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This newsletter is our ninth annual review of
significant state court decisions relevant for private company
M&A transactions and related governance matters and
disputes.
* Esther Ju contributed to this
Advisory. Ms. Ju is a graduate of the University of Illinois
College of Law and is employed at Arnold & Porter’s New
York office as an Associate. Ms. Ju is admitted only in Illinois.
She is not admitted to the practice of law in New York.
Manti Holdings, LLC v. Carlyle Grp. Inc., C.A. No.
2020-0657-SG, 2022 WL 444272 (Del. Ch. Feb. 14, 2022)
Summary
In a case involving a challenge to an alleged contractual
waiver in a stockholders agreement of breaches of corporate
directors’ and controllers’ fiduciary duties of loyalty,
the Delaware Chancery Court held that the disputed language in the
stockholders agreement did not satisfy the exacting standards under
Delaware law to constitute a waiver of fiduciary duties. In dictum,
the court also raised significant doubt that a corporate
director’s fiduciary duty of loyalty could properly be waived
by contract in advance.
Background
The plaintiffs, former stockholders of Authentix Acquisition
Company, Inc. (Authentix), brought a post-closing damages action
challenging alleged breaches of fiduciary duty by the defendants in
connection with the sale of Authentix in 2017 (the Sale). The
defendants were preferred stockholders of Authentix and affiliated
entities, who were alleged to be controllers of Authentix, and
three alleged associated persons who were former directors and
officers of Authentix. The Sale was opposed by the plaintiffs on
the basis that it was prompted not by a desire to realize value for
the common stockholders of Authentix, but instead by the strong
desire of the defendants to cash out their preferred stock
investment prior to a self-imposed deadline in September 2017.
The plaintiffs sued the defendants for breach of fiduciary
duties and certain related claims. The defendants moved to dismiss
the plaintiffs’ claims, based in part on plaintiffs having
alleged waived their rights to challenge the Sale pursuant to
a stockholders agreement that pre-dated the Sale. Specifically, the
defendants relied on the following provision of the stockholders
agreement:
“In the event that . . . a Company Sale is approved by the
Board and . . . the holders of at least fifty percent (50{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}) of the
then-outstanding Shares . . . each Other Holder shall consent to
and raise no objections against such transaction. .
.”1
The Court’s Decision
Noting that the court had held in a prior stage of the
litigation that the Sale constituted a “Company Sale” as
referred to in the above-quoted provision of the stockholders
agreement, and further noting that there was no dispute among the
litigants that the Sale had been approved by the board and at least
50 percent of the then-outstanding shares or that the plaintiffs
were “Other Holders” as defined by the stockholders
agreement, the court’s opinion stated that the pertinent
question was whether the plaintiffs’ post-closing damages
action breached their obligation under the stockholders agreement
to “consent to and raise no objections against” the
transaction.2 The court held that it did not because the
disputed language in the stockholders agreement did not constitute
a waiver of rights to seek damages for breaches of fiduciary duty.
In this connection, the court noted that under Delaware law
“waiver is the intentional relinquishment of a known
right,”3 that the facts relied upon to prove a
waiver must be “unequivocal”4 and that the
purported waiver must be “clear and
unambiguous.”5 Further, as Delaware courts have
noted with respect to fiduciary duty waivers in the limited
liability company context (in which fiduciary duty waivers are
specifically permitted by the applicable statute), drafters must
“make their intent to eliminate fiduciary duties plain and
unambiguous for such waivers to be effective.”6
In its analysis, the court pointed out that the Authentix
stockholders agreement made no reference to fiduciary duties, while
it did specifically prohibit the plaintiffs from voting against the
transaction, asserting appraisal rights, or refusing to execute
certain transaction documents. The court said that a more
reasonable interpretation of the disputed language (than it being
an attempt to waive the possibility of redress for duty of loyalty
breaches) is that the language was intended solely to preclude the
plaintiff stockholders from taking actions that would impede or
delay the closing of the transaction, such as voting against a
transaction, refusing to execute transaction documents, or
asserting rights that would arise from any company sale
transaction. In other words, the language was intended to waive
objections to the transaction itself, rather than waiving
objections to fiduciary duty breaches arising in connection with
the transaction. As characterized by the court, the plaintiffs were
not objecting to the Sale; they were instead seeking redress for
purported breaches of fiduciary duty that led to the Sale.
