MICHAEL DELL ISN'T COMPLAINING. PHOTOGRAPHER: JUSTIN
Matt Levine is a Bloomberg View
columnist writing about Wall Street and the financial world.
Levine was previously an editor of Dealbreaker. He has worked as
an investment banker at Goldman Sachs and a mergers and
acquisitions lawyer at Wachtell, Lipton, Rosen & Katz. He spent
a year clerking for the U.S. Court of Appeals for the Third
Circuit and taught high school Latin. Levine has a bachelor's
degree in classics from Harvard University and a law degree from
Yale Law School. He lives in New York.
T. Rowe Price Voted for the Dell Buyout by Accident
MAY 13, 2016 12:14 PM EDT
Sometimes companies are acquired by
other companies. The way this works is that the target company's
managers and board negotiate a deal with the acquirer, and then they
call a meeting where the shareholders can vote on the deal. They book
a big room, and the shareholders show up, and the managers say why the
deal is good, and the shareholders discuss it for a bit, and then they
vote. This is a real thing that actually happens. I went to one once.
But usually it is more complicated than that. Mostly, it is
inconvenient for shareholders to show up at the meeting, so mostly
they don't. Companies mail out proxy cards, and if you are a
shareholder with better things to do that day, you fill out the proxy
card and mail it back. The proxy card appoints someone who'll be at
the meeting anyway -- typically someone who works for the company --
to vote on your behalf.
You tell her how to vote, and then she does it,
and it's as though you'd been there and voted yourself. You don't even
have to pay postage; the company provides a self-addressed stamped
But usually it is more complicated than
that. Most shareholders in most companies are not actually
shareholders in those companies. That is, they are not "shareholders
of record," who own shares that are reflected on the stock registry of
the company, or physical paper stock certificates. Instead, they hold
shares in "street name," meaning that their banks or brokers own the
shares on their behalf. This makes a lot of things more
convenient, especially if you want to sell your shares: You don't have
to contact the company and tell it to update its shareholder records,
or mail stock certificates anywhere. Your broker, who actually owns
the shares, can handle it for you. But this means that your broker
also has to handle voting for you: The broker is the legal owner, so
it gets to vote, but it will ask you for instructions and then vote
however you tell it to.
(Incidentally, this means that, if you are a shareholder in street
name and you want to show up and vote at the actual meeting, you have
to get a proxy from your broker so that you can get in.)
But usually it is more complicated than
that. Even the brokers mostly don't own the shares they hold for
customers in "street name." Instead, they've all agreed to put their
shares in one place, called the Depository Trust Co., which owns all
their shares for them.
This makes transfers even more convenient; instead of moving around
physical share certificates between brokerages, everyone can just move
around entries in DTC's central computer. It does make voting one
level more complicated: Delightfully, DTC (or, strictly, its nominee,
Cede & Co.) is the record owner for state law purposes, while the
brokers are the record owners for federal law purposes, with the odd
result that Cede (the Delaware owner) has to give proxies to the
brokers (the federal owners) so that they can vote. By proxy. On
behalf of their customers.
But usually it is more complicated than that. Most
are held, not by individuals, but by institutions, pensions, asset
managers, mutual funds, etc. Many of those institutions own shares in
hundreds or thousands of companies, and can't keep track of all those
companies' meetings. So often they hire someone to keep track of the
meetings, submit their proxies, and generally be in charge of voting.
The situation is similarly challenging for brokers, who have to keep
track of even more meetings, and who similarly outsource their voting
obligations. So T. Rowe Price is a gigantic institutional asset
manager, and State Street is the broker for some of its funds, and
both of them outsource the voting stuff, to two different companies:
State Street outsourced to
Broadridge Financial Solutions, Inc. the task of collecting and
implementing voting instructions from its many account holders,
including the T. Rowe Petitioners. To carry out that task, State
Street gave Broadridge a power of attorney which authorized
Broadridge to execute proxies on State Street’s behalf. At that
point, voting authority for the T. Rowe Petitioners’ shares rested
To fulfill its contractual
obligations to State Street, Broadridge communicated with State
Street’s account holders and obtained voting instructions by mail,
by telephone, or over the internet. With T. Rowe, the process
involved an additional party: Institutional Shareholder Services
Inc. (“ISS”). To facilitate the submission of voting instructions
in connection with numerous meetings of stockholders each year, T.
