Saturday, February 19, 2022
I am so amused by this brief opinion in Manti Holdings v. The Carlyle Group.
The case is a continuation of Manti Holdings, LLC v. Authentix Acquisition Co. There, as many of you know, the Delaware Supreme Court held that a shareholder agreement among sophisticated investors in a private company could waive appraisal rights associated with a merger.
Well, the same shareholders who sought appraisal are now instead suing for breach of fiduciary duty in connection with the merger, and the defendants argued that the same shareholder agreement not only waived appraisal rights, but also waived the right to sue for breach of fiduciary duty. We know, of course, that you cannot waive fiduciary duties in corporate constitutive documents; the question for VC Glasscock was whether you can waive them in personally-negotiated shareholder agreements. Glasscock held that he did not need to reach that question, because even if such waiver was possible, the agreement here was not clear about it.
But his reasoning is what fascinates me.
The agreement required that shareholders “consent to and raise no objections against such transaction,” i.e., the merger, thus raising the question whether an action for fiduciary breach is the equivalent of not consenting, and raising an objection.
Glasscock concluded it was not, in part because the agreement delineated the types of actions that would be deemed objections and nonconsents (such as voting against the deal, and seeking appraisal), and waiver of fiduciary duties was not on the list. As he put it:
Had the drafters desired to eliminate fiduciary duties, they could have similarly enumerated such an explicit waiver. They did not. The Defendants attempt to sidestep this choice by arguing that Section 3(e) does not waive the fiduciary duties themselves, it just waives claims for fiduciary duty breaches regarding a Company Sale. That, I admit, is a distinction too fine for my legal palate. A right without an enforcement mechanism is an empty right; without the Authentix stockholders’ ability to police fiduciary duty breaches, the fiduciary duties owed to them would be illusory.
I mean, I don’t disagree, but aren’t Delaware fiduciary duties literally built on the concept that the standard of conduct is different than the standard of review? For example, in Frederick Hsu Living Trust v. ODN Holding Corporation, 2017 WL 1437308 (Del. Ch. Apr. 24, 2017), the court said:
When determining whether directors have breached their fiduciary duties, Delaware corporate law distinguishes between the standard of conduct and the standard of review. The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct.
The distinction matters because the standard of review is more forgiving of directors than the standard of conduct, see Chen v. Howard-Anderson, 87 A.3d 648 (Del. Ch. 2014), which as a practical matter means that some actions by directors are fiduciary breaches without any remedy at all.
But Glasscock was not finished. He then went on to say that “the language waives objections to the Sale itself; it does not waive objections to fiduciary duty breaches made in connection with the Sale.”
Which is completely logical! And completely contrary to the entire Corwin line of cases, which treat a vote in favor of a transaction as the equivalent of a waiver of claims for fiduciary breach! Which is exactly what scholars have been saying for years. See, e.g., James D. Cox, Tomas J. Mondino, & Randall S. Thomas, Understanding the (Ir)relevance of Shareholder Votes on M&A Deals, 69 Duke L.J. 503 (2019).
In any event, I suppose none of that matters because despite claiming he would not do the thing, Glasscock then kind of went and did the thing. See footnote 45:
Finding such waiver [of duty] effective is a proposition that would blur the line between LLCs and the corporate form and represent a departure from norms of corporate governance, I note, even under the limited circumstances here, described above.
So, you know. Funny case.