Stockholders That OK Forced Merger Vote Don't Waive Appraisal Rights, Court Rules

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By Michael Greene

Feb. 27 — The Delaware Chancery Court Feb. 26 found that minority shareholders that agreed to allow a corporation to force them to vote in favor of a merger did not waive their appraisal rights when the corporation failed to exercise its drag-along rights.

Even though Vice Chancellor Sam Glasscock III observed that this case raised the novel question of whether common stockholders can waive their statutory right to an appraisal in the case of a squeeze out merger of a corporation, he declined to address the merits of this issue.

Instead, he found that since the corporation never demanded the shareholders vote in favor of the merger agreement, the shareholders did not waive their rights to an appraisal.

‘Drag-Along Rights.'

Riverstone National Inc. was acquired by Greystar Real Estate Partners LLC and its wholly owned subsidiary in an agreement approved by Riverstone's 91 percent controlling stockholder, non-party CAS Capital Ltd.

After the merger agreement was executed, Riverstone sent a letter to its minority shareholders, without notice, informing them that shares would be converted into the right to receive cash.

Subsequently, several minority shareholders filed a petition with chancery court seeking appraisal of their shares. The corporation, however, counterclaimed, seeking to specifically enforce “drag-along” rights that were agreed to as part of a stockholder agreement between the corporation and the minority stockholders.

The drag-along rights included the right to compel minority shareholders to vote in favor of certain change-in-control actions.

Not Agreed To

Vice Chancellor Glasscock found that the minority stockholders did not waiver their appraisal rights through the stockholders agreement.

Instead of an explicit waiver of appraisal rights, the parties agreed to contract for acts that would have this effect—either through a forced tender or vote in favor of a merger.

Vice Chancellor Glasscock found that these acts were entirely prospective in nature and required advanced notice, as defined by the drag-along provision.

Accordingly, he held that the company was not entitled to specific performance under the express terms of the agreement because the minority stockholders could not consent to a merger that had already been consummated.

“The Company bargained for a right it did not exercise, and not the similar right it attempted to exercise,” he wrote.

“In other words, because the Company would have gotten X had it exercised its rights does not mean the Company is entitled to result X when it failed to exercise those rights. Rather, the Company is limited to the benefit of its bargain, which according to the literal language of the Drag-Along, does not include the power to require the Minority Stockholders to consent to a transaction that has already taken place,” he added.

Implied Covenant

Vice Chancellor Glasscock also determined that Riverstone was not entitled to specific performance because of the covenant of good faith and fair dealing implicit in the stockholders agreement.

The court refused to imply terms into the parties' agreement, finding that Riverstone was a sophisticated party that failed to exercise its drag-along rights, at no fault of the minority stockholders.

“Our Supreme Court has made clear that the gap-filling function of the implied covenant does not provide relief in a situation such as this, where the Company asks the court to imply a right for which it did not contract and should have foreseen,” he wrote.

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Kristyn Hyland at

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