Manti Holdings, LLC v. Authentix Acquisition Company, Inc. ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MANTI HOLDINGS, LLC, MALONE )
MITCHELL, WINN INTERESTS, LTD., )
EQUINOX I. A TX, GREG PIPKIN, )
CRAIG JOHNSTONE, TRI-C )
AUTHENTIX, LTD., DAVID MOXAM, )
LAL PEARCE, and JIM RITTENBURG, )
)
Petitioners, )
)
v. ) C.A. No. 2017-0887-SG
)
)
AUTHENTIX ACQUISITION )
COMPANY, INC., )
)
Respondent. )
_________________________________ )
)
AUTHENTIX ACQUISITION )
COMPANY, INC., )
)
Counterclaim-Plaintiff, )
)
v. )
)
MANTI HOLDINGS, LLC, MALONE )
MITCHELL, WINN INTERESTS, LTD., )
EQUINOX I. A TX, GREG PIPKIN, )
CRAIG JOHNSTONE, TRI-C )
AUTHENTIX, LTD., DAVID MOXAM, )
LAL PEARCE, and JIM RITTENBURG, )
)
Counterclaim-Defendants. )
MEMORANDUM OPINION
Date Submitted: May 28, 2019
Date Decided: August 14, 2019
John L. Reed, of DLA PIPER LLP, Wilmington, Delaware, Attorney for
Petitioner/Counterclaim-Defendants.
Samuel A. Nolen, of RICHARDS, LAYTON & FINGER, P.A., Wilmington,
Delaware, Attorney for Respondent/Counterclaim-Plaintiff.
GLASSCOCK, Vice Chancellor
Before me is the Petitioners’ Motion for Reargument of my Letter Opinion of
October 1, 2018 (the “Letter Opinion”).
Motions for reargument are, in my view, a tool that generally serves best left
in the sheath; they are, I find, rarely fruitful, and most often result in additional
expense for the litigants and effort by the Court, to no purpose. A motion for
reargument, as this Court has pointed out on numerous occasions, does not provide
a forum to relitigate issues decided by the trial judge, and if the trial court is in error
on those issues, vindication is available on appeal, not via reargument. Nonetheless,
reargument can be a useful tool if used as designed, to forestall a final opinion in
which the judge has disregarded matters of law or fact, or has inadvertently failed to
respond to an argument of counsel. In such cases, exercise of the motion can save
the expense and delay of the matter being reviewed on appeal and remand, and I
look on the (rare) well-founded motion for reargument as beneficial to the system of
justice—and the time and effort of both bench and appellate judges—as well as to
the client.
The Petitioners advance such a useful motion here. In my Letter Opinion of
October 1, 2018, on the Petitioners’ Motion to Dismiss the counterclaims and the
Respondent’s Motion for Partial Summary Judgment, I decided what I considered to
be the issue before me: whether, pursuant to contract, the Petitioners had waived
their ability to pursue appraisal rights under the DGCL. The parties had opposing
positions on this issue based on the applicable contractual language, positions they
presented forcefully in oral argument. I found that the Petitioners had agreed to
waive appraisal rights. Largely missing from the oral argument, however, and
missing from my Letter Opinion, was a predicate issue: whether a stockholder can,
via contract, validly waive her appraisal rights to begin with.
The Petitioners moved for reargument, in part on that ground. In examining
the applicable briefing, it is clear that the Petitioners raised fairly the issue of the
enforceability of a stockholder agreement to waive appraisal rights. As a result, I
should have addressed it initially, and I rectify that omission here. Upon
consideration, I find on this issue in the Respondent’s favor; nonetheless, the
Petitioners’ Motion for Reargument was well-taken.
I. BACKGROUND
I will recite in this Letter Opinion only those facts and contractual provisions
necessary to my decision. The facts available at the time I issued the Letter Opinion
have been supplemented at my request by the parties’ Joint Stipulation of Fact (the
“Joint Stipulation”), submitted on May 28, 2019; those facts are referenced as
appropriate.
This matter relates to the sale via merger of Authentix Acquisition Co.