Rowe has retained ISS to notify T. Rowe about upcoming votes,
provide voting recommendations, collect T. Rowe’s voting
instructions, and convey them to Broadridge. To make the voting
process more efficient, T. Rowe has a computerized system
that automatically generates default voting instructions and
provides them to ISS.
That's from Wednesday's
Delaware Chancery Court decision
about the 2013 leveraged buyout of Dell Inc., which features this
lovely chart of how those shares were voted:
It isn't as simple as just showing up to
a shareholder meeting when you're invited! There are wheels within
wheels within powers of attorney.
One reason that I have told you this
boring complicated story is to persuade you that it is boring and
complicated. In human life, things that are boring and
complicated tend to get messed up, because honestly, who wants to pay
attention to all this stuff?
As it happens, T. Rowe Price's votes
on the Dell buyout got messed up in two completely separate ways,
requiring two separate Delaware court opinions. T. Rowe Price opposed
the buyout, which was led by Michael Dell, the company's founder and
chief executive officer. Several T. Rowe Price funds not only vocally
opposed the deal, they also demanded appraisal of their shares, which
is the process by which a Delaware court determines how much the
shares were worth and orders the surviving company to pay the
difference. The buyout price for Dell ended up being $13.88 a share.
T. Rowe thought it should have been more, so it sued.
It lost. Twice. On technicalities. The
Delaware appraisal statute
has pretty strict rules, two of which are that, to get appraisal:
You have to demand appraisal in writing before the merger closes, and
hold your shares continuously until the closing, and
You have to vote against the merger.
All of the relevant T. Rowe Price funds more or less did both
of these things. But not quite! Last year some of the funds' appraisal
lawsuits were dismissed because they flunked the first test, for
reasons that were
At some point, the shares beneficially owned by some T. Rowe funds had
their official record ownership transferred from Cede & Co. to Kane &
Co., a nominee of JPMorgan, which was the custody broker for those
funds. The T. Rowe funds never sold those shares, but their entirely
arbitrary legal ownership changed, which was enough to disqualify them
But the T. Rowe funds custodied with
State Street avoided this problem, and stayed at Cede & Co. the whole
time. They had an even dumber problem: They voted in favor of the
deal. They didn't mean to, but they did, just because, you know, this
stuff is so boring and complicated, who can keep track? The Dell
buyout was so controversial that the shareholder meeting had to be
rescheduled several times to get enough votes (and negotiate a higher
price). Before the first scheduled meeting, ISS asked T. Rowe Price
how it wanted to vote, and T. Rowe told ISS that some of its funds
wanted to vote against the merger. So ISS recorded the votes against
the merger. The first couple of times the meeting was postponed,
nothing happened: ISS just kept the old voting instructions from T.
Rowe, and T. Rowe logged back into the ISS voting system anyway to
make sure the instructions were correct. Everything worked smoothly
and redundantly. But then:
On September 4, 2013, the ISS Voting
System generated a new meeting record for the re-scheduled meeting
(the “September Meeting Record”). The T. Rowe Voting System showed
both the July Meeting Record and the September Meeting Record. In
the ISS Voting System, however, the September Meeting Record
replaced the July Meeting Record. This had the effect of deleting
the voting instructions that had been entered in the ISS Voting
The T. Rowe Voting System
automatically pre-populated the September Meeting Record with the
default voting instructions called for by T. Rowe’s voting
policies. As a result, the T. Rowe Voting System populated the
September Meeting Record with instructions to vote “FOR” the
Merger, “AGAINST” the advisory resolution on golden parachutes,
and “FOR” authority to adjourn the meeting.
No one from T. Rowe’s proxy team
logged into the ISS Proxy System to check the status of T. Rowe’s
voting instructions. As part of the routine operation of the two
systems, the default instructions in the September Meeting Record
were conveyed automatically to ISS.
Oops! I don't know whose fault this was.
