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In re Appraisal of
Dell Inc.: Delaware Court of Chancery Provides Guidance on
"Dissenting Stockholder" Requirement |
May 12, 2016
In In re Appraisal of Dell Inc.,
C.A. No. 9322-VCL (Del. Ch. May 11, 2016), the Court held that
fourteen mutual funds sponsored by T. Rowe Price & Associates, Inc.
(“T. Rowe”) as well as institutions that relied on T. Rowe to direct
the voting of their shares (the “T. Rowe Petitioners”) were not
entitled to an appraisal of their shares of Dell Inc. in connection
with Dell’s go-private merger, because the record holder had voted the
shares at issue in favor of the merger, thus failing to meet the
“dissenting stockholder” requirement of Section 262 of Delaware’s
General Corporation Law. The T. Rowe Petitioners held their shares
through custodians. The custodians, however, were not record holders
of the shares; they were participants of the Depository Trust Company,
which held the shares in the name of its nominee, Cede & Co., which,
for purposes of Delaware law, was the record holder. As the record
holder, Cede had the legal right to vote the shares on the Dell merger
and to make a written demand for an appraisal of the shares.
The Court noted that, through a
“Byzantine” system, Cede was constrained to vote the T. Rowe
Petitioners’ shares in accordance with T. Rowe’s instructions.
Although T. Rowe had publicly opposed the merger, due to its internal
voting processes, it had in fact submitted instructions to vote the T.
Rowe Petitioners’ shares in favor of the merger. To assist in its
voting processes, T. Rowe had retained Institutional Shareholders
Services Inc. (“ISS”). On matters on which a stockholder vote was
sought, the voting system generated default voting instructions. In
the case of management-supported mergers, such as Dell’s merger, the
default voting instructions were to vote in favor of the merger.
The special meeting of Dell’s
stockholders to vote on the merger was originally scheduled for July
18, 2013. For that meeting, T. Rowe confirmed that its shares were to
be voted against the merger. Dell opened the July 18 meeting for the
sole purpose of adjourning it. After a series of subsequent
adjournments, the special meeting was held on September 12, 2013.
Shortly before the meeting, the voting system generated a new meeting
record, which had the effect of replacing the prior instructions (i.e.,
“against”) with new default instructions (i.e., “for”). After
the switch, no one from T. Rowe logged into the ISS system to check
the status of its voting instructions. As a result, the T. Rowe
Petitioners’ shares were voted in accordance with the new default
instructions—that is, they were voted in favor of the merger, a fact
that came to light after certain of the T. Rowe Petitioners submitted
filings required by federal law disclosing their vote.
Section 262 of Delaware’s General
Corporation Law confers appraisal rights upon a stockholder of record
who holds shares on the date an appraisal demand is made, continuously
holds the shares through the effective date of the merger, submits a
demand for appraisal in compliance with the statute, and has not voted
in favor of the merger or consented to it in writing. The Court noted
that Section 262’s requirements could be read as “all-or-nothing
propositions,” such that a stockholder of record, like Cede, would be
foreclosed from asserting appraisal rights if it voted a single share
in favor of the merger. The Court observed that the Delaware Supreme
Court, recognizing that a broker or nominee may hold shares of record
on behalf of multiple clients, has permitted a stockholder of record
to split its vote and seek appraisal for shares not voted in favor of
the merger. The key consequence of such vote splitting, the Court
stated, is that a record holder can only seek appraisal for the
specific shares that were not voted in favor of the merger. The key
consequence for the T. Rowe Petitioners is that their shares held of
record by Cede, having been voted in favor of the Dell merger, were
not entitled to appraisal rights.
In arriving at its holding, the
Court noted that language in several of its recent “appraisal
arbitrage” opinions, if read literally, would preclude it from
considering anything other than Cede’s aggregated votes on the merger.
The Court stated, however, that there was no evidence in those cases
regarding how the particular shares were voted. The Court concluded
that the appraisal arbitrage cases deal only with the situation
involving the absence of proof; they do not stand for the proposition
that, where evidence as to how the shares were voted exists and the
parties can introduce it, the Court is precluded from considering it.
The Court’s solution was to provide
that, once an appraisal petitioner has made out a prima facie
case that its shares are entitled to appraisal (which, where the
shares are held of record by Cede, it can meet by showing that there
were sufficient shares held by Cede that were not voted in favor of
the merger to cover the appraisal class), the burden shifts to the
respondent corporation to demonstrate that Cede actually voted the
shares for which appraisal is sought in favor of the merger. The Court
noted that the corporation could introduce public filings or other
evidence from providers of voting services, such as internal control
numbers and voting authentication records. If the corporation
demonstrates that Cede (or any other record holder) actually voted the
shares for which appraisal rights have been asserted in favor of the
merger, the requirements of Section 262 will not have been met, and
the petitioner will not be