As we have posted previously, whether a voting agreement, or so-called drag-along provision, can be successfully enforced to prevent common stockholders from seeking appraisal is an open question in the Delaware courts.  And so it remains, even in the wake of Halpin v. Riverstone National, Inc., (Del. Ch. Feb. 26, 2015), in which the Court of Chancery faced the question of whether common shareholders can be charged with having waived their statutory appraisal rights in advance of the transaction under a drag-along provision.  The drag-along provision at issue did not actually include a waiver of appraisal rights, and instead required the minority stockholders to vote in favor of a change-in-control transaction upon advance notice of the transaction.  While in theory an agreement that forces a shareholder to vote in favor of a deal arguably leads to a waiver of appraisal rights insofar as such an agreement eliminates a stockholder’s opportunity to provide the requisite dissent from the proposed merger, it is also true that in order to be effective such an agreement would have to be in place prior to any vote on the transaction.  In Halpin, the company did not invoke the drag-along provision until after the merger vote, so the Court avoided deciding the question of whether a waiver took place and instead held that as a matter of contract the minority stockholders were free to seek statutory appraisal of their shares.  The minority shareholders obviously could not be forced to consent to a deal that had already occurred.

The Court did assume, without deciding the issue, that as a theoretical matter holders of common stock could indeed waive their appraisal rights by contract in advance of a transaction.  But that assumption is simply that, an assumption, which as a legal matter was not decided and remains an open question of law.  The Court also noted that, unlike common stockholders, it is well-established Delaware law that  preferred stockholders may waive their appraisal rights.  Indeed, we have previously posted here about the important differences between the appraisal rights of preferred and common stockholders, and Chancery once again acknowledged the unique nature of the preferreds’ appraisal rights.

The question of whether voting agreements, or so-called drag-along provisions, in stockholder agreements can be used to prevent a dissenter from exercising appraisal rights has not been tested in the courts.  Such clauses are often included in stockholders agreements to secure advance shareholder consent to such corporate actions as a sale of the company.  Prospective buyers tend to look favorably upon drag-along provisions because they offer the prospect of supportive votes favoring the acquisition, with the added hope that the drag-along rights may be sufficient to quash any appraisal rights that the shareholder might otherwise be inclined to exercise.

Interestingly, we are not aware of any case in Delaware or New York that has decided whether a drag-along clause can be enforced to effectively waive appraisal rights on the part of the shareholder being dragged along to consent to the deal.  Absent a specific waiver of appraisal rights, it is difficult to imagine that a chancery judge will be inclined to sweep them aside, and yet there is no guiding precedent to inform that decision.  Some academic commentary has speculated that common shareholders who have agreed to vote their shares as directed by drag-along provisions may lose their right to appraisal, which is generally available only to shareholders who vote against the transaction.  See Brian Broughman & Jesse M. Fried, Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, 98 Cornell Law Review 1319, 1331, n. 50 (2013).  But again, no court has yet accepted or rejected this notion.  While courts are indeed inclined to appraise preferred stock as a matter of pure contract law  based on a clear and unambiguous provision in the company’s certificate of designation, it remains to be seen whether the courts will likewise deem a common stockholder to have waived her appraisal rights by virtue of a voting agreement or drag-along clause in a stockholder agreement, especially where that waiver has not been made explicitly in the contract itself.