation Law ("DGCL"). Authentix moved to dismiss the petition, arguing that the petitioners had waived their appraisal rights under a stockholders agreement that bound the corporation and all of its stockholders. The Court of Chancery granted the motion to dismiss, holding that the petitioners had agreed to a clear provision requiring that they "refrain" from exercising their appraisal rights with respect to the merger. In a separate opinion, the court awarded the petitioners equitable interest on the merger consideration and declined to award Authentix pre-judgment interest under a fee-shifting provision. All parties appealed the Court of Chancery's decisions.

The arguments in this appeal largely focus on whether Section 262 of the DGCL prohibits a Delaware corporation from enforcing an advance waiver of appraisal rights against its own stockholders. Pointing to Delaware's strong policy favoring private ordering, Authentix argues that stockholders are free to set the terms that will govern their corporation so long as such alteration is not prohibited by statute or otherwise contrary to the laws of this State. Authentix contends that a waiver of the right to seek appraisal is not prohibited by the DGCL and is not otherwise contrary to the laws of this State.

The petitioners recognize that the DGCL is flexible, but they argue that the DGCL has mandatory provisions that are fundamental features of the corporate entity's identity. These features, they contend, cannot be varied by a contract between the corporation and all its stockholders. The petitioners argue that, if one desires true "freedom of contract," Delaware provides that option through the alternative entity forms, which expressly give maximum effect to the principle of freedom of contract. The petitioners warn that, if this Court allows a waiver of any mandatory right under the DGCL, such as the right to demand appraisal, then any other right could be waived. For example, they argue that a Delaware corporation and all its stockholders could also agree to a preemptive and blanket waiver of their statutory right to seek books and records under Section 220, their ability to challenge an election under Section 225, their ability to bring an action to compel a stockholders’ meeting under Section 211, and their ability to file a breach of fiduciary duty action, among others.

As a matter of public policy, there are certain fundamental features of a corporation that are essential to that entity's identity and cannot be waived. Nonetheless, it is the Court's view that the individual right of a stockholder to seek a judicial appraisal is not among those fundamental features that cannot be waived. Accordingly, we hold that Section 262 does not prohibit sophisticated and informed stockholders, who were represented by counsel and had bargaining power, from voluntarily agreeing to waive their appraisal rights in exchange for valuable consideration.

This Court also affirms the other aspects of the Court of Chancery's decision. The petitioners agreed to a clear waiver of the appraisal rights with respect to the 2017 merger. Authentix was an intended beneficiary capable of enforcing that waiver. The waiver is not a stock restriction that had to be included in the corporation's charter, and Delaware corporations may enforce stockholders agreements. The Court of Chancery did not abuse its discretion by awarding the petitioners equitable interest on the merger consideration; nor did the court abuse its discretion by declining to award Authentix pre-judgment interest under a fee-shifting provision. Accordingly, the Court of Chancery's judgment is affirmed.

I. BACKGROUND

A. Parties and Relevant Non-Parties

Authentix is a Delaware corporation.¹

Appellants and Cross-Appellees Manti Holdings, LLC; Malone Mitchell; Winn Interests, Ltd.; Equinox I. A Tx; Greg Pipkin; Craig Johnstone; Tri C Authentix, Ltd.; David Moxam; Lal Pearce; and Jim Rittenburg (collectively, the "Petitioners") were minority stockholders of Authentix before the corporation's merger with a third-party entity.²

The Carlyle Group and J.H. Whitney & Co. (collectively, "Carlyle") were majority stockholders of Authentix before the corporation's merger with a third-party entity.³

Authentix, Inc. is the predecessor entity to Authentix.⁴

B. The Petitioners Enter into the Stockholders Agreement

In 2007, Authentix, Inc. retained an investment banker and began exploring its strategic and financial options.⁵ At that time, each of the Petitioners owned stock in Authentix, Inc.; and Manti Holdings, LLC held a majority of the outstanding shares.⁶ Several prospective bidders made offers, including Carlyle.⁷ The Carlyle offer won out, and in 2008 Authentix, Inc. entered into a transaction under which it became a wholly-owned subsidiary of Authentix. Carlyle gained majority control of the parent corporation, Authentix.⁸ The Petitioners rolled over or reinvested their stakes and became minority stockholders in the post-merger Authentix.⁹

As a condition of the 2008 merger, Carlyle required that Authentix and all of its stockholders enter into a stockholders agreement (the "Stockholders Agreement").¹⁰ The Petitioners, Authentix, and Carlyle were all represented by counsel; the Stockholders Agreement was not a contract of adhesion; and all of the parties received valuable consideration in exchange for entering into the agreement.¹¹ Authentix and each of the Petitioners signed the Stockholders Agreement, along with Carlyle.¹²

In 2009, Authentix sought to raise additional capital by issuing Series B preferred stock.¹³ All of the existing stockholders, including the Petitioners, participated on a pro rata basis.¹⁴ Carlyle and other stockholders purchased shares of the Series B preferred stock.¹⁵ In connection with this transaction, the Stockholders Agreement was amended to add a definition of "Preferred Stock."¹⁶

C. Authentix Merges with a Third-Party Entity

On September 12, 2017, the Authentix board recommended a merger with a third-party entity.¹⁷ On September 13, 2017, Carlyle approved the merger by written consent, and closing occurred the same day.¹⁸ The Petitioners did not receive advance notice of the merger and were not given an opportunity to vote on the transaction.¹⁹

Shortly after the merger closed, the Petitioners were provided with a written notice that the corporation had executed a merger agreement by written consent.²⁰ The notice summarized various details of the merger agreement and "request[ed] that [the recipient] execute [an attached] Written Consent to waive any appraisal rights that [they] may have under Section 262 of the DGCL pursuant to [their] obligations set forth in the Company's Stockholder's Agreement to which [they] are a party and to which [they] are bound."²¹ The notice included a one-page disclosure informing the recipient of their appraisal rights:

APPRAISAL RIGHTS OF STOCKHOLDERS

The Company's stockholders who do not consent in writing to the Merger may be entitled to certain appraisal rights under Section 262 of the DGCL in connection with the Merger as described below. ... Stockholders who executed and delivered a written consent of stockholders to consent to the adoption of the Merger Agreement will not be entitled to these rights. [The recipient] [is] reminded that [they] have contractually agreed to refrain from exercising any appraisal rights pursuant to the Company Stockholders Agreement to which [they] are bound.²²

Under the merger agreement, all of the Petitioners’ stock was cancelled and converted into a right to receive the merger consideration.²³ The merger consideration was to be distributed to stockholders based on a waterfall provision that gave priority to the preferred stockholders.²⁴ It appears that common stockholders, like the Petitioners, could expect to receive little to no compensation for their cancelled stock and that nearly all of the merger consideration would be paid to the preferred stockholders, such as Carlyle.²⁵

D. The Court of Chancery Dismisses the Appraisal Petition

In September and October of 2017, the Petitioners sent timely appraisal demands to Authentix.²⁶ In response, Authentix requested that the Petitioners withdraw their appraisal demands and agree to exchange their shares for the merger consideration.²⁷ The Petitioners refused and filed a petition (the "Appraisal Petition") in the Court of Chancery seeking to...