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.

Like common stockholders, holders of preferred stock may exercise appraisal rights.  The extent of what those rights actually entail, however, may be far more limited than what common shareholders may experience.  As a general rule, preferred stock has the same appraisal rights as common stock, but “[u]nlike common stock, the value of preferred stock is determined solely from the contract rights conferred upon it in the certificate of designation.”  Shaftan v. Morgan Joseph Holdings, Inc., 57 A.3d 928, 942 (Del. Ch. 2012) (citing In re Appraisal of Metromedia International Group, Inc., 971 A.2d 893, 900 (Del. Ch. 2009)).

Delaware courts have consistently ruled that if the company’s certificate of designation is clear in providing just what the preferred stock is to receive upon a merger, then the certificate controls and effectively preempts the rights of the preferred stockholders to seek appraisal.  Thus, as Delaware Chancery has held, when the terms of preferred stock “clearly describe[d] an agreement between the [preferred stockholders] and the company regarding the consideration to be received” by the stockholders in the event of a specific type of merger, and that specific type of merger occurred, the stockholders were deemed to have waived their appraisal rights and were only entitled to the compensation provided for in the governing certificate.  Shaftan 57 A.3d at 928 (citing In re Appraisal of Ford Holdings, Inc. Preferred Stock, 698 A.2d 973, 978 (Del. Ch. 1997)).  Put another way, where the certificate of designation is clear in “contractually establish[ing] the metric for valuing the preferred shares in the event of a merger,” the court need not entertain competing valuation models and undertake the customary appraisal analysis; instead, the court simply views the valuation of the preferred stock “through the defining lens of its certificate of designation, unless the certificate is ambiguous or conflicts with positive law.”  Metromedia, 971 A.2d at 900.

In the case of unclear or indirect drafting in the certificate, the courts will not deprive stockholders of their statutory right to judicial appraisal of their preferred shares.