(“Authentix”) to a third-party entity. As of 2008, the Petitioners were the sole
2
owners of Authentix, Inc. 1 In that year, Authentix, Inc. merged into Authentix, with
The Carlyle Group and J.H. Whitney & Co. (collectively, “Carlyle”) as the new
majority owner.2 As a condition of the merger, the Petitioners agreed to roll over
their interest in Authentix, Inc. into Authentix; also as a condition of the merger,
they entered into a Stockholders Agreement (“SA”).3 In 2009, as a response to a
need for capital, the SA was amended to recognize a new issuance of preferred stock,
Series B, in which the Petitioners and other equity holders were invited to
participate. 4 Carlyle participated in the Series B round.5
The SA was not a contract of adhesion. As provided in the supplemental Joint
Stipulation of Fact, the Petitioners—who were, I find, sophisticated parties—were
represented by counsel, who exchanged drafts of the proposed SA before agreeing
to a final contract.6 In other words, the sole owners of Authentix, Inc., with the help
of counsel, negotiated the terms of the SA, as part of the 2008 merger with the
Carlyle entity, Authentix, which merger was, I presume, valuable to the Petitioners.
One of the provisions in that negotiated contract was, as I have found, a waiver of
appraisal rights at issue here. The SA also rigorously limits the Petitioners’ rights
to sell their shares: the Carlyle majority must approve any sale, and the buyer must
1
Joint Stip. of Fact [hereinafter Joint Stip.], at ¶ 2.
2
Id. at ¶ 3.
3
Id. at ¶ 4.
4
Id. at 9.
5
Id.
6
Id. at ¶¶ 6–7.
3
consent in writing to be bound by the SA’s terms, including the waiver of appraisal
rights.7 Presumably, the Petitioners have enjoyed the benefit of their bargain,
through the time of the sale of Authentix.
The Petitioners seek statutory appraisal under Section 262 of the Delaware
General Corporation Law (“DGCL”) in connection with a 2017 transaction.8 On
October 1, 2018, I issued my Letter Opinion in this matter, granting the
Respondent’s Motion for Partial Summary Judgment on whether the Petitioners are
contractually barred from exercising their appraisal rights.9 In short, I found that the
Petitioners had, by the SA, waived their right to statutory appraisal in the event of a
sale of Authentix, provided that stockholders received the “same price.” 10
In the October 1 Opinion, I held that the parties’ contractual rights and
obligations continued post-merger, that the transaction at issue triggered those
contractual rights and obligations—specifically, to refrain from seeking appraisal—
and that the company has the authority to enforce the SA.11 On October 8, 2018, the
Petitioners moved for reargument of the October 1, 2018 Letter Opinion.
In their Motion, the Petitioners submit that, in the Letter Opinion, I erred as
to the interpretation of the SA. Per the Petitioners, contrary to my ruling, under the
7
See id. at Ex. A, SA §§ 2, 5.
8
See Compl.; see also 8 Del. C. § 262.
9
2018 WL 4698255 (Del. Ch. Oct. 1, 2018).
10
Id.
11
Id. at *2–3.
4
plain terms of the SA the merger constitutes a “sale of equity securities,” and so
Section 3(e) of the SA applies here. 12 Under that provision, the Petitioners are
entitled to receive the “same price” as [Carlyle] stockholders in the event of a sale. 13
The Petitioners also submit that I erred as a matter of statutory law; that under
Delaware law, statutory appraisal rights cannot be waived via contract.14
On November 20, 2018, I directed the parties to supplement their briefing on
the Motion for Reargument, to address one narrow issue: whether a contractual
undertaking to limit or waive future appraisal rights, in connection with a transaction
that is not yet contemplated, is enforceable. The parties submitted further briefing,
which concluded on January 4, 2019. I asked them to supplement that briefing with
a factual recitation, the Joint Stipulation of Fact, filed on May 28, 2019. At that
time, the Motion was submitted for decision. What follows is my analysis
specifically limited to the facts as stated above: Does the DGCL forbid the
sophisticated owners of a corporation from negotiating a term as part of a merger
agreement that binds them to a future sale and waives statutory appraisal rights? I
conclude that it does not.
12
Pet’rs’ Mot. for Reargument of the Court’s Ltr. Op. Dated Oct. 1, 2018 [hereinafter Pet’rs’ Mot.
for Reargument], at 10–11.
13
See Stip. of Fact, at Ex. A, SA § 3(e).
14
Pet’rs’ Mot. for Reargument, at 11–14.
5
II. ANALYSIS
Under Court of Chancery Rule 59(f), a party may move for reargument within
five days after the Court issues an opinion. Reargument is warranted only where
“the Court has overlooked a decision or principle of law that would have controlling
effect or . . . misapprehended the facts or the law so the outcome of the decision
would be different.”15 “A motion for reargument is not a mechanism to present new
arguments or to relitigate claims already considered by the Court.” 16
A. No error as a matter of statutory law
The Petitioners contend that the October 1, 2018 Letter Opinion erred as a
matter of statutory law. Per the Petitioners, the error was that I upheld an agreement
that abrogates the statutory right of appraisal. 17 In the Letter Opinion, I assumed
without deciding that I could avoid decision of the ability of these parties to waive
appraisal, because the Petitioners informed me at Oral Argument that there were no
issues of law.18 On reargument, the Petitioners assert that they preserved this issue
in briefing.19 Upon review, I do not consider the issue to be waived, even though it
15
Pontone v Milso Indus. Corp., 2014 WL 4352341, at *1 (Del. Ch. Sept. 3, 2014).
