Laster: Remove the
Cobwebs From Stock Record-Keeping
■ Delaware judge
takes up antiquated stock record-keeping and voting system in Dole
Travis Laster has become a forceful advocate for reform of the system
for voting corporate stock and tracking share ownership, and in a Feb.
15 decision he confronted yet another drawback of that system. The
Delaware vice chancellor presided over a case in which Dole Food
Co. agreed to pay stockholders an additional $2.74 a share plus
interest to settle claims that the controlling stockholder David
Murdock violated his fiduciary duties to minority stockholders in
buying Dole for $1.2 billion, or $13.50 a share, in 2013.
There were 36.8 million shares eligible for the settlement, but
claimants submitted "facially valid claims" for 49.2 million shares, a
discrepancy that the settlement administrator and class counsel could
not resolve because the Depository Trust Co. and Cede Co., which keep
the stockholder ledger for public companies, did not receive
information about trades made in the three trading days before the
deal closed on Nov. 1, 2013, a period in which 32 million Dole shares
changed hands. Nor could the DTC/Cede system track short sales made in
those three days.
There is no cost-effective way to determine who did own the shares at
closing, Laster wrote. Instead, he held that the counsel for
stockholders, who were led by Stuart Grant of Grant & Eisenhofer PA in
Wilmington and Randall Baron of Robbins Geller Rudman & Dowd LLP
should distribute the settlement consideration to Cede and thereby to
the custodial banks and brokers whose clients are the economic owners
of the shares and let those institutions sort the problem out.
Laster wrote at the end of the opinion that the Dole case raises
broader issues: "The problems raised by short sales and trades during
the three days before closing appear endemic to the depository system
and hence likely infect every claims process. Nothing about either
factor was unique to Dole. The only difference was the magnitude of
the discrepancy, which made the issues visible."
The judge grappled with another drawback of the current depository
system last year when he found that mutual funds sponsored by T. Rowe
Price & Associates Inc. could not seek appraisal on the 27 million
Dell Inc. shares they owned because the funds had inadvertently voted
for the deal, thanks to a clerical error that ended up costing the
mutual fund company's investors over $100 million. The error stemmed
from the byzantine way in which stock is owned and voted-a "daisy
chain," as Laster called it.
He offered a way to untangle the daisy chain in "The Block Chain
Plunger: Using Technology to Clean Up Proxy Plumbing and Take Back the
Vote," a paper he delivered last fall to the Council of Institutional
Investors. Like almost all shareholders, the T. Rowe funds did not own
their Dell stock directly. Instead, they were beneficial owners,
holding their shares through a custodial bank, State Street Bank &
Trust Co., which in turn is a member of the Depository Trust Co.,
whose nominee Cede was the stockholder of record, as it is for most
public companies. State Street in turn used Broadridge Financial
Solutions Inc. to collect and implement voting instructions
from account holders. Laster noted in his speech that Broadridge
"controls over 98% of the U.S. market for proxy vote processing
services." T. Rowe added yet another intermediary, since it uses
Institutional Shareholder Services Inc. to notify its funds about
upcoming votes, provide voting recommendations, collect voting
instructions and deliver them to Broadridge.
Laster argued in his speech that the contorted way in which shares are
held and voted makes precise vote counting impossible. He noted that
one prominent Wilmington lawyer estimated that in a corporate election
closer than 55% to 45%, "There is no verifiable answer to the
question, 'Who won?'"
Many lawyers have also warned that the number of shares on which
appraisal could be sought is theoretically infinite because of the
oddities of the DTC/Cede system, but those fears had never been borne
out until the Dole case, which gives Laster one more powerful example
to argue for a much-needed reform of the system.
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