ISS's computer probably shouldn't have overwritten the old
instructions. The T. Rowe proxy team probably should have
double-checked that its instructions were right, like, the day before
the vote. But it isn't hard to be sympathetic to both sides. The
surprise is that this doesn't happen all the time.
By the way, you might assume that, since the law requires you to vote
against the deal to get appraisal, and since T. Rowe Price voted in
favor of the Dell deal, its appraisal lawsuit would be an obvious
no-hoper and get tossed pretty quickly, but: nope. It took years, and
decision dismissing it
is 70 pages long. This is in part because Vice Chancellor J. Travis
Laster takes even more delight than I do in going through all of the
complexities of the voting system, but also in part because T. Rowe
had a real -- and paradoxical -- argument that it could demand
appraisal, because it didn't own the shares, Cede did,
and Cede voted enough shares against the deal to preserve its
appraisal rights. The court didn't buy it -- I don't either -- but it
wasn't a terrible argument.
When we talked about last year's T. Rowe-Dell decision,
The financial system is built up
in layers of abstraction over some vast and unwieldy machinery.
The machinery is complicated in part in order to make the
abstraction simple: You can buy stock with a click of a
mouse because armies of people devote their careers to the legal
niceties and operational maintenance and integration of all this
And sometimes they forget to check their
voting instructions for the fourth time, and mild disaster ensues.
The obvious question is: Does it have to
be this way? The machinery is complicated in part to make the
abstraction simple, but also because it has accreted over decades to
respond to particular problems in more or less ad-hoc ways, and
because decisions made to simplify one thing, like stock transfers,
have complicated other things, like voting. But computers are better
now than they were when DTC was invented, or for that matter when
proxy cards were invented. You could just, you know, build a big
database of who owns shares, and transfer shares on that database, and
not rely on a system in which people own shares in brokers' databases
and brokers own shares in DTC's database and DTC owns shares in
companies' (transfer agents') databases. The big database could send
out voting instructions directly to the shareholders, cutting back on
the outsourcing. You could build a new system, from the ground
up, corresponding to the actual practices of finance rather than to
the archaisms that they're built on.
This is of course more or less
the dream of the blockchain,
though there it is overlaid with a lot of mysticism about
decentralization and cryptography. The mysticism can occasionally be
annoying, but it serves an obvious function. All of this stuff is so
boring. The people in charge of building the systems that transmit
the voting instructions from the brokers' voting agents to the mutual
funds' voting agents -- those people are not celebrities. Those people
don't give keynote speeches at conferences. The blockchain's key
tend to think,
is sociological: It makes this sort of back-end database technology
stuff cool. A little overenthusiastic hand-waving may be a small price
to pay to get people to pay attention to systems.
At the same time, though, technology is
mostly good for solving technological problems. Building a really good
computer system to keep track of share ownership is a good idea, but
it isn't the hard part. (Building one simple system should be easier than
the complex accretion of systems we have today.) The hard parts are
sociological -- getting actors in the current system to give
up control, and perhaps their market niches, to cooperate in building
a new system -- and also, perhaps above all, legal. Laws exist,
and many of them were written decades ago and are not well adapted to
the conveniences of modern technology.
Earlier this week,
LendingClub's recent legal troubles, in which its push to simplify and
disintermediate lending may have led it to cut some legal corners with
the loans it was selling to customers. But I didn't want to put too
much blame on the "financial technology" mindset. I said: "The fintech
industry, after all, didn't invent fintech." Securitization, the MERS
mortgage registry: These were attempts to transcend the old-timey
legal structures of lending and to create abstract,
technology-enabled, fast and convenient systems for trading and owning
loans. They mostly worked! But there were glitches, because the clever
new systems were built on top of inconvenient old rules. And just
because your new system is cleverer and faster, that doesn't mean you
get to ignore the old rules.
The DTC/Cede/street name/etc. system is
another case of pre-fintech fintech, a privately coordinated system
for simplifying and electronifying the cumbersome traditional
processes of owning and trading and voting shares. It's just that the
way to simplify those processes often made them more complicated in
other ways. Perhaps the next round of financial technology will avoid
that difficulty. But complexity is a stubborn survivor; often, when
you think you are getting rid of complexity, you are only moving it
I mean, in the normal merger case, it's
someone (or someones) who work for the company. In proxy fights, like
where a hedge fund is running its own nominees for the board, the
hedge fund can solicit shareholders to sign its own proxy card, giving
voting authority to someone who works for the hedge fund.
