Manti Holdings, LLC v. The Carlyle Group Inc.

• Court: Court of Chancery of Delaware
• Decided: February 14, 2022
• Docket: CA. No. 2020-0657-SG
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MANTI HOLDINGS, LLC, MALONE ) MITCHELL, WINN INTERESTS, LTD., ) EQUINOX I. A TX, GREG PIPKIN, ) CRAIG JOHNSTONE, TRI-C ) AUTHENTIX, LTD., DAVID MOXAM, ) JOHN LAL PEARCE, and JIM ) RITTENBURG, ) ) Plaintiffs, ) ) v. ) C.A. No. 2020-0657-SG ) THE CARLYLE GROUP INC., ) CARLYLE U.S. GROWTH FUND III, ) L.P., CARLYLE U.S. GROWTH FUND ) III AUTHENTIX HOLDINGS, L.P., ) CARLYLE INVESTMENT ) MANAGEMENT L.L.C., TCG ) VENTURES III, L.P., BERNARD C. ) BAILEY, STEPHEN W. BAILEY, and ) MICHAEL G. GOZYCKI, ) ) Defendants. )

MEMORANDUM OPINION

Date Submitted: November 5, 2021 Date Decided: February 14, 2022

Rolin P. Bissell, Paul J. Loughman, and Alberto E. Chávez, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: D. Patrick Long, Jonathan R. Mureen, and John Tancabel, of SQUIRE PATTON BOGGS (US) LLP, Dallas, Texas, Attorneys for Plaintiffs. Albert H. Manwaring IV and Kirsten Zeberkiewicz, of MORRIS JAMES LLP, Wilmington, Delaware; OF COUNSEL: Robert A. Van Kirk, Sarah F. Kirkpatrick, and Lauren Uhlig, of WILLIAMS & CONNOLLY LLP, Washington, DC, Attorneys for Defendants.

GLASSCOCK, Vice Chancellor The dispute between the parties here appears to raise the question of whether

a stockholder in a Delaware corporation can waive the right to seek redress against

corporate directors and controllers for breach of the duty of loyalty, by contract, in

specific limited situations. I use the term “appears” advisedly, since the language at

issue—which, per Defendants, waives the right to redress for certain loyalty

breaches in connection with a sale of the company—in my view, does not work a

waiver. If waiver of such a right is not unenforceable for reasons of public policy,

nonetheless, as with any waiver of a right, the language relied upon must represent

a clear and knowing relinquishment of the right. The language here falls short of

such an enforceable waiver. Accordingly, I need not reach the general issue of

waivability of fiduciary duty here.

The Plaintiffs here, former stockholders of Authentix Acquisition

Company, Inc. (“Authentix”), bring a post-closing damages action challenging

alleged breaches of fiduciary duty in connection with the sale of Authentix to Blue

Water Energy in 2017 (the “Sale”).1 The Defendants have moved to dismiss the

Amended Complaint.2 This Memorandum Opinion addresses a predicate issue

raised in the motion to dismiss briefing: whether the Plaintiffs waived their right to

1 See generally Verified Am. Compl., Dkt. No. 38 [hereinafter “Am. Compl.”]. 2 Defs.’ Mot. Dismiss Pls.’ Verified Am. Compl., Dkt. No. 39 [hereinafter “Defs.’ Mot. Dismiss”]. bring this action by entering into a stockholders agreement (the “Stockholders

Agreement”) that required them to “consent to and raise no objections against such

transaction.”3 This Memorandum Opinion concludes that this language does not

constitute such a waiver.

I. BACKGROUND4

Authentix, a non-party, is a Delaware corporation.5 The Plaintiffs are

individuals and entities that were common stockholders of Authentix at the time of

the Sale.6 The Defendants are (i) preferred stockholders of Authentix and affiliates

of those preferred stockholders, alleged to be controllers; and (ii) three former

directors and officers of Authentix, who were allegedly associated with the

controller Defendants.7

On September 12, 2017, the Board approved the Sale over the objection of

one director, who was a representative of Plaintiff Manti Holdings, LLC on the

Authentix Board.8 The Amended Complaint alleges that the Sale was prompted, not

by a desire to realize value for common stockholders, but instead because of a

3 See Aff. Matthew F. Lintner Supp. Defs.’ Opening Br. Supp. Mot. Dismiss Verified Am. Compl., Ex. A § 3(e) [hereinafter the “Stockholders Agreement”]. 4 Unless otherwise noted, the facts referenced in this Memorandum Opinion are drawn from the Amended Complaint and the documents incorporated therein. 5 Am. Compl. ¶ 14. 6 Id. ¶¶ 15–25. 7 Id. ¶¶ 2, 26–33, 113. 8 Id. ¶¶ 2, 11, 37, 57, 76, 91, 94–96, 102–03. 2 self-imposed deadline in September 2017 for the controller Defendants to cash out

