Dell Shareholders' Appraisal Claims Denied After
Brett M. McCartney,
Delaware Business Court Insider
May 25, 2016
2015, the Delaware Court of Chancery issued an opinion in In re
Appraisal of Dell, Consol. C.A. No. 9322-VCL, holding that the
technical missteps of a custodial bank necessarily required the court
to deny certain beneficial stockholders' demands for appraisal. Nearly
a year later and after trial, Vice Chancellor J. Travis Laster held
that certain other petitioners seeking appraisal of their Dell shares
were barred from doing so because the record holder of the shares
voted in favor of the Dell going-private merger and, in doing so,
violated the "dissenting stockholder" requirements of Delaware's
appraisal statute, Section 262 of the Delaware General Corporation
Law. Again, the court was faced with a situation where the petitioners
argued that the defect in their appraisal demand was inadvertent. And
yet again, the explicit requirements of Section 262 demanded denial of
the appraisal claims. Interestingly, Laster noted with approval the
recent "appraisal arbitrage decisions," which decline to require a
petitioner to "share-trace" when demonstrating that the petitioners'
shares were not voted in favor of a merger. However, Laster relied
upon information that effectively traced the Dell petitioners' shares
as voting in favor of the merger when holding that the petitioners'
appraisal claims were barred.
most recent opinion in
In re Appraisal of Dell,
C.A. 9322-VCL (Del. Ch. May 11, 2016), the court considered appraisal
demands of 14 mutual funds sponsored by T. Rowe Price & Associates
Inc. and institutions that relied upon T. Rowe to direct the voting of
their shares. The T. Rowe petitioners were not record holders of their
Dell shares. The T. Rowe petitioners held their shares through
custodial banks, who were participant members of the Depository Trust
Co. (DTC). The DTC held the shares in the name of its nominee, Cede &
Co., which was the record holder. As the record holder, Cede held the
legal rights to vote the T. Rowe petitioners' shares and demand
appraisal for the shares. As the record holder, Cede was required to
vote the T. Rowe petitioners' shares in accordance with T. Rowe's
instructions. While T. Rowe publicly opposed the merger, its voting
system generated instructions for Cede to vote the T. Rowe
petitioners' shares in favor of the merger. T. Rowe retained
Institutional Shareholder Services Inc. (ISS) to update T. Rowe of
upcoming shareholder votes and ISS's recommendations regarding those
votes and to provide those instructions to T. Rowe's custodial banks.
In an effort to make the voting of the T. Rowe shares more efficient,
T. Rowe's internal voting-management system set default voting
instructions to approve management-supported mergers. Those
instructions were provided through the daisy chain of entities and,
ultimately, to Cede, which voted the T. Rowe petitioners' shares in
favor of the merger.
special meeting of Dell's shareholders occurred July 18, 2013, to vote
on the merger. At the time of that meeting, T. Rowe confirmed that its
instructions were to vote against the Dell merger. The July 18 meeting
was adjourned and, after several subsequent adjournments, on Sept. 12,
2013, the special meeting of the Dell shareholders was finally held.
Prior to the Sept. 12 meeting, T. Rowe's voting management system
generated a new voting record, replacing the instruction to vote
against the merger with a default instruction to vote for the merger.
No one from T. Rowe confirmed the voting instruction prior to the
Sept. 12 meeting. As a result, the T. Rowe petitioners' shares were
voted in favor of the merger.
Delaware appraisal statute requires, among other things, that the
petitioner seeking appraisal has not voted the appraisal shares in
favor of the merger or consented to the merger in writing. The court
discussed the impact of Section 262's requirements on record holders
of shares, such as Cede. Theoretically, Section 262 could be
interpreted to prevent Cede from demanding appraisal for any shares
when it votes a single share in favor of the merger on behalf of a
shareholder. The Delaware Supreme Court, mindful of brokers or
nominees potentially holding record shares on behalf of a variety of
shareholders, has held that record holders may split their votes and
seek appraisal for shares not voted in favor of a merger. A necessary
consequence of allowing vote splitting is that a record holder can
only demand appraisal for the specific shares that did not vote in
favor of the merger. In this instance, that prohibited the T. Rowe
petitioners from pursuing appraisal claims.
reaching its conclusion, Laster considered and distinguished the
aforementioned appraisal arbitrate decisions, which generally support
the proposition that the court need only look at the record holders'
aggregated votes when determining whether a shareholder's shares voted
against a merger. Laster noted that there was no available evidence in
the decisions regarding how specific shares voted. As a consequence,
Laster stated that the appraisal arbitrage decisions concern
situations where there is an absence of proof, as opposed to
circumstances present in Dell where evidence exists and is
available demonstrating how the shares were voted.
particular importance in this decision is the court's discussion of
the burden shift in demonstrating compliance with Section 262. A
petitioner can establish a prima facie case that the "dissenting
stockholder" requirements were met by showing that the record holder
held sufficient shares not voting for the merger to cover the
appraisal class. The burden then shifts to the respondent to
demonstrate how the record holder actually voted the shares for which
appraisal is sought. The respondent company could rely upon public
filings, internal control numbers or other voting authentication
materials to demonstrate how the record holder voted its shares. If,
as was the case in Dell, such information indicates that the
petitioners' shares voted in favor of the merger, the court will
dismiss the appraisal claim and the petitioners will receive the
merger consideration without interest.
Brett M. McCartney
is a partner at Morris James in Wilmington and a member of its
corporate and fiduciary litigation group. He practices primarily in
the Delaware Court of Chancery and Delaware Superior Court and focuses
on corporate governance and complex commercial litigation, stockholder
litigation, fiduciary duties, alternative entity disputes, class
action, and derivative litigation.
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