The Securities and Exchange Commission's proxy rules are set out in
The Delaware General Corporate Law proxy rules are in DGCL
This post will eventually be about Dell, so I refer you to
the proxy statement
for Dell's 2013 buyout. The proxy card is at the very end; it says:
You hereby (a) acknowledge receipt of the proxy statement related
to the above-referenced meeting, (b) appoint Lawrence P. Tu and
Janet B. Wright, and each of them, as proxies, with full power of
substitution, and authorize them to vote all shares of Dell Inc.
common stock that you would be entitled to vote if personally
present at such meeting and at any postponement or adjournment
thereof and (c) revoke any proxies previously given.
This proxy will be voted as specified by you. If no choice is
specified, the proxy will be voted according to the Board of
Director recommendations indicated on the reverse side, and
according to the discretion of the proxy holders for any other
matters that may properly come before the meeting or any
postponement or adjournment thereof.
On the back, there are some check boxes to vote For, Against, or
Abstain on the merger and a couple of other matters.
Also phone and Internet voting
instructions, because who sends snail mail?
By the way, it's usually more complicated
than that, too: Most companies have outside transfer agents to
keep track of their shareholder records. From
Wednesday's Dell decision:
Dell outsourced the obligation to maintain its stock ledger and
generate a stock list to its transfer agent, American Stock
Transfer & Trust Company, LLC (“American”).
This is in Rules 14b-1
See, e.g., page 136 of
Dell proxy statement:
Stockholders of record will be able to vote in person at the
special meeting. If you are not a stockholder of record, but
instead hold your shares in “street name” through a bank, broker
or other nominee, you must provide a proxy executed in your favor
from your bank, broker or other nominee in order to be able to
vote in person at the special meeting.
Most of them. In the Dell
the proxy says
that there were 1,755,951,717 shares outstanding as of the record
says that Cede & Co. was the record holder of 1,535,558,891 of them,
or about 87 percent.
of the DGCL, famous from the fact that it has to be
included in merger proxy statements.
There were previous cases in which
appraisal-arbitrage investors bought shares after the record date for
voting on the merger (which is usually
weeks before the meeting date). So they didn't get to vote, and
companies argued that they shouldn't get appraisal because they
couldn't prove that the shares they bought had been voted against the
deal. The courts decided that this was unfair, and since Cede actually
owned all the shares anyway, the appraisal arbs could count Cede's
votes against the deal. That is, as long as Cede voted enough shares
against the deal to "cover" all the people seeking appraisal, the
arbitrageurs could assume that all the shares they bought were shares
that voted no, in the absence of evidence the other way.
That was rough justice, but again: in the absence of evidence the
other way. Here, we know that the T. Rowe funds actually voted for the
deal, so there is not much of a fairness argument for pretending that
they'd voted against. From the decision:
The evidence showing how Cede voted particular blocks of shares
provides a basis for distinguishing the Appraisal Arbitrage
Decisions. Under those opinions, an appraisal petitioner that held
in street name can establish a prima facie case that the Dissenter
Requirement was met by showing that there were sufficient shares
at Cede that were not voted in favor of the merger to cover the
appraisal class. This showing satisfies the petitioner’s initial
burden and enables the case to proceed. If there is no other
evidence, then as in the Appraisal Arbitrage Decisions, the prima
facie showing is dispositive.
The analysis, however, need not stop there. Once the appraisal
petitioner has made out a prima facie case, the burden shifts to
the corporation to show that Cede actually voted the shares for
which the petitioner seeks appraisal in favor of the merger.
And since we can trace how T. Rowe/State Street/Broadridge/Cede/etc.
voted these shares, and since they voted for the merger, they lose.
Incidentally, record dates -- where you have to own the shares weeks
before the meeting to vote the shares at that meeting -- are kind of
another weird archaism.
This column does not necessarily reflect the opinion of the editorial
board or Bloomberg LP and its owners.
To contact the author of this story:
Matt Levine at
To contact the editor responsible for this story:
James Greiff at
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