16
Cabela’s LLC v. Wellman, 2018 WL 6680972, at *1 (Del. Ch. Dec. 19, 2018).
17
Pet’rs’ Mot. for Reargument, at 11–14.
18
See June 13, 2018 Oral Arg. Tr., at 7:14–15 (Counsel for the Petitioners said, “I still don’t believe
there’s any real dispute about the law here.”).
19
Pet’rs’ Supp. Opening Br. in Connection With Reargument of the Court’s Oct. 1, 2018 Ltr. Op.
[hereinafter Pet’rs’ Supp. Opening Br.], at 2.
6
was not clearly raised at Oral Argument. Although I did not address this issue in my
earlier Letter Opinion, I address it now, for completeness.
First, the Petitioners submit that Section 262 is a mandatory provision, and
that mandatory rights cannot be waived ex ante.20 They cite to this Court’s decision
in Appraisal of Ford Holdings, Inc. Preferred Stock, which stated that “generally
. . . mandatory provisions may not be varied by the terms of the certificate of
incorporation or otherwise.”21 I note, however, that Ford Holdings (discussed in
greater detail, below) nevertheless upheld a contract that fixed the appraisal price of
preferred stock, rendering statutory appraisal meaningless. 22 My understanding of
the Petitioners’ argument is that even though Ford Holdings tends to suggest that
appraisal rights may be waived ex ante, such suggestion is dicta; this court has never
explicitly held that such is allowed, and therefore, waiving appraisal rights is
contrary to Delaware law. Moreover, according to the Petitioners, under my
decision that “same price” applies within each class of stock, as opposed to all
stockholders being entitled to receive the same price, the Petitioners could receive
as little as nothing in return for the obligation to “refrain” from exercising appraisal
20
Id. at 12. The right is mandatory, I presume, in that it exists for all stockholders of Delaware
corporations by statute. It is not mandatory in that stockholders must pursue appraisal, or that an
appraisal action must proceed in every instance in which statutory appraisal is permitted under the
DGCL. To the contrary, stockholders must meet certain procedural requirements to invoke
appraisal rights, and stockholders are deemed to have waived appraisal rights if those requirements
are not satisfied. 8 Del. C. § 262.
21
698 A.2d 973, 976 (Del. Ch. 1997).
22
Id. at 977.
7
rights, so allowing a contractual waiver of appraisal rights here is contrary to
Delaware law. 23
Second, the Petitioners argue that a corporation may not impose an advance
waiver of appraisal rights by separate agreement, because even if such waiver is not
prohibited by the DGCL, it is nevertheless inconsistent with the DGCL. 24 They point
to a hierarchy, in which the DGCL resides at the top, followed by a corporation’s
certificate of incorporation, then its bylaws, and then other contracts (such as the SA
at issue here). 25 Per the Petitioners, the lower items on the hierarchy cannot conflict
with the higher-ranking items. Because the DGCL, Authentix’s certificate of
incorporation, and its bylaws do not expressly allow contractual waiver of appraisal
rights, the provision to that effect in the SA is in conflict with those three “higher”
items. It follows, the Petitioners posit, that if Authentix wanted to alter appraisal
rights, it should have been an LLC or an LP, not a corporation.
I conclude that the SA here is enforceable, including the provision that waives
the Petitioners’ appraisal rights. The SA is a clear, unambiguous contract, created
as part of a merger, that was entered into by sophisticated parties, including the
Petitioners here, who owned the entire interest in the entity to be merged. My finding
is informed by Delaware precedent, including the Ford Holdings case. There, this
23
Pet’rs Supp. Opening Br., at 5.
24
Id. at 15.
25
Id.
8
Court upheld, in part, a contract between a corporation and its preferred stockholders
that, in the event of a merger, fixed “fair value” at a set price, thereby effectively
waiving the stockholders’ right to appraisal. 26 The Court reasoned that “[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
. . . .”27 Modification of a statutory right to appraisal “must be express or at least
very clearly implied.” 28 This reasoning—that waiver of a party’s rights is permitted,
but must be clear—is found elsewhere in our law. 29
Ford Holdings involved the appraisal rights of preferred stockholders,
whereas the present case involves the appraisal rights of common stockholders.
