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The Shareholder Forumtm

special project of the public interest program for

Fair Investor Access

Supporting investor interests in

appraisal rights for intrinsic value realization

in the buyout of

Dell Inc.

For related issues, see programs for

Appraisal Rights Investments

Fair Investor Access

Project Status

Forum participants were encouraged to consider appraisal rights in June 2013 as a means of realizing the same long term intrinsic value that the company's founder and private equity partner sought in an opportunistic market-priced buyout, and legal research of court valuation standards was commissioned to support the required investment decisions.

The buyout transaction became effective on October 28, 2013 at an offer price of $13.75 per share, and the appraisal case was initiated on October 29, 2013, by the Forum's representative petitioner, Cavan Partners, LP. The Delaware Chancery Court issued its decision on May 31, 2016, establishing the intrinsic fair value of Dell shares at the effective date as $17.62 per share, approximately 28.1% more than the offer price, with definitive legal explanations confirming the foundations of Shareholder Forum support for appraisal rights.

Each of the Dell shareholders who chose to rely upon the Forum's support satisfied the procedural requirements to be eligible for payment of the $17.62 fair value, plus interest on that amount compounding since the effective date at 5% above the Federal Reserve discount rate.

Note: On December 14, 2017, the Delaware Supreme Court reversed and remanded the decision above, encouraging reliance upon market pricing of the transaction as a determination of "fair value." The Forum accordingly reported that it would resume support of marketplace processes instead of judicial appraisal for the realization of intrinsic value in opportunistically priced but carefully negotiated buyouts.


Forum distribution:

Blaming antiquated laws for fund manager's ownership errors in Dell appraisal case


For previous reports of the administrative errors addressed in the article below, and the referenced court decision itself encouraging higher court review of the administrative requirements for perfecting appraisal rights, see

Note: Each of the petitioners that have been determined ineligible for appraisal in this court decision are among the petitioner accounts with approximately 31 million shares managed by T Rowe Price, all of which Dell is also challenging for eligibility based on T Rowe Price having voted the shares in favor the Dell merger; see May 18, 2015 USA Today: "Dell moves to boot T. Rowe from appraisal case" and the referenced May 8, 2015 [May 15 2015 Public Version], In Re: Appraisal of Dell, Inc. (Consol. C. A. No. 9322-VCL): Letter on behalf of Dell Inc. to the Honorable J. Travis Laster with attached non-confidential Exhibits.


Source: The New York Times | DealBook: July 21, 2015 column

Funds Find They Don’t Really Own Dell Shares

JULY 21, 2015

Harry Campbell

Deal Professor




It turns out that mutual funds may not be that great at keeping track of the stocks they own. The latest evidence comes from a legal battle over the $24.9 billion management-led buyout at Dell.

After the Dell deal was made in 2013, about 2.7 percent of shareholders objected to the purchase price of $13.75 a share, exercising what are called appraisal rights. The shareholders filed suit in a Delaware court, arguing that the buyout price was too low and asking the court to determine the fair value of Dell shares.

These last stalwarts of the Dell buyout opponents included funds advised by T. Rowe Price and Morgan Stanley. Most other shareholders, including Carl C. Icahn, who threatened to exercise appraisal rights, folded and took the $13.75 for each of their shares. Who can blame them? Appraisal involves a convoluted court proceeding and all the costs that go with it.

Add to the problems with appraisal rights the fact that the United States system of share ownership is even more bizarre. Five funds holding 922,975 shares that dissented from the Dell buyout, including T. Rowe Price’s fund, found this out last week when their case was dismissed.

In his opinion, Vice Chancellor J. Travis Laster of the Delaware Chancery Court gave a startling reason: The five funds didn’t really own their shares the way they thought they did.

How could a mutual fund lose track of its ownership?

The answer is that in the United States, most people who think they own shares actually do not.

Instead, in the United States most shares are held through a nominee system. Shareholders are what we call beneficial owners — they have a right of ownership, but one that is not reflected in the actual legal title of the shares.

Individuals buy stock through brokers like Charles Schwab. The brokers then purchase the stock on the investor’s behalf. But the brokers that hold these shares do not actually own them. Instead, the shares are held by a superentity called Cede & Company in an arrangement administered by the Depositary Trust and Clearing Corporation. More than 800 brokers and other institutions that hold stock are members of the D.T.C.C. and hold shares at Cede.

The bottom line is that when you look at your brokerage statement, the shares listed are most likely owned by Cede on your behalf.

