In July 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.
In this 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.
A 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.
The 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.
In 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.
Of 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 (firstname.lastname@example.org) 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.