Dole Case Illustrates Problems in Shareholder System
The share ownership system in the United
States is fraying. And while its shortcomings have been largely behind
the scenes, now they are going to cost some innocent shareholders
The problems have become apparent as a
result of a Delaware court case over
the $1.2 billion buyout
of Dole Food in 2013. A $115.7 million settlement was reached after a
lawsuit that accused David H. Murdock — Dole’s controlling shareholder
and chief executive — and his lieutenants of conflicts of interest in
taking the company private.
Former Dole shareholders will receive
$2.74 a share — a nice chunk of change in addition to the $13.50 a
share originally paid in the deal. Still, because of the shareholder
ownership system, some of those Dole shareholders may not get that
The reason is that while shareholders
think they own the shares they buy, they don’t in a sense.
That may come as a surprise to those who
check their online brokerage accounts daily or see traders on a floor
of an exchange reacting to price movements. A market that in many ways
is open and transparent is underpinned by a system of share ownership
that can be anything but.
Share ownership in the United States is
conducted through the Depository Trust Company, which was formed after
the back-office scandal of the early 1970s. At that time, trading
volume on Wall Street became too much to handle, and brokerage firms
were swamped by paperwork, falling months behind.
The idea was to freeze ownership of
company shares in one place. Now, when Apple or Microsoft look at
their share register they see only the Depository Trust Company. When
trading occurred, brokers would now transfer shares among accounts at
the trust company. The brokers hold the shares on behalf of customers
who were the ultimate beneficial owners.
The result was that the Wall Street
firms could now more easily track shares by having to deal only with
themselves and the Depository Trust Company. Companies, meanwhile,
were taken out of the process.
Because shareholders are actually only
beneficial owners, lots of odd things can happen.
For example, instead of executing a
trade in the market, a broker may just transfer shares among clients
and mark the trade as a sale. (The broker is still required by the
Securities and Exchange Commission to get the best price.)
Alternatively, if a person wants to
short a stock by borrowing it and selling it in the market — thereby
betting that the stock price will drop — the broker may “lend” your
shares without you knowing it.
These issues have been brought to the
forefront by the Dole case. In the settlement, 4,662 people and
entities claimed 49,164,415 shares at $2.74 per share.
There is just one problem: Dole had only
36,793,758 shares outstanding.
These are probably not false claims.
They go directly to the problems with the share ownership system.
The first problem is that the Depository
Trust Company sometimes can’t keep track of shares. When this happens,
it puts a “chill” on the shares, meaning that it stops tracking them
because it is too hard to do so in the final three trading days up to
the closing of a merger.
Instead, the Depository Trust Company
sort of wings it, and the money in a merger is simply paid to the
brokers who are supposed to filter it down to the investors.
Usually this works, but apparently in
the Dole buyout, there may have been some problems with the tracking.
Because no records were kept by the Depository Trust Company and the
process is too hard (read, too expensive) to reconstruct, no one
The bigger problem, however, is the
shorting issue. Normally, when someone shorts shares, they borrow them
and then sell them. When the short position is closed, the investor
buys back the shares and restores them to their lender.
In a merger, the shorting party simply
pays the merger consideration.
There seemed to have been many shorts in
Dole. Expectations that the company would obtain a higher sale price
lifted Dole’s shares above the terms of the buyout offer.
Other investors were apparently
skeptical that would happen, and more than 2.9 million shares were
shorted on the last day that the trust company tracked the trading of
How to deal with this was the subject of
in the Delaware court case. Essentially, the judge threw up his hands,
saying that the plaintiffs could pay the brokers their money and be
done with it.
For good measure, the judge, Vice
Chancellor J. Travis Laster of the Delaware Court of Chancery, noted
that “it bears noting for future merger cases that 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
In other words, this happens every time.
It became a problem in the Dole settlement only because with so much
money being paid out, more shareholders than usual took the trouble to
submit a claim.
But there is not enough money. When
short sellers borrowed shares they sold them to other shareholders in
the market. Under the ruling, those third parties who unknowingly
bought shares that were shorted will now not be paid. Instead, the
holders of the shares that were loaned out will be paid. Those who
bought shorted shares will be left to look to the shorters.
The investors who shorted the stock did
so expecting to make a few cents a share: the difference between where
Dole had been trading above the buyout price and the price just before
the deal closed. Now, they could be on the hook for millions of
if they can be tracked down.
And that is a big if.
The Dole settlement highlights that as
our capital markets become ever more complex, share trading and
ownership are getting harder track. But in an age when computing power
is cheap, why can’t we keep track of shares?
Matt Levine of Bloomberg View, noting
that the 40-year-old system “is starting to show its age,” has
suggested that blockchain technology
could be the answer.
But is that really necessary? The system
might be fixed just by adding some computing power to better trace
shares. Of course, this would require the people who control the
plumbing of the markets to invest millions and millions of dollars in
Alas, there is no profit to be made on
an upgrade. This is an area where the nation’s chief market regulator,
the Securities and Exchange Commission, needs to step in.
But even this will not solve the
shorting issue. When you sign up with your broker you are signing up
to short shares, whether you like it or not. People are then buying
shares without your knowledge.
This is a problem that the brokerage
firms have created, and hopefully they will fix. At a minimum, they
need to stand behind the shareholders here. After all, they helped
create this mess.
Davidoff Solomon is a professor of law at the University of
California, Berkeley. His columns can be found at nytimes.com/dealbook.
A version of
this article appears in print on March 22, 2017, on Page B4 of the New
York edition with the headline: Dole Case Illustrates Problems in
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