This system was set up after the back-office brokerage and paperwork crisis of the 1960s, when brokerage houses could not keep up with an ever-increasing number of trades. Back then, anytime a trade occurred, it needed to be recorded with the company and a new stock certificate issued. The brokers could not keep up, and a number of them folded because of faulty record-keeping.

To keep up with the increasing ownership, the system was overhauled. Today, when a trade occurs, there is no need to issue a new stock certificate. Instead, an entry is simply made by the brokerage house internally and at Depositary Trust and Cede. If you think about it, this is the only way the system can handle billions of shares a day.

Like everything, though, this system of share ownership is imperfect.

That is what these five Dell shareholders found out when they exercised appraisal rights and encountered the law’s very particular requirements.

The Delaware appraisal law requires that dissenters own their shares from the time of dissenting until the completion of the deal. In other words, there must be continuous ownership.

But the rule assumes a world in which people directly hold certificates. This is not surprising, since the rule was adopted well before the Depositary Trust system was set up.

Here is where the problem occurred. The fund holders thought they owned their shares throughout this time period. They did not.

Instead, when the funds exercised their appraisal rights, Cede transferred the shares held by the funds to new nominees at the brokers (including JPMorgan Chase and Bank of New York Mellon) representing these funds. While beneficial ownership remained, actual ownership changed — a violation of the continuous ownership requirement.

Why did this occur? It’s not clear, but it was most likely a result of simple back-office errors. Matt Levine of Bloomberg View cast blame on JPMorgan Chase and Bank of New York Mellon, writing, “Getting this wrong, and costing customers their appraisal claims, seems almost deliberately perverse ”

Unfortunately for the funds, Vice Chancellor Laster held that this transfer disqualified them from exercising appraisal rights. While they were beneficial owners of the shares, title changed, violating the continuous ownership requirement.

The judge recognized that this was unfair, but he stated that his hands were tied by Delaware law, which recognized only the actual holder of record as the owner of shares.

The only remedy now is for the funds to go to the Delaware Supreme Court, the higher state court, and persuade it to change the rules, something Vice Chancellor Laster seemed to want.

It is almost so arcane you could cry. But it raises bigger issues about both share ownership and appraisal rights that are being swept under the rug.

That most shareholders do not actually hold title to their shares is for the most part a meaningless technicality. But it still raises all sorts of issues as people try to track these shares.

For example, the system of voting shares is a mess because of this ownership problem. T. Rowe Price mistakenly voted yes for the Dell deal when it meant to vote no. And in the battles between hedge funds and companies to elect directors, the voting system still cannot allow for a universal ballot, one where all the nominees of each side are on one card, since people cannot track all the information needed down to beneficial owners.

Beyond the share tracking issue, there is perhaps a bigger point about appraisal rights.

In the last few years, more and more shareholders have tried to exercise appraisal rights. Many of them are hedge funds that buy shares specifically to take their chances in court. But others are shareholders like T. Rowe Price that think they deserve a better deal.

That was always the purpose behind appraisal rights — to allow shareholders that thought they had received a bad deal to go to court and get the fair value for their shares.

Now that appraisal rights are being exercised regularly, however, companies are fighting back, trying to find every technicality to throw out these suits.

A proposal before the Delaware Legislature to cut back these cases by barring people with less than $1 million in shares from exercising appraisal rights, among other steps, did not succeed in part because many companies felt it did not go far enough in halting the tide of appraisal rights cases.

But the Dell case is a warning. Appraisal rights are there to protect shareholders from underpriced deals. Instead of wrangling about technicalities or rewriting the statute to cut back on these actions, Delaware should perhaps write an appraisal statute that works with the share ownership rules.

One could blame the T. Rowe Price fund and the others for this fiasco. Yet they are really the victims here, tripped up by an unnecessarily arcane system of shareholding in the United States. The lesson here is: Don’t hate the player. Hate the game.

Steven Davidoff Solomon is a professor of law at the University of California, Berkeley. His columns can be found at 

A version of this article appears in print on July 22, 2015, on page B5 of the New York edition with the headline: Funds Challenging Dell Bid Find Shares Aren’t Really Theirs.

Copyright 2015 The New York Times Company


This project was conducted as part of the Shareholder Forum's public interest  program for "Fair Investor Access," which is open free of charge to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The management of Dell Inc. declined the Forum's invitation to provide leadership of this project, but was encouraged to collaborate in its progress to assure cost-efficient, timely delivery of information relevant to investor decisions. As the project evolved, those information requirements were ultimately satisfied in the context of an appraisal proceeding.

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