DE Court Addresses Contractual Waiver of Stockholder Claims in a Sale

A Delaware court recently rejected an argument that a stockholders agreement barred minority stockholders from bringing a lawsuit alleging that the board of directors had breached its fiduciary duties in approving a sale of the corporation.  This is the second recent Delaware opinion to examine contract provisions purporting to limit stockholder rights at privately-held companies.  It is also a reminder that limited liability companies offer more flexibility in structuring an entity’s relationships among equity holders and management.

In Manti Holdings, former stockholders of a Delaware corporation brought a post-closing lawsuit alleging that the controlling stockholders, directors, and officers breached their fiduciary duties in connection with a sale of the corporation.¹  The defendants responded that, under a stockholders agreement, the plaintiffs had waived their right to bring the lawsuit.  The pertinent provision of the stockholders agreement said that each stockholder “shall consent to and raise no objections against” a sale transaction.

The Court of Chancery held that the waiver was not sufficiently clear to waive a fiduciary duty claim.  In particular, the court noted the absence of any reference to “fiduciary duties” and said “a more reasonable interpretation… precludes the Plaintiffs from taking actions that would impede or delay the closing of an applicable Company Sale (for example, by voting against the transaction or refusing to execute transaction documents) or asserting rights that would arise from any Company Sale (such as the right to an appraisal).”  Because its ruling was based on the contract language, the court did not address whether such a waiver would be enforceable under Delaware corporation law.  The court noted, however, that “[f]inding such waiver effective is a proposition that would blur the line between LLCs and the corporate form and represent a departure from the norms of corporate governance.”

Last year, in related litigation involving the same corporation, the Delaware Supreme Court upheld a stockholder’s contractual waiver of appraisal rights, but the court’s ruling was not unanimous.²  The court’s majority also appeared to be quite careful in describing the circumstances in which it was upholding the waiver, stating that Delaware’s appraisal statute 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.”

Stockholders agreements often impose obligations and restrictions on stockholders in order to facilitate significant transactions, including drag-along terms, voting agreements, and waivers of various stockholder rights.  These agreements are particularly common at private equity and venture capital-backed companies and start-ups generally, and similar provisions may be found in equity grants given to employees at privately-held companies.  In light of the two Manti Holdings cases, practitioners should be aware of questions relating to the enforceability of some provisions in stockholder agreements.

In addition, practitioners should note the Court of Chancery’s reference to the “line” between limited liability companies and corporations.  The Delaware General Corporation Law allows corporations to eliminate director liability for breaches of the duty of care and to renounce corporate opportunities, but the statute does not expressly authorize a waiver of fiduciary duties or of claims to enforce such duties.  In contrast, the Delaware Limited Liability Act has broad enabling provisions allowing for broad private ordering, including the modification or elimination of fiduciary duties.

¹ Manti Holdings, LLC v. The Carlyle Group Inc., C.A. No. 2020-0657-SG (Del. Ch. Feb. 14, 2022).

² Manti Holdings, LLC v. Authentix Acquisition Co., No. 354, 2020 (Del. Sept. 13, 2021).