Delaware Chancery Court Confirms that Non-Signatory Shareholders are Bound to Terms of Merger Agreement
By Carl R. Sanchez & Laura McGurty
It is not uncommon for the equity of private companies to be held by a small group of controlling shareholders, with the remaining equity interests being held by a number of minority shareholders who are often the companys founders or management. In the context of venture capital-backed companies or private equity portfolio companies, the occurrence of such splits in equity ownership is commonplace. Despite this commonplace equity picture, interesting questions regarding the rights of the minority shareholders often arise in the context of a merger of the company approved only by the controlling shareholders. There is often uncertainty in the minds of deal counsel as to whether the minority shareholders are bound by the actions of a shareholders representative appointed by the controlling shareholders in a merger agreement to handle disputes regarding earn-outs, other post-closing adjustments or indemnification claims. On September 20, 2010, the Delaware Court of Chancery (the Court) issued its opinion in Aveta Inc. v. Cavallieri (the Opinion) which held, in part, that minority shareholders indeed are bound by such a provision contained in a merger agreement even under circumstances where such shareholders did not sign the deal documents or vote on or approve the transactions contemplated thereby.
In addition to providing valuable guidance in structuring merger transactions, particularly in the context of a target company with a large number of minority shareholders, the decision reflects the Courts willingness to ensure that the parties to a merger agreement receive the benefit of their bargain.