In Manti Holdings, LLC v. The Carlyle Group Inc., (Del. Ch. Feb. 14 2022), the Delaware Court of Chancery analyzed whether a stockholder in a Delaware corporation can waive claims against corporate directors for breach of fiduciary duties.
The short answer is no. Or, maybe more precisely, not yet and not without a clear waiver.
The Manti plaintiffs were Authentix common stockholders. They asserted certain directors and preferred stockholders breached their fiduciary duties in connection with Authentix's sale. Plaintiffs alleged defendants fast-tracked Authentix's sale in order to cash out the defendants' preferred stock.
Defendants moved to dismiss, arguing that plaintiffs waived their rights to challenge the sale when plaintiffs signed Authentix's stockholders agreement. That agreement stated that if Authentix's board and more than 50% of its shareholders approved Authentix's sale to a third party, all other shareholders would "consent to and raise no objections against such transaction." The stockholders agreement then proceeded to list several required or prohibited acts, including: (i) to vote in favor of the sale, (ii) to refrain from exercising appraisal rights, and (iii) to execute all necessary purchase agreements. The stockholders agreement did not explicitly reference fiduciary duty claims.
The court recognized that a fiduciary-duty waiver is a permitted feature of Delaware limited liability companies. But it resisted the defendants' efforts to extend that waiver to Delaware corporations under this case's facts. The court emphasized that drafters of an entity's documents "must make their intent to eliminate fiduciary duties plain and unambiguous" in order for such waiver to be effective. The court found dispositive the stockholders agreement's omission of any "reference to fiduciary duties." The issue was simple in the court's mind: "Had the drafters desired to eliminate fiduciary duties, they could have similarly enumerated such an explicit waiver."
Defendants argued that the stockholders agreement did "not waive the fiduciary duties themselves, it just waived claims for fiduciary duty breaches regarding" Authentix's sale. The court found that argument unconvincing: "A right without an enforcement mechanism is an empty right; without Authentix's stockholders' ability to police fiduciary duty breaches, the fiduciary duties owed to them would be illusory."
- In Delaware, when it comes to waiving or preserving fiduciary duty claims, "the interpretative scales tip in favor" of preservation.
- To enforce a waiver of fiduciary duty claims, you must be explicit and unequivocal. Delaware courts won't allow a defendant to shield itself with vague notions of advance consent and promises not to object. The language relied upon must represent a clear and knowing relinquishment of the right to assert fiduciary duty claims.
- So what happens next when the court confronts an unequivocal waiver of fiduciary duty claims? If LLC members can waive fiduciary duty claims, it's possible Delaware corporate shareholders can do the same. But future litigants will need to grapple with public policy concerns and the norms of Delaware corporate governance.
- The Manti court may have tipped its hand on this issue: "Finding such waiver effective is a proposition that would blur the line between LLCs and the corporate form." The crux of the matter will turn on why corporate shareholders should receive greater protections than LLC members. And for that matter, it's worth monitoring the same issue in the context of future cases involving trusts, partnerships, and other alternative business forms.
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