Why Drag-Along Rights May Not Waive Common’s Appraisal Rights

Halpin v. Riverstone National, Inc., C.A. No. 9796-VCG (Del. Ch. Feb. 26, 2015)

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a) What’s the Point?

Venture-backed companies should not assume an implied waiver of minority appraisal rights in a merger that utilizes a voting agreement’s drag-along rights if procedural requirements are not followed. When a waiver of appraisal rights has procedural requirements, they need to be followed or eliminated via an amendment. Alternatively, the drag-along can require minority stockholders to explicitly approve the sale, instead of having the sale be de facto valid without their signatures given the drag-along.

b) What’s the Story?

I n 2014, the controlling stockholders of Riverstone National, Inc. (“Riverstone”) entered into a merger agreement to sell the company without prior notice to the minority stockholders. Since the sale was being effectuated via the drag-along rights in the stockholders agreement, the controlling stockholders assumed that the drag-along implicitly waived the appraisal rights. The minority stockholders nevertheless asserted their appraisal rights and filed suit.

The minority stockholders argued that certain procedural requirements to exercising the drag-along were not followed, e.g., providing notice prior to a merger transaction, and therefore the right couldn’t be used to force them to tender their shares — an act that would have waived their appraisal rights as a matter of law.

The Court agreed with the minority stockholders. It reasoned that because the stockholders agreement was unambiguous in it’s procedural requirements to exercise the drag-along, the controlling stockholders’ failure to follow these procedures made the exercise of the drag-along invalid. Therefore, there could not have been a waiver of appraisal rights.

c) What’s the Law?

The law is that in the waiver of appraisal rights context for common stockholders, just because majority stockholders bargain for a certain result, it doesn’t entitle them to that result if they fail to follow the procedural requirements for exercising that right.

Here, the controlling stockholders failed to follow the explicit procedural requirements for exercising their drag-along in the stockholders agreement. Therefore, the right was not exercised properly and did not have the effect of waiving appraisal rights.