Passengers Will Please Refrain: Delaware Court of Chancery Upholds Contractual Waiver of Statutory Appraisal Rights in a Merger

By Jay McMillan

Until recently, it was unclear whether a stockholder’s statutory right to appraisal of shares following a merger could be waived by contract.  In Manti Holdings, LLC v. Authentix Acquisition Co., C.A. No. 2017-0887-SG (Oct. 1, 2018), Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery rejected a stockholder’s argument that allowing waiver of appraisal rights by contract was against public policy.  Under Section 262 of the Delaware General Corporation Law, a stockholder in a Delaware corporation may dissent from a merger if the stockholder does not vote in favor of or consent in writing to the merger.  Dissenting stockholders are entitled to appraisal of their shares by the Court of Chancery and are entitled to receive the fair value of their shares as determined by the Court.  In Manti Holdings, the Court of Chancery held for the first time that the statutory right to appraisal can be waived by contract.

The corporation, Authentix, merged with a third party in a transaction that resulted in the appraisal petitioners and other common stockholders receiving little or no consideration for their shares.  Authentix and the petitioners were parties to a stockholders’ agreement that required the parties to consent to a defined “Company Sale” – which occurred in the merger – and to “refrain from the exercise of appraisal rights” with respect to a Company Sale.  The Court stated that “[d]emonstrating a waiver of the statutory right to appraisal requires language evincing the clear intent to waive.”

The petitioners argued, first, that the stockholders’ agreement provided “[t]his agreement, and the respective rights and obligations of the Parties, shall terminate upon the … consummation of a Company Sale,” and their obligation to refrain from exercising appraisal rights thus terminated upon the closing of the merger, allowing them to seek appraisal post-closing.  The petitioners argued that the stockholders’ agreement could have, but did not, state that the right to appraisal was “waived” or “void” upon approval of a sale.  The Court, however, demonstrated a common-sense approach to contract interpretation, finding that the “refrain” language was not ambiguous and that “[n]o contracting party, agreeing to the quoted language, would consider itself free to exercise appraisal rights.”

(The Court, in one of its arcane pop-culture references, contrasted the petitioners’ effort to find ambiguity in the word “refrain” with Arlo Guthrie’s use of the word in a song about a train called “City of New Orleans”: “the conductor sings his songs again, the passengers will please refrain.”)

Second, the petitioners argued that their obligation to refrain from exercising appraisal rights was not triggered because the stockholders’ agreement provided that the obligation would only arise if the company’s majority stockholder received the same value as other stockholders, and that condition was not met.  The Court rejected that argument also, finding that the provision the petitioners relied on only applied in a sale or transfer of the company’s stock, and not in a merger, such as occurred here.  The Court concluded that the petitioners were bound by the stockholders’ agreement to consent to the merger, not to object, and not to exercise appraisal rights.

Third, the petitioners argued that the waiver of appraisal rights, if enforceable, was not enforceable by the company.  The Court found, however, that Authentix was a party to the stockholders’ agreement and would be the respondent in any appraisal action, and that any duty to pay would fall on the company.  Again demonstrating a common-sense approach, the Court concluded that the petitioners “knew they would be bound” by the stockholders’ agreement at the time of a Company Sale.

Finally, the petitioners argued that enforcing the obligation to refrain from exercising appraisal rights was precluded by public policy.  Under Section 151(a) of the Delaware General Corporation Law, limitations on classes of stock must be stated in or derived from the certificate of incorporation.  The petitioners argued that the stockholders’ agreement would allow the company’s board to circumvent the statute by placing restrictions on a class of stock by contract.  The Court rejected that argument also, finding that imposing limitations on stockholders’ rights under contract was “not the equivalent” of imposing limitations on classes of stock under Section 151(a).  The Court concluded that the stockholders’ agreement “did not restrict the appraisal rights of the classes of stock held by the Petitioners; instead, the Petitioners, by entering the [stockholders’ agreement], agreed to forbear from exercising that right.”

The Court noted that the stockholders’ agreement “was presumably to the benefit of all parties” and that the waiver of appraisal rights was included “to entice investment” and “make the Company more attractive to potential buyers.”  It is now clear that such contractual waivers are enforceable under Delaware law, at least where, as in Manti Holdings, they require stockholders to “refrain from the exercise of appraisal rights.”

Update:  The petitioners have filed a motion for reargument and have identified five grounds for appeal.  The Court has scheduled argument on the motion for November 26, 2018.  I will post a further update as soon as the Court issues a ruling.

James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP.  He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery.  For more information on the firm, visit

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