their preferred stock.9 The Plaintiffs accordingly bring claims for breach of fiduciary

duty, aiding and abetting, civil conspiracy, and unjust enrichment against the

Defendants relating to their actions in connection with the Sale.10

The Defendants moved to dismiss the Amended Complaint on November 17,

2020.11 In their briefing, the Defendants argue that the allegations of the Amended

Complaint fail to state claims under the Rule 12(b)(6) standard.12 They also raise a

predicate issue that they contend precludes this action: the Plaintiffs purportedly

waived their right to challenge the Sale under the Stockholders Agreement.13

Although the Plaintiffs asserted that the Stockholders Agreement “is not

incorporated in or integral to the common law causes of action in the [Amended]

Complaint,” they nevertheless “consent[ed] to adjudicating this issue.”14 I held oral

9 Id. ¶¶ 2, 8, 57, 73, 77, 91, 103, 105–06. 10 Id. ¶¶ 107–35. 11 See Defs.’ Mot. Dismiss. 12 See, e.g., Defs.’ Opening Br. Supp. Mot. Dismiss Am. Compl., Dkt. No. 39 §§ II–VI [hereinafter “Defs.’ Opening Br.”]. 13 See, e.g., id. § I. 14 Pls.’ Answering Br. Opp’n Defs. Mot. Dismiss at 19 n.80 [hereinafter “Pls.’ Answering Br.”]. 3 argument on the motion to dismiss on January 26, 2021,15 and the parties completed

supplemental briefing on February 24, 2021.16

On June 4, 2021, I stayed consideration of the Defendants’ motion to dismiss

here17 pending an appeal to the Supreme Court of my decision in a related appraisal

action regarding the Sale, Manti Holdings, LLC v. Authentix Acquisition Co., in

which I held that the parties to the Stockholders Agreement waived their right to an

appraisal in connection with the Sale.18 The Supreme Court affirmed that opinion

on September 13, 2021.19 On November 5, 2021, the parties submitted supplemental

memoranda addressing whether that Supreme Court decision impacted their

arguments made in connection with the Defendants’ motion to dismiss here.20 I

consider the matter fully submitted as of that date.

15 See Tr. Oral Argument re Defs.’ Mot. Dismiss and Mot. Stay Disc. and Ct.’s Ruling Mot. Stay Held Via Zoom, Dkt. No. 56 [hereinafter “Oral Arg. Tr.”]. 16 See Defs.’ Suppl. Br. Supp. Mot. Dismiss Am. Compl., Dkt. No. 57; Pls.’ Suppl. Br. Regarding Defs.’ Mot. Dismiss, Dkt. No. 58; Defs.’ Suppl. Answering Br., Dkt. No. 59; Pls.’ Suppl. Answering Br. Defs.’ Suppl. Br., Dkt. No. 60. 17 Dkt. No. 62. 18 2018 WL 4698255 (Del. Ch. Oct. 1, 2018). 19 Manti Holdings, LLC v. Authentix Acquisition Co., Inc., 261 A.3d 1199 (Del. 2021). 20 See Defs.’ Suppl. Mem. Supp. Their Mot. Dismiss Am. Compl. and Regarding Recent Supreme Ct. Decision, Manti Holdings, LLC v. Authentix Acquisition Co., Dkt. No. 70 [hereinafter “Defs.’ Suppl. Mem.”]; Pls.’ Informal Mem. Further Opp. Defs.’ Mot. Dismiss, Dkt. No. 71. 4 II. ANALYSIS

The parties dispute whether the Stockholders Agreement includes a waiver of

the plaintiffs’ right to bring this post-closing damages action. “Delaware law

adheres to the objective theory of contracts, i.e., a contract’s construction should be

that which would be understood by an objective, reasonable third party.” 21 The

objective theory of contracts requires the court to effectuate the parties’ intent,22

which, absent ambiguity, “must be ascertained from the language of the contract.”23

