Chancery Court Dismisses Appraisal Challenge Based on Re-Titling of Shares, But Advocates For a Different Approach
By Annette Becker and Lauren Garraux
On July 13, 2015, Vice Chancellor J. Travis Laster issued his Memorandum Opinion in In re Appraisal of Dell Inc. in which he granted Dell’s motion for summary judgment against five institutions which owned Dell common stock and sought appraisal in connection with a going-private merger of the Company which closed in October 2013. Though Vice Chancellor Laster acknowledged that Dell’s motion “must be granted” based on existing Delaware precedent interpreting the requirement that a stockholder who wishes to pursue appraisal “continuously hold[] such shares through the effective date of the merger,” the Vice Chancellor advocated for and urged the Delaware Supreme Court to adopt the federal law approach which, if applied, would allow the petitioners’ appraisal challenge to proceed.
In February 2013, Dell agreed to a merger in which each publicly held share of Dell common stock would be converted into the right to receive $13.75 in cash, subject to the right of stockholders to seek appraisal under Section 262 of the Delaware General Corporation Law (“DGCL”). In July 2013, prior to the vote on the merger, five institutions who owned approximately 922,975 shares of Dell common stock (the “Petitioners” or “Funds”) in street name through their custodial banks caused Cede & Co. (“Cede”), the nominee of the Depository Trust Company (“DTC”) and the entity in whose name the shares were registered, to demand appraisal rights on their behalf .
After Cede made the appraisal demand on behalf of the Funds, and as is typical in appraisal actions, DTC issued paper stock certificates in Cede’s name for the shares and delivered them to Petitioners’ custodial banks. Upon receipt of the certificates, however, the custodial banks took the additional “back-office” step of instructing Cede to authorize that the shares be re-titled in the names of their own nominees, a procedure that the custodial banks at issue and others follow for various business reasons including insurance requirements, recordkeeping for internal audit and mitigating the risk of theft. The shares were re-titled prior to the consummation of the merger on October 29, 2013 and, though the Funds remained the beneficial owners and the custodial banks remained the custodians both before and after the re-titling, new nominees appeared on the stock ledger after this step was taken.
Dell moved for summary judgment on grounds that the re-titling the shares as an administrative transfer barred the beneficial owner from pursuing appraisal rights and, therefore, that Petitioners did not meet the requirement under Delaware law that a stockholder who wishes to pursue appraisal “continuously hold[] such shares as a holder of record through the effective date of the merger.” Based on existing Delaware case law interpreting the requirement and after providing both a detailed description of the process by which shares are held in fungible bulk and then re-certificated by DTC and a meticulous history of the record holder requirement, Vice Chancellor Laster granted Dell’s motion. Specifically, based on Delaware precedent, Vice Chancellor Laster concluded that Petitioners did not meet the continuous holder requirement due to the re-titling and causing ownership to change and, therefore, that Petitioners lost their appraisal rights when the re-titling occurred.
Despite reaching this conclusion, which Vice Chancellor Laster explained was required under existing Delaware precedent, the Vice Chancellor advocated for a different and, in his opinion, “preferable” approach. In particular, for purposes of federal law, the custodial banks and brokers — and not Cede — are deemed the record holders of shares. Thus, if Delaware followed the federal approach, the custodial banks and brokers who appear on the DTC participant list would be stockholders of record for purposes of Delaware law. Under these circumstances, Dell’s motion for summary judgment would be denied because there was no change of ownership at the DTC participant level. The Vice Chancellor urged the Delaware Supreme Court to effectuate this modernization of the law, noting that a statutory amendment from the legislature was one — but not the only — method of doing so.