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July 13 — Delaware needs a new approach for determining who is a “stockholder of record” under its appraisal statute, Vice Chancellor J. Travis Laster advocated in a July 13 opinion.
Under Delaware law, to pursue an appraisal, the record holder of stock must continuously hold its shares through the effective merger date. However, when determining the stockholder of record, the Delaware courts have exclusively looked to the records maintained by the corporation or it transfer agent, which typically list the Depository Trust Company's nominee as the registered owner.
According to Laster, Delaware courts should not wait for legislative action to change this approach. Instead, he believes that the state's high court should adopt an approach that recognizes custodial banks and brokers as stockholders of record for the purpose of determining whether the continuous ownership requirement is met.
Despite taking this view, Laster held that under Delaware precedent, he was compelled to find that the five institutional investors in the underlying case lost their rights to seek an appraisal when their shares of Dell Inc. were re-titled in the names of their custodial banks' nominees.
“Were I writing on a blank slate, I would hold that the records of the corporation for purposes of determining who is a stockholder of record include the DTC participant list. Under this interpretation, the custodial banks and brokers who appear on the DTC participant list would be stockholders of record for purposes of Delaware law, just as they are for federal law and just as they were before share immobilization,” he opined.
In this case, five institutional investors caused an appraisal demand to be made of 922,975 shares of Dell common stock. Because the investors owned their shares “street name”— meaning that the DTC held the shares on behalf of custodial banks, which in turn held the shares of behalf of the investors—the DTC's nominee Cede & Co. made the demand on their behalf.
As a result of back office procedures, the investors' custodial banks, J.P. Morgan Chase and The Bank of New York Mellon, instructed Cede to re-title their investors' shares in the name of the banks' nominees.
Because the re-titling occurred before the effective merger date, Dell filed a motion to dismiss the appraisal demands, claiming that the continuous holder requirement had not been met.
Despite criticizing the state's high court's interpretation of the continuous holder requirement, Laster concluded that under governing Delaware precedent, the petitioning investors lost the their appraisal rights when their shares were re-titled.
In doing so, he rejected an argument that the “continuous holder requirement” should be interpreted liberally in favor of the shareholders. Instead, he opined that the Delaware Supreme Court has instructed that the state's appraisal statute be constructed “even handedly, not as a one-way street.”
“In other words, both petitioners and the corporation must adhere strictly to the appraisal statute's requirements; neither gets the benefit of the doubt under more a lenient rule of liberal construction. Given these pronouncements and existing precedent, the Funds cannot rely on a principle of liberal construction to preserve their appraisal rights,” he wrote.
Despite concluding that the petitioners lost their appraisal rights, Laster outlined the reasons for adopting a different approach to interpreting who is a stockholder of record.
He encouraged the state supreme court to “modernize” the law, despite its stated preference for a legislative cure.
“[T]he question of what constitutes the records of the corporation for purposes of determining who is a holder of record is a quintessential issue of statutory interpretation appropriate for the judiciary to address,” Laster wrote, adding that the supreme court has “not traditionally deferred to the prospect of legislative action.”
The petitioners were represented by Grant & Eisenhofer P.A.
Dell was represented by Richards, Layton & Finger, P.A. and Alston & Bird LLP
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The opinion is available at http://www.bloomberglaw.com/public/document/IN_RE_APPRAISAL_OF_DELL_INC_No_9322VCL_2015_BL_222333_Del_Ch_July.
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