Recently, the Delaware Court of Chancery refused to dismiss an action for post-closing damages stemming from alleged breaches of fiduciary duty brought by former stockholders of Authentix Acquisition Company, Inc. In doing so, the Court rejected the defendants’ arguments that a provision in a stockholders agreement entered by the plaintiffs waived such claims for breaches of fiduciary duties.
The dispute arose out of the sale of Authentix to Blue Water Energy in 2017. The plaintiffs in the case were holders of common stock in Authentix. In connection with their investment in the company, the plaintiffs entered into a Stockholders Agreement which provided that they would “consent to and raise no objections against” any sale of the company approved by Authentix’s board and holders of at least 50% of outstanding shares. In 2017, the board approved a sale to Blue Water Energy over the objection of one of the plaintiffs, a director stockholder. The sale was also approved by holders of more than 50% of the company’s outstanding shares.
In response to the sale, the plaintiffs filed suit for post-closing damages, alleging various breaches of fiduciary duties by three former directors and officers of Authentix as well as the preferred stockholders of Authentix who plaintiffs alleged controlled the company. In response, the defendants moved to dismiss the plaintiffs’ claims arguing that the plaintiffs had waived any right to bring such claims. According to the defendants, because the sale was approved by Authentix’s board and at least 50% of the outstanding shares, the Stockholders Agreement precluded plaintiffs from raising any objections related to the sale.
The Court denied the defendants’ motion finding that the language in the Stockholders Agreement was not sufficiently clear to establish a knowing relinquishment of the right to bring claims for breaches of fiduciary duties related to the sale. The Court emphasized that Delaware law required waivers, particularly those involving fiduciary duties, to be “clear and unequivocal.” With regard to fiduciary duties in particular, the Court cited case law holding that the intent to waive such duties must be “plain and unambiguous” otherwise “the interpretive scales . . . tip in favor of preserving fiduciary duties.”
The Court held that the purported waiver of fiduciary duty claims in the Stockholders Agreement was neither clear and unequivocal nor plain and unambiguous. Although the Stockholders Agreement prohibited several types of actions following approval of a sale of the company including voting against a sale, asserting appraisal rights, and refusing to sign documents, it did not mention anything about bringing breach of fiduciary duty claims. In fact, the waiver provision did not mention fiduciary duties at all. The Court explained that a more reasonable interpretation of the waiver provision in the Stockholders Agreement was that it precluded the plaintiffs from taking actions that would have the effect of impeding or delaying the closing of the sale.
The clear takeaway from this case is that contract drafters should clearly spell out what types of actions or claims the parties to the contract are waiving by entering it. Relying on vague or overly broad language may backfire and leave a party without a key protection it believed that it had.
The Court’s full opinion can be found online here.
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