Based on its reading of the disputed stockholder agreement
language, the court concluded that it did not need to rule on the
question of whether contractual waivers of breaches of fiduciary
duty are permissible under Delaware corporate law. The court
nonetheless stated in footnote 45 to its opinion that finding such
waivers to be effective “would blur the line between LLCs and
the corporate form and represent a departure from norms of
corporate governance . . .”7
Additional Guidance in Subsequent Decisions
In Totta v. CCSB Fin’l Corp., issued a few months later and
described elsewhere in this Advisory, the Court of Chancery
considered whether a charter provision that empowered a board of
directors to interpret and enforce a 10 percent vote limitation and
that purported to make the board’s decision “conclusive
and binding,” foreclosed judicial review for breach of
fiduciary duties.8 The court noted that fiduciary duties
arise in equity, that the Delaware legislature could replace equity
standards with statutory law, and that “Delaware corporations
may not . . . default fiduciary obligations unless authorized to do
so by statute.”9 The court held that in contrast to
alternative entities, such as limited liability companies and
limited partnerships, Delaware corporations only have very limited
ability to modify or eliminate fiduciary duties, such as the
ability under DGCL Section 102(b)(7) to eliminate monetary damages
for breach of the duty of care. Totta therefore appears to
answer in the negative the question left open in Manti Holdings
regarding whether corporate directors’ and controllers’
fiduciary duties of loyalty may be waived in advance by
contract.
Support for that conclusion is also found in Delman v.
Gigacquisitions3, LLC,10 a case against a SPAC
sponsor and board members alleging breach of fiduciary duties in
connection with a value-destructive de-SPAC transaction. The
defendants in that case argued that the plaintiff could not bring a
fiduciary duty claim because the plaintiff had implicitly agreed to
the conflicts of interest inherent in the SPAC structure and
disclosed in the IPO prospectus when he invested in the IPO and
again in the proxy statement provided to stockholders in connection
with the solicitation of their approval of the de-SPAC transaction.
The court rejected that argument, holding that it was inconsistent
with the fundamental principles of Delaware law and that
“Delaware corporate law does not allow for a waiver of the
directors’ duty of loyalty.”11
Takeaways
As implied in Manti and stated more directly by the courts in
Totta and Delman, advance contractual waivers of
the fiduciary duty of loyalty of Delaware corporate directors and
controllers are unlikely to be enforceable. One of the situations
where this frequently arises is exit transactions. Controlling
investors should assume that they cannot rely on pre-existing
drag-along provisions or redemption provisions in stockholders
agreements or corporate documents to override fiduciary challenges
to mergers or other corporate transactions. Accordingly,
controlling investors and board members should be conscious of
structuring exit transactions in a way that complies with their
fiduciary duties, particularly transactions where the holders
of common stock receive little or no value and may therefore be
predisposed to initiate fiduciary duty challenges.
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Footnotes
1 Id. at *3.
2 Id.
3 Id. at *2 (citing Minna v. Energy Coal
S.p.A., 984 A.2d 1210, 1214 (Del. Nov. 16, 2009)).
4 Id. (citing Bantum v. New Castle Cnty.
Vo-Tech Educ. Ass’n, 21 A.3d 55, 50 (Del. May 18,
2011)).
5 Id.
6 Id. (citing Bay Ctr. Apartments Owner, LLC
v. Emery Bay PKI, LLC, C.A. No. 3658-VCS, 2009 WL 1124451 at
*9 (Del. Ch. Apr. 20, 2009)).
7 Id. at *4 n.45.
8 Totta v. CCSB Financial Corp., C.A. No.
2021-0173-KSJM, 2022 WL 1751741 at *14 (Del. Ch. May 31,
2022).
9 Id. at *16.
10 Delman v. GigAcquisitions3, LLC, C.A. No.
2021-0679-LWW, 2023 WL 29325 (Del. Ch. Jan. 4, 2023).
11 Id. at *1.
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