Exercising Drag-Along Rights After Merger Did Not Waive Appraisal Rights
In Halpin et al v. Riverstone National, Inc., the Delaware Court of Chancery found that invoking drag-along rights against minority stockholders after a merger did not waive appraisal rights under the facts of the case before the court.
Here, the drag-along right did not include a specific waiver of appraisal rights. It only provided that upon advance notice, minority shareholders would vote in favor of a change-in-control-transaction.
Delaware courts have never addressed whether a common stockholder can waive appraisal rights in advance. The court discussed In re Appraisal of Ford Holdings, Inc. That case found that a preferred stockholder may waive its right to appraisal. According to the case, “[s]ince Section 262 represents a statutorily conferred right, it may be effectively waived in the documents creating the security only when that result is quite clearly set forth when interpreting the relevant document under generally applicable principles of construction,” and ultimately held that the indirect language in the relevant documents was “too frail a base upon which to rest the claim that there has been a contractual relinquishment of rights under Section 262″.
For purposes of the Halpin opinion, the court assumed that common stockholders may waive appraisal rights in advance of a transaction. Here the court found construction of the unambiguous contract provision does not clearly demonstrate that the company is entitled to force a waiver of appraisal. The court found the contract demonstrated the opposite—under the circumstances, the minority stockholders did not breach the stockholders agreement by seeking appraisal.
The court assumed, as argued by the company, that the only purpose of the drag-along was to waive the minority stockholders’ appraisal rights. However, rather than explicitly waiving appraisal rights, the parties opted instead to contract for acts by the minority stockholders that would have the effect of waiving appraisal rights–either a forced tender or vote in favor of a transaction.
But the company’s argument failed because it did not exercise the drag-along rights before the merger. The actual vote on the merger occurred by written consent of the controlling stockholder, before the drag-along rights were exercised. Simply put, the drag-along rights did not require the minority stockholders to consent to a transaction that had already taken place.
The court rejected the notion that the minority stockholders waived their appraisal rights because of the implied covenant of good faith and fair dealing. The company and the minority stockholders were sophisticated parties, and both were charged with knowledge as to the various ways the company could have carried out a merger under Delaware law, including by written consent pursuant to Section 228 of the DGCL. Yet, with full awareness that it could consummate a merger by written consent, without the minority stockholders’ knowledge or involvement, the company agreed to drag-along rights that by their unambiguous terms did not apply to this retrospective scenario.