That is, “[t]he Court will interpret clear and unambiguous terms according to their

ordinary meaning.”24

Under Delaware law, “[w]aiver is the intentional relinquishment of a known

right.”25 “A waiver may be either express or implied, but either way, it must be

unequivocal.”26 “[T]he standards for proving waiver under Delaware law are ‘quite

exacting,’” and “[t]he facts relied upon to prove waiver must be unequivocal.”27 A

21 Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014) (quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010)). 22 Zimmerman v. Crothall, 62 A.3d 676, 690 (Del. Ch. 2013). 23 Comet Sys., Inc. S’holders’ Agent v. MIVA, Inc., 980 A.2d 1024, 1030 (Del. Ch. 2008) (quoting In re IAC/InterActive Corp., 948 A.2d 471, 494 (Del. Ch. 2008)). 24 GMG Cap. Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012). 25 Manti, 261 A.3d at 1210 (quoting Minna v. Energy Coal S.p.A., 984 A.2d 1210, 1214 (Del. 2009)). 26 Id. at 1210–11 (quoting Dirienzo v. Steel Partners Holdings L.P., 2009 WL 4652944, at *4 (Del. Ch. Dec. 8, 2009)). 27 Id. at 1211 (quoting Bantum v. New Castle Cnty. Vo-Tech Educ. Ass’n, 21 A.3d 44, 50 (Del. 2011)). 5 waiver of fiduciary duties, to the extent allowed by Delaware law, must be clear and

unambiguous.28 And, as our courts have noted in connection with fiduciary duty

waivers in the LLC context, because drafters of the entity’s documents “must make

their intent to eliminate fiduciary duties plain and unambiguous” in order for such

waivers to be effective, “the interpretive scales . . . tip in favor of preserving

fiduciary duties.”29

The Defendants rely on the following language from Section 3(e) of the

Stockholders Agreement for their position that the Plaintiffs waived their rights to

challenge the Sale:

In the event that . . . a Company Sale is approved by the Board and . . . the holders of at least fifty percent (50%) of the

28 See Schock v. Nash, 732 A.2d 217, 225 n.21 (Del. 1999) (duty of care waiver in certificate of incorporation must be “clear and unambiguous”); Ross Holding & Mgmt. Co. v. Advance Realty Grp., LLC, 2014 WL 4374261, at *13 (Del. Ch. Sept. 4, 2014) (“Drafters of a limited liability company agreement ‘must make their intent to eliminate fiduciary duties plain and unambiguous.’” (quoting Feeley v. NHAOCG, LLC, 62 A.3d 649, 665 (Del. Ch. 2012)); Smith v. Scott, 2021 WL 1592463, at *9 (Del. Ch. Apr. 23, 2021) (same); Skye Min. Invs., LLC v. DXS Cap. (U.S.) Ltd., 2020 WL 881544, at *21 (Del. Ch. Feb. 24, 2020) (“Although fiduciary duties may be disclaimed, agreements’ drafters must do so clearly, and should not be incentivized to obfuscate or surprise investors by ambiguously stripping away the protections investors would ordinarily receive.” (quotation omitted)); Miller v. Am. Real Est. Partners, L.P., 2001 WL 1045643, at *8 (Del. Ch. Sept. 6, 2001) (“A topic as important as [fiduciary duty waivers] should not be addressed coyly.”). 29 Bay Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451, at *9 (Del. Ch. Apr. 20, 2009); see also id. (“Because the existence of fiduciary duties under § 6.1(b) can be reconciled with § 6.2’s apparent elimination of them in this way, Bay Center’s reading of the LLC Agreement is more reasonable than the defendants’ reading.”); Advance Realty, 2014 WL 4374261, at *15 (“A failure to mention a duty . . . is not an adequate disclaimer of it. Such a rule, which resolves ambiguities in favor of the full panoply of duties, is sensible.”). 6 then-outstanding Shares . . . , each Other Holder shall consent to and raise no objections against such transaction . . . .30 This general duty in Section 3(e) to “consent to and raise no objections against such

transaction” is followed by several specific applications of the duty, set forth in

subsections of Section 3(e).31 For example, Other Holders agree to “vote the shares

of Common Stock held by such Other Holder in favor of such transaction”; “refrain

from the exercise of appraisal rights with respect to such transaction”; and, subject

to certain limitations, “execute any purchase agreement, merger agreement or other

agreement . . . in connection with such transaction setting forth the terms and

conditions of such transaction and any ancillary agreement with respect thereto.”32

I have already held, and the parties do not dispute, that the Sale meets the

contractual definition of a “Company Sale.”33 Nor do the parties dispute that the

Sale was approved by the Board and at least 50% of the then-outstanding shares, and

that the Plaintiffs are “Other Holders” as defined by the Stockholders Agreement.

