Appraisal Waivers

Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School. This post is based on her recent paper, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Appraisal has long been a controversial topic. The courts have struggled to determine the most appropriate valuation methodology and the extent to which that methodology should depend on vary based on case-specific factors. The Delaware Supreme Court continues to face an active docket of appraisal cases and to resolve them through opinions that are highly context-dependent. For example, in Brigade Leveraged Capital Structures Fund Ltd. v. Stillwater Mining Co., C.A., 2020 Del. LEXIS 335 (Del. Oct. 12, 2020) the court upheld the use of deal price as a reliable indicator of fair value despite significant flaws that were identified in the deal process. In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (Del. 2019), the Supreme Court reversed the Chancery court’s valuation based on unaffected market price in favor of deal price minus synergies, and, at the same time, adjusted the lower court’s calculation employing that methodology. Yet in Fir Tree Value Master Fund, L.P. v. Jarden Corp., 236 A.3d 313 (Del. July 9, 2020) the court affirmed the use of unaffected trading price despite warning that “it is not often that a corporation’s unaffected market price alone could support fair value.” Variation in both the valuation method that the courts will employ and the implementation of that method create substantial uncertainty. The challenges are magnified by the heavy dependence on expert testimony and the potential for opportunistic litigation pejoratively described as appraisal arbitrage.

Appraisal proceedings in private companies such as venture-capital funded start-ups can involve even more difficult valuation challenges because of the absence of contemporaneous market-based evidence of fair value and the lack of reliable inputs for a discounted cash flow analysis. As the Chancery court recently observed, the evidence in such cases may make it “difficult to discern any wholly reliable indicators of …fair value.” Kruse v. Synapse Wireless, Inc., 2020 Del. Ch. LEXIS 238.

With the continued importance of mergers as an exit option for private company shareholders and the risk that such mergers could subject companies to expensive and uncertain appraisal litigation, many private companies are seeking to address these problems contractually. A growing trend is to use provisions in shareholder agreements, including drag-along rights, fair price provisions and explicit appraisal waivers, to limit or eliminate the exercise of appraisal rights. Drag-along provisions are commonly used by start-up investors. They do not speak directly to dissenting shareholders’ appraisal rights but rather operate indirectly by requiring shareholders to vote in favor of a proposed merger under specified conditions, thereby eliminating the eligibility of those shareholders to exercise appraisal rights. A 2016 Delaware chancery court decision, Halpin v. Riverstone National, Inc., 2015 Del. Ch. LEXIS 49 cast doubt upon the question of whether common shareholders could, through such a drag-along provision, “ex ante contractually commit to a waiver of the appraisal rights provided by statute.”

The case for the validity of appraisal waivers was considerably strengthened when the Delaware Chancery court recently held in a case of first impression that an appraisal waiver by common shareholders was valid and enforceable. In Manti Holdings, LLC v. Authentix Acquisition Co., 2018 Del. Ch. Lexis 318; 2019 Del. Ch. Lexis 307 the court concluded that such a waiver did not violate public policy, at least on the facts of the case at bar where the waiver was clear and unambiguous, the parties were sophisticated, advised by counsel, and waived their appraisal rights in exchange for consideration. Manti thus poses the question of whether appraisal waivers are generally permissible under Delaware law and, if so, whether they are normatively desirable.

Appraisal Waivers considers both the normative and the legal case for appraisal waivers. With respect to the normative case, the Article recounts the multiple efforts by courts and legislatures to revise the appraisal remedy and the valuation process it employs. As the Article observes, these efforts and their ineffectiveness at stemming the ongoing debate over appraisal offer reasons to question whether current law has gotten appraisal “right.” The Article further observes that the role of appraisal is a function of both ongoing market developments and a company’s particular features including the liquidity of its shares, its ownership structure and the needs of its shareholder base, thereby highlighting the value of a flexible firm-specific approach. Allowing corporations to modify appraisal rights through private ordering enables them to evaluate the weigh the need to protect minority shareholders with appraisal rights against the increased certainty associated with limiting that right. The Article observes, moreover, that private ordering facilitates nuanced tailoring of appraisal rights. Waivers can be limited to specific contexts or require specified conditions such as a minimum merger price or designated procedural protections in connection with the negotiation process. Notably, this analysis is not limited to private corporations, in which appraisal waivers can be implemented through a shareholder agreement, but extends to public companies, in which such private ordering would necessarily take the form of a charter provision or bylaw. Indeed, the Article highlights the value of appraisal waivers in public companies by allowing the market to assess what works best without the high cost of regulatory error.

This Article then considers the legal case for appraisal waivers. In its close reading of the Delaware appraisal statute, Del. Gen. Corp. L. §262, the Manti court concluded 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.” Such a reading is consistent with the Delaware Supreme Court’s recent decision in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), in which the Court both noted the breadth of charter provisions permitted by Del. Gen.Corp. L. 102 and Delaware’s legislative policy of “look[ing] to the will of the stockholders.” (In contrast, MBCA §13.02 only authorizes charter provisions that limit or eliminate the appraisal rights of preferred shareholders.) This textual analysis is likely to be further informed by public policy considerations, and, in particular, the extent to which appraisal rights should be treated as a mandatory component of corporate law that is not subject to private ordering.

Ultimately, the Article concludes that existing case law on the mandatory versus enabling distinction does not provide a straightforward answer to whether appraisal waivers are legal under current law. It argues that, in light of the normative case supporting appraisal waivers, this legal uncertainty is problematic. It therefore proposes explicit legislative authorization of appraisal waivers but advocates that the legislation should permit such waivers only in corporate charters. Significantly, charter provisions—unlike bylaws or shareholder agreements—require bilateral implementation by boards and shareholders, increasing the transparency of appraisal waivers, reducing the potential for opportunistic behavior and subjecting the decision to adopt an appraisal waiver to the constraint of the board’s fiduciary duties. These safeguards strengthen the policy case for allowing the private ordering of shareholder appraisal rights.

The complete paper is available for download here.

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