Waiver of statutory stockholder rights under Delaware law

May 2023 | SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

May 2023 Issue

Under Delaware law, stockholders are entitled by statute to certain rights designed to both protect and advance their interests. For example, for certain merger and consolidation transactions, the Delaware Code grants appraisal rights to dissenting stockholders that entitle such stockholders to an “appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock” and payment of the court-determined fair value of the shares.

Before the statutory grant of appraisal rights, merger and consolidation transactions required unanimous stockholder approval, meaning that an individual stockholder could effectively veto an entire transaction and impede the merger or sale of a company. While the Delaware Code was amended to allow for the sale of a corporation upon majority consent, by granting appraisal rights, the Delaware General Assembly ensured that dissenting minority stockholders would remain protected and “be paid for that which has been taken”.

Inspection rights are another example of a statutory right granted to protect investor interests. Section 220 of the Delaware Code grants stockholders the right to inspect the books and records of a corporation “for any proper purpose”. Inspection rights, when properly invoked, can help to police a corporation by bridging the gap between the information that is voluntarily disclosed to stockholders and the information stockholders may need to determine whether officers and directors are engaging in any wrongdoing in carrying out the company’s business.

While statutory investor rights such as appraisal rights and inspection rights are undoubtedly important stockholder protection tools, Delaware courts have repeatedly emphasised that the Delaware corporate statute is a “flexible” and “enabling” one.

Freedom of contract remains a bedrock principle of Delaware law and therefore even statutory rights are not immune from Delaware’s strong policies in favour of enforcing voluntary agreements. Instead, Delaware law is clear that stockholders may contractually waive their statutory rights. Indeed, in recent years, Delaware courts have reaffirmed Delaware’s long tradition of enforcing the clear language of parties’ contracts by explicitly confirming that stockholders may prospectively waive their statutory right to appraisal.

While these decisions have generally focused on the waiver of appraisal rights, they suggest that stockholders may prospectively waive other statutory rights, such as inspection rights, and can be instructive as to what Delaware courts are likely to scrutinise in cases challenging or relying upon such waivers.

Delaware’s approach to statutory waiver

Delaware courts have long held that contractual waivers of statutory rights are enforceable provided that the waiver is “clearly and affirmatively expressed”.

As noted by the Delaware Supreme Court in Manti Holdings, LLC v. Authentix Acquisition Co. (a 2021 decision affirming that a stockholder’s agreement barring common stockholders from exercising their appraisal rights was enforceable), “our legal system permits one to waive even a constitutional right and, [a] fortiori, one may waive a statutory right”. However, the contractual waiver of a statutory right must be clear to be enforceable and the facts relied upon to prove waiver must be unequivocal.

For example, in Manti, the court had to determine whether a 2008 stockholders agreement providing that, “[I]n the event that…a Company Sale is approved…, each Other Holder shall consent to and raise no objections against such transaction…, and…[shall] refrain from the exercise of appraisal rights with respect to such transaction”, waived the petitioning stockholders’ statutory appraisal rights with respect to a 2017 merger agreement. In holding that the agreement clearly and unambiguously waived such rights, the court relied on principles of contract interpretation, including Delaware’s well-established principles requiring courts to “read agreements as a whole and enforce the plain meaning of clear and unambiguous language”.

Delaware law is also clear that public policy concerns alone will not prevent the enforcement of statutory waivers. As another example from Manti, there, the petitioning stockholders argued that even if they had contractually agreed to waive such rights, “[a]ppraisal rights are core characteristics of the corporate entity that provide basic protections to investors” that cannot be waived as a public policy matter. In rejecting these arguments, the Manti court emphasised that the Delaware Code is a “broad enabling act that allows immense freedom for private ordering” and noted that certain investor rights, such as the right of a stockholder to seek a judicial appraisal, can be contractually waived even if deemed “fundamental”.

In holding that even “fundamental” appraisal rights could be validly waived, the court further noted that the petitioning stockholders “were sophisticated and informed investors, represented by counsel, that used their bargaining power to negotiate a waiver of their appraisal rights in exchange for valuable consideration”. In other words, the stockholders were “sophisticated insiders with access to all the information that they could need to understand the Refrain Obligation’s (waiver’s) value and cost” and such “capable investors do not need protection of the courts to escape a bad bargain”.

While the Manti court acknowledged that “there are certain fundamental features of a corporation that are essential to that entity’s identity and cannot be waived”, the court did not elaborate on what those features may be. However, Manti and other Delaware decisions suggest that inspection rights would not fall under the category of non-waivable statutory rights. Indeed, just as the Manti court observed regarding the waiver of appraisal rights, it is not clear that inspection rights “play a sufficiently important role in regulating the balance of power between corporate constituencies to forbid sophisticated and informed stockholders from freely agreeing to an ex ante waiver of their [] rights under a stockholders agreement in exchange for consideration”.

For example, in Kortum v. Webasto Sunroofs, Inc., a 2000 decision from the Delaware Court of Chancery, the defendant corporation argued that the plaintiff stockholder’s inspection rights should be limited to only those documents to which the plaintiff would be entitled under a shareholder’s agreement. Notably, in rejecting this argument, the Delaware Court of Chancery did not state that inspection rights are one of the rights that are so essential to an entity’s identity that they can never be waived.

Nor did the court state that inspection rights are so vital to regulating the balance of power between a corporation and its stockholders that they cannot be waived by sophisticated and informed parties. Rather, consistent with the court’s guidance in Manti, the court held that the shareholder’s agreement at issue in Kortum did not “expressly provide for a waiver of statutory inspection rights” and “[t]here can be no waiver of a statutory right unless that waiver is clearly and affirmatively expressed in the relevant document”.

Conclusion

Until Delaware courts provide further clarity on the waiver of statutory rights outside of the appraisal context, parties seeking to enter into agreements that waive other statutory investor rights, such as inspection rights, should take a cue from Manti and Kortum and make efforts to ensure that any waiver agreements are carefully drafted with clear and unambiguous language. Moreover, because Delaware courts will often consider the sophistication of the parties entering into a particular agreement (as noted, the Manti court emphasised that the challenging stockholders “were sophisticated and informed investors, represented by counsel, that used their bargaining power to negotiate a waiver of their appraisal rights in exchange for valuable consideration”), parties entering into statutory waiver agreements should ensure that the negotiations and discussions leading to such agreements are transparent and all parties are represented by counsel.

Julia Beskin is a partner and Samantha J. Yantko is an associate at Quinn Emanuel Urquhart and Sullivan, LLP. Ms Beskin can be contacted on +1 (212) 849 7000 or by email: juliabeskin@quinnemanuel.com. Ms Yantko can be contacted on +1 (212) 849 7583 or by email: samanthayantko@quinnemanuel.com.

Julia Beskin and Samantha J. Yantko

Quinn Emanuel Urquhart and Sullivan, LLP