Therefore, the pertinent question is whether this post-closing damages action

contravenes the Plaintiffs’ obligation to “consent to and raise no objections against

such transaction.”34 Relying on a broad definition of the word “objection,” to mean

30 Stockholders Agreement § 3(e). 31 Id. §§ 3(e)(i)–(iv). 32 Id. 33 Manti, 2018 WL 4698255, at *2. 34 Stockholders Agreement § 3(e). 7 “the act of challenging or disagreeing with something,”35 the Defendants contend

that this obligation precludes the Plaintiffs from bringing any action challenging the

Sale, whether pre- or post-closing, and whether for a breach of fiduciary duties or

otherwise. The Defendants point out that the Plaintiffs are signatories of the

Stockholders Agreement, that they are sophisticated investors, and that they signed

the Agreement for consideration; they argue that the sale provisions provide

substantial protections for the Plaintiffs despite any waiver.36 Accordingly, they

contend that although the obligation applies only “in a narrow set of circumstances,”

“when it does apply, the waiver is complete.”37 I disagree.

As I noted above, a waiver, and especially a waiver of fiduciary duties, must

be clear and unequivocal.38 Despite this clearly established requirement,

Section 3(e) makes no reference to fiduciary duties.39 This failure to heed “the

lessons of those earlier cases clearly to eliminate or modify the traditional fiduciary

duties” is dispositive.40 Indeed, the drafters of the Stockholders Agreement were

careful to enumerate other restrictions that fall within the general duty to “consent

to and raise no objections against such transaction.” For example, Sections 3(e)(ii)–

35 Oral Arg. Tr. at 16:14–23. 36 Defs.’ Suppl. Mem. § I. 37 Defs.’ Opening Br. at 20. 38 See, e.g., Manti, 261 A.3d at 1211; Schock, 732 A.2d at 225 n.21. 39 See Stockholders Agreement § 3(e). 40 Advance Realty, 2014 WL 4374261, at *13. 8 (iv) explicitly prohibit the Plaintiffs from voting against the transaction, asserting

appraisal rights, and refusing to execute certain transaction documents.41 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.42 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. And

in any event, the Plaintiffs are not objecting to the consummation of the Sale; they

seek redress for purported breaches of duty that led to the Sale.43 Accordingly, to

my mind, the “no objection” language is not sufficient to evince a knowing waiver

of fiduciary rights, to the extent such would be enforceable.

Instead, a more reasonable interpretation is that Section 3(e) precludes the

Plaintiffs from taking actions that would impede or delay the closing of an applicable

Company Sale (for example, by voting against the transaction or refusing to execute

transaction documents) or asserting rights that would arise from any Company Sale

41 Stockholders Agreement §§ 3(e)(ii)–(iv). 42 Defs. Reply Br. Supp. Mot. Dismiss Am. Compl. at 2–4. 43 See Am. Compl. ¶¶ 107–17. The Plaintiffs also assert secondary liability claims based on those alleged fiduciary breaches. See id. ¶¶ 118–35. 9 (such as the right to an appraisal). In other words, the language waives objections

to the Sale itself; it does not waive objections to fiduciary duty breaches made in

connection with the Sale. With the “interpretive scales” “tip[ped] in favor of

preserving fiduciary duties,”44 I find this interpretation to be more reasonable.

III. CONCLUSION

Accordingly, I hold that the Plaintiffs did not waive their right to bring this

action challenging fiduciary duty breaches allegedly committed in connection with

the Sale (Counts I and II). For the same reasons, I find that the Plaintiffs likewise

did not waive their ability to bring the related secondary liability claims for aiding

and abetting (Count III), civil conspiracy (Count IV), and unjust enrichment

(Count V).

Waiver of fiduciary duty is a permitted feature of the LLC form. According

to the Defendants, the parties to the Stockholders Agreement attempted to exercise

a similar function by contract, with reference to a Delaware corporation, in way of a

sale of the company. Because I find that the parties did not effectively waive the

right to enforce such duties via the Stockholders Agreement, I need not pass on

whether such a waiver of duty is permissible under our law. 45 The parties should

44 Emery Bay, 2009 WL 1124451, at *9. 45 Finding such waiver 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. See generally Manti, 261 A.3d 1199. 10 confer and inform me whether they believe further briefing is required on their

remaining motion to dismiss arguments, in light of this Memorandum Opinion.