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Manti Holdings, LLC v. Authentix Acquisition Co.

Court of Chancery of Delaware

October 1, 2018

Manti Holdings, LLC et al.
Authentix Acquisition Co.,

          Date Submitted: June 27, 2018


         Dear Counsel:

         This matter involves the sale via merger of Authentix Acquisition Co. (the "Company") by written consent, to a third-party Guernsey[1] entity. The Petitioners seek a statutory appraisal under Section 262 of the DGCL. This brief Letter Opinion will address a narrow predicate issue: whether the Petitioners are barred by contract from exercising their appraisal rights.

         The Petitioners are among the stockholders of the Company who lost their shares via the merger. The Company has moved for a judgment under the terms of a stockholders' agreement (the "SA"), to which the Petitioners and the Company were parties. The SA was entered in 2008 (and amended in 2009) to induce investment in the Company by investors, to whom I will refer collectively as the "Carlyle Group."[2] The Carlyle Group was the majority stockholder and controller of the Company.[3] According to Authentix, the Petitioners are barred contractually from asserting appraisal rights.[4] The Petitioners read the contract differently.[5]

         After Authentix was sold, the cash consideration was (or will be) distributed to the various categories of stock via the waterfall provision of the Certificate of Incorporation.[6] The Petitioners and other common stockholders (including the Carlyle Group) will, it appears, receive little or nothing for their equity interest in the Company.

         On January 17, 2018, the Petitioners filed a Motion to Dismiss the Respondent's counterclaims, and on January 24, 2018, the Respondents filed a Motion for Partial Summary Judgment on Entitlement Issues. At oral argument, the parties agreed to consider the matter of waiver or estoppel of Petitioner's right to appraisal as submitted on a stipulated record.[7] The facts are undisputed; it remains only to apply the law and the language of the SA to the facts. The nature of the motion practice-cross motions and briefing, cross openings and answers-led to the parties' issues and grounds for relief being less than perfectly congruent. Counsel raised issues at argument that were not clearly presented in the briefs, and other issues that were briefed were never mentioned. Accordingly, I allowed short post-argument submissions. I address here only those issues presented at oral argument and in the supplemental submissions; issues not so presented I deem waived.[8]

         Because I find the Petitioners contractually bound to refrain from seeking appraisal, the Company's motion is granted, and that of the Petitioners is denied. My reasoning follows.

         I. BACKGROUND

         I will recite in this Letter Opinion only those facts and contractual provisions necessary to my decision. Section 3(e) of the SA provides certain contractual rights and duties arising in the context of a "Company Sale"-a defined term that all parties agree occurred here.[9] Section 3(e) provides generally that parties agree to consent to such a sale. It also imposes specific duties. One such duty that a contractually-compliant sale imposes on the Petitioners is set out at Section 3(e)(iv): to "refrain from the exercise of appraisal rights with respect to such transaction." I may state, therefore, two principles that must guide my decision: 1) Assuming that Section 3(e)(iv) is both enforceable and unambiguously applicable under these facts, the Company is entitled to Summary Judgement; and 2) if ambiguities lurk in the SA such that I cannot find it applicable on its face, the SA cannot be construed to bar the Petitioners' right to appraisal. Demonstrating a waiver of the statutory right to appraisal requires language evincing the clear intent to waive[10]-evidence that is not present on this stipulated record outside the language of the SA itself. I turn, then, to the Petitioners' various arguments negating the applicability of Section 3(e)(iv).

         II. ANALYSIS

         A. The Termination of the SA As Of The Time Of Sale

         The Petitioners point to Section 12 of the SA, which provides, unremarkably, that "[t]his agreement, and the respective rights and obligations of the Parties, shall terminate upon the . . . consummation of a Company Sale. . . ."[11]The parties agree that rights vested before termination are not extinguished by such a provision, but the Petitioners argue strenuously that the SA did not vest a right, or concomitant obligation, to refrain from appraisal, post-close. The rights and duties of Section 3(e) arise at the time of (and "in the event that") "a Company Sale is approved by the Board."[12] The Board approved the transaction at issue at a time when the SA was unquestionably in effect. Nonetheless, the Petitioners contend that the explicit language of Section 3(e)(iv) compels the conclusion that their right to appraisal was not extinguished, but was only in abeyance, as of the time of sale. Per Petitioners, once the Company Sale was "consummated," the duty to refrain from appraisal terminated, leaving the Petitioners free to pursue this appraisal action. The Petitioners point out that the SA could have, but did not, use language that the right to exercise appraisal was "waived" or "void" as of the time of Board approval of the sale; instead, Section 3(e)(iv) imposes a duty on Petitioners to "refrain" from "exercise" of those rights.[13] According to the Petitioners, "refrain" implies live-non-extinguished-rights from which to refrain, and thus cannot refer to irrevocably waived rights.[14] At the least, according to the Petitioners, the language is ambiguous, and thus insufficient to support a finding of waiver.[15]

         The Petitioners make a valiant attempt to freight the term "refrain" with more ambiguity than anyone since Arlo Guthrie.[16] Nonetheless, to my mind, the SA is clear. No contracting party, agreeing to the quoted language, would consider itself free to exercise appraisal rights in light of Board approval of a contractually-compliant Company Sale. In that case, the contracting parties were bound to "assent to" and to "raise no objections against" the sale, and specifically to refrain from exercise of appraisal rights. This language is not ambiguous.

         My finding is bolstered by the obvious fact that the "exercise of appraisal rights" with respect to a transaction is meaningless until the transaction is accomplished: under the Petitioners' reading, subsection (iv) is a nullity. That is because, in the Petitioners' view, parties must "refrain" from exercise of appraisal rights only pre-close, but at the same time, the exercise to be refrained from could only be consummated in the post-sale period in which, per Petitioners, the enforcement of parties' rights and duties is foreclosed. This is not a reasonable reading of the quoted language, which, again, I find unambiguous.[17]

         For the foregoing reasons, I find the termination of rights and obligations set out in Section 12 is no ...

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