The Delaware Court of Chancery’s ruling in Halpin v. Riverstone National* is an important decision for private equity professionals. While the Delaware courts have previously found that a holder of preferred stock may waive its rights of appraisal in advance, they have not expressly addressed the enforceability of an advance waiver of appraisal rights by a common stockholder. Though Riverstone does not definitively answer the question of whether a holder of common stock may waive statutory appraisal rights prospectively by contract, the decision throws into stark relief a number of considerations that private equity sponsors and legal practitioners should bear in mind when seeking to draft or exercise drag-along provisions.
The court was presented with unique facts in Riverstone. The complainant minority stockholders were party to a stockholders’ agreement that contained a typical drag-along provision, which granted the power to the corporation, under certain conditions, to require its minority stockholders to tender and/or vote their shares in favor of a “Change of Control Transaction” approved by a majority of the corporation’s stockholders. When the corporation entered into a merger agreement, pursuant to which it was to be acquired, the corporation’s 91% majority stockholder (without notice to the minority stockholders) approved the merger, and the following day, the merger was consummated. After the consummation of the merger, the corporation sent an information statement to its stockholders, informing them of, among other things, the entry into merger agreement and the approval of the merger by its 91% majority stockholder, as well as the effectiveness of the merger. Among other things, the information statement attempted to invoke the corporation’s drag-along right by requiring the minority shareholders to “vote to approve the adoption of the Merger Agreement” by executing and returning an attached written consent.
The ruling in Riverstone hews to these unique facts. The court held that the minority stockholders were not prohibited from exercising their statutory appraisal rights in a squeeze-out merger despite the existence of a drag-along provision in a stockholders’ agreement to which such minority stockholders were parties. Under the specific terms of the drag-along in the stockholders’ agreement, the corporation could only seek to invoke the drag-along right related to the requirement for the stockholders to vote their shares in favor of a Change of Control Transaction when it “proposes” to enter into a qualifying transaction. The drag-along provision also required that the corporation provide 10 days’ written notice to the stockholders in order to seek to invoke such right. Thus, the drag-along right requiring the stockholders to vote their shares in favor of a Change of Control Transaction was not exercisable by the corporation in this case because the minority stockholders were only informed of the merger after it had already been consummated, and the express terms of the drag-along right only permitted such right to be exercised prospectively (not retrospectively). The court rejected the argument that the sole purpose of this drag-along right was to cause the minority stockholders to waive their appraisal rights, saying, “The Company bargained for a right it did not exercise, and not the similar right it attempted to exercise.” Because the corporation did not comply with the express terms of the stockholders’ agreement that would have effected such a waiver, the minority stockholders were not prohibited from exercising their appraisal rights in this instance. Interestingly, the corporation did not seek to invoke the component of the drag-along provision requiring stockholders to tender their shares, though it is possible that, had they done so, the outcome in this case would have been different.
While the court did not rule on whether a holder of common stock may expressly waive statutory appraisal rights prospectively by contract, it seemed willing to permit (assuming compliance with the specified notice provisions), the invocation of Riverstone’s right to compel the minority stockholders to vote in favor of the merger (which would have had the effect of waiving their statutory appraisal rights), so long as the merger had not yet been consummated. In light of this, private equity professionals should consider drafting drag-along rights to allow for the exercise thereof not only when the corporation “proposes” to enter into a qualifying transaction but also following the consummation of such transaction. This ability to enforce the drag-right retrospectively is particularly important when applied to the mandatory tender of shares in the transaction (as opposed to the mandatory vote in favor of the transaction) commonly found in drag-along rights (which, as mentioned above, was included in the drag-along provision at issue in this case but not invoked by the corporation).
Overall, Riverstone serves as a reminder of the importance of precise drafting, and then scrupulous adherence to agreed-upon terms, in order to avoid the risk of litigation. While waiting for the courts to ultimately rule on the validity of prospective waivers of appraisal rights by common stockholders, practitioners and private equity professionals should take a cautious approach when drafting and exercising rights under provisions that purport to require stockholder participation or voting in a merger.
*The case is Halpin v. Riverstone National, Inc., C.A. No. 9796-VCG (Del. Ch. Feb. 26, 2015) (Glasscock, V.C.)