Nevertheless, given the Chancellor’s reasoning in that case, in light of Delaware’s
aforementioned precedent permitting waiver of other statutory rights, and in light of
the specific facts here, I find that waiver of appraisal rights is permitted under
Delaware law, as long as the relevant contractual provisions are clear and
unambiguous.
26
Ford Hldgs., 698 A.2d at 974.
27
Id. at 977.
28
Id. at 975.
29
See, e.g., Kortum v. Webasto Sunroofs, Inc., 769 A.2d 113, 125 (Del. Ch. 2000) (waiver of
statutory rights must be “clearly and affirmatively expressed in the relevant document”); see also
Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908 (Del. 1989) (arbitration provision that
waived insured’s right to a jury trial was upheld, despite it being a contract of adhesion); Libeau
v. Fox, 880 A.2d 1049, 1056 (Del. Ch. 2005) (“the absolute right to [statutory] partition [may] be
relinquished by contract”).
9
Here, Authentix Inc. was a private company (as is Authentix), and the
Petitioners were its sole stockholders. There is no record evidence that the
Petitioners were not fully informed; to the contrary, there is evidence that the
Petitioners are sophisticated investors who were fully informed and represented by
counsel when they signed the SA, under which they obtained some rights and
relinquished others, and then accepted the benefits of that contract for seven years. 30
The SA clearly and unambiguously waives appraisal rights; therefore, it should be
enforced. I need not decide whether a waiver of appraisal would be upheld in other
circumstances.
Moreover, I note that the DGCL does not explicitly prohibit contractual
modification or waiver of appraisal rights, nor does it require a party to exercise its
statutory appraisal rights. 31 Thus, such modification or waiver serves to supplement
the DGCL, and is not inconsistent with, nor contrary to, the DGCL. The same logic
applies to Authentix’s certificate of incorporation and its bylaws, which are silent
regarding waiver of appraisal rights; as a contract between the corporation and its
stockholders, the SA augments the parties’ rights and responsibilities.
30
See, e.g., Joint Stip., at ¶¶ 6–7.
31
See 8 Del. C. § 262.
10
B. The contract issues were previously addressed
The Petitioners argue that I erred by holding that the merger at issue is not a
“sale of equity securities” under the SA, and so Section 3(e) of the SA does not
apply.32 The Petitioners already raised these arguments, both in their briefs and at
oral argument on the cross-case dispositive motions. 33 I have already considered the
Petitioners’ contentions, and rejected them. To the extent I erred, the available
remedy is an appeal.
III. CONCLUSION
For these reasons, the Petitioners’ Motion for Reargument is denied. The
parties should inform me what issues, if any, remain. An appropriate order is
attached.
32
Pet’rs’ Mot. for Reargument, at 7–11.
33
See Pet’rs’ Ans. Br. in Opp’n to Resp’t’s Mot. for Partial Summ. J., at 10; June 13, 2018 Oral
Arg. Tr. at 10:12–19, 13:3–6, 15:1–2, 16:20–23.
11
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MANTI HOLDINGS, LLC, MALONE )
MITCHELL, WINN INTERESTS, LTD., )
EQUINOX I. A TX, GREG PIPKIN, )
CRAIG JOHNSTONE, TRI-C )
AUTHENTIX, LTD., DAVID MOXAM, )
LAL PEARCE, and JIM RITTENBURG, )
)
Petitioners, )
)
v. ) C.A. No. 2017-0887-SG
)
)
AUTHENTIX ACQUISITION )
COMPANY, INC., )
)
Respondent. )
_________________________________ )
)
AUTHENTIX ACQUISITION )
COMPANY, INC., )
)
Counterclaim-Plaintiff, )
)
v. )
)
MANTI HOLDINGS, LLC, MALONE )
MITCHELL, WINN INTERESTS, LTD., )
EQUINOX I. A TX, GREG PIPKIN, )
CRAIG JOHNSTONE, TRI-C )
AUTHENTIX, LTD., DAVID MOXAM, )
LAL PEARCE, and JIM RITTENBURG, )
)
Counterclaim-Defendants. )
ORDER
AND NOW, this 14th day of August, 2019,
The Court having considered the Petitioners’ Motion for Reargument, IT IS
HEREBY ORDERED that the Motion is DENIED.
IT IS SO ORDERED.
/s/ Sam Glasscock III
Vice Chancellor
2