4:47 pm ET
Jul 13, 2015
Investors Challenging Dell Deal Hit a Clog
in the ‘Proxy Plumbing’
Who actually owns a share of stock?
The complicated answer to that question has tripped up some Dell Inc.
investors challenging the technology company’s 2013 sale to its founder,
and it could save Dell millions of dollars.
A Delaware judge on Monday found that because owners of 922,975 Dell
shares failed to continuously hold their stock during the buyout process,
they forfeited their rights to challenge the deal price. He blamed legal
precedent and quirks of the country’s arcane stock-management system, and
expressed frustration at his own ruling.
Monday’s 54-page ruling from Vice Chancellor J. Travis Laster, the
Delaware Court of Chancery’s
outspoken merger cop, describes
large kinks in the nation’s “proxy plumbing”–the labyrinthine system that
keeps tracks of public-company shares as they change hands. A web of
brokers, transfer agents and bank custodians stand in between a company
like Dell and the investors who ultimately own its stock.
Dell in 2013 was sold to its founder, Michael Dell, and private-equity
firm Silver Lake Partners for $24.4 billion. Several investors, including
the five funds at issue here, asked a judge to award a higher price for
a legal process known as appraisal.
Dell’s appraisal is one of the biggest to date, and Monday’s ruling
affects only a small fraction of the roughly 37 million shares that have
objected to the $13.75-a-share deal price.
Like most U.S. investors, these five funds, including T. Rowe Price Group
Inc.-managed funds, held their shares through custodian banks, which in
turn participated in a national stock aggregator called the Depository
Trust Company. DTC, which was created in the 1970s to reduce the mountains
of paperwork that had to be generated each time a share of stock changed
hands, holds shares in bulk and reassigns them to new owners as needed. It
is the largest shareholder of record of most U.S. public companies.
To separate out the appraisal-seeking shares from the millions of other
Dell shares on its books, DTC notified the custodian banks, who reassigned
the shares under new entities. The “beneficial owner” of the shares never
changed, but the title holder did.
Dell argued that these steps broke the continuous-ownership chain required
under the appraisal rules, and Mr. Laster reluctantly agreed.
“Were it up to me, I would hold that the concept of a ‘stockholder of
record’ includes the custodial banks and brokers,” he wrote. But “the
funds lost their appraisal rights when their shares were re-titled in the
names of their custodial banks ‘nominees.”
The ruling could have broader implications as the number appraisal cases
spikes. Big cases are currently challenging the buyouts of
AOL Inc. and PetSmart Inc. and
others, and it’s possible that stock in these companies could have hit the
same back-office snags as the Dell shares.