In a recent opinion, Halpin v. Riverstone National, Inc.1 , the Delaware Court of Chancery granted the minority stockholders’ appraisal rights following the consummation of the merger, even though the stockholders had agreed to drag-along rights in the stockholders agreement. The court declined to answer directly whether a common stockholder can, ex ante and by contract, waive appraisal rights in the case of a squeezeout merger.
In Halpin, the minority common stockholders of Riverstone National Inc., a Delaware corporation (Riverstone or the Company), entered into a stockholders agreement in June 2009 with Riverstone, granting it the power, subject to certain restrictions, to require the minority stockholders to tender and/or vote their shares in favor of a change-in-control transaction approved by a majority of Riverstone’s stockholders.
On June 2, 2014, Riverstone was merged into a third party. That merger had been approved by the 91 percent controlling stockholder several days before the merger became effective, but no notice of the merger or the vote to approve the merger was sent to the minority stockholders until the merger had been completed. On June 9, 2014, Riverstone sent a letter to the minority stockholders informing them of the completion of the cash-out merger with a third party. The letter notified the minority stockholders that Riverstone had exercised its drag-along rights provided in the stockholders agreement, and required the minority stockholders to execute and deliver a written consent to the merger. The letter further provided that if a minority stockholder executed the written consent, he would not be entitled to exercise appraisal rights; if he did not execute the written consent, he would be in breach of the stockholders agreement.
Upon receiving the letter, several of the minority stockholders delivered separate written demands for appraisal of their shares pursuant to Section 262 of the DGCL. Riverstone brought counterclaims seeking specific performance against the minority stockholders to waive the appraisal rights.
Plain Meanings of the Drag-Along Rights
The court denied Riverstone’s request of specific performance under the language of the stockholders agreement. The stockholders agreement provided that upon a “change-in-control transaction” proposal, the minority stockholders would be given “written notice thereof at least ten days in advance of the date of the transaction” to “tender the specific numbers of [s]hares” and could be required to “vote in favor of such transaction.” The court noted that the stockholders did not explicitly waive appraisal rights in the stockholders agreement, but instead contracted for specific acts by the minority stockholders that would have the effect of waiving appraisal rights—either a forced tender or vote. In addition, the unambiguous language of the drag-along rights was of a prospective nature providing that the minority stockholders would consent to a “proposed” merger, not one that had already been consummated.
The court held the fact that “the Company would have gotten result X had it exercised its rights does not mean the Company is entitled to result X when it failed to exercise those rights. Rather, the Company is limited to the benefit of its bargain, which, according to the literal language of the drag-along, does not include the power to require the [m]inority [s]tockholders to consent to a transaction that has already taken place. Thus, the Company is not entitled to specific performance according to the express terms of the contractual right it invoked.”
Waiver of Common Stockholders’ Appraisal Rights Ex Ante
Delaware courts have never answered the question whether a common stockholder can, ex ante and by contract, waive appraisal rights in the case of a squeeze-out merger. The court discussed in a previous case2 that preferred stockholders’ rights are largely contractual and such stockholders may waive appraisal rights ex ante by contract. The court noted here that the case regarding common stockholders is “more nuanced than is the case with preferred stockholders.” The court declined to address directly whether a common stockholder can waive appraisal rights in advance, but only assumed that a common stockholder may waive its appraisal rights ex ante for purpose of this opinion.
Implied Covenant of Good Faith and Fair Dealing
The court also denied Riverstone’s specific performance request based on the implied covenant of good faith and fair dealing, which the court has used in previous cases as a gap filler to analyze unanticipated development. The court held that the covenant doesn’t provide relief when a company asks the court to “imply a right for which it didn’t contract and should have foreseen.” The court noted that both Riverstone and the minority stockholders were sophisticated parties and should have had knowledge that Riverstone could consummate a merger by written consent. However, Riverstone failed to exercise its drag-along rights as provided by the contract prior to the completion of the merger. Therefore, the court would not hold that the minority stockholders waived their appraisal rights based on the implied covenant of good faith and fair dealing because the parties could have anticipated this type of situation, but had not contracted for it.
Although this case did not resolve whether a common stockholder can waive appraisal rights in advance by contract, it does show that companies should exercise their drag-along rights according to the contractual provisions agreed to in the stockholders agreement. Absent proper execution of drag-along rights pursuant to the terms of a contract, a stockholder retains its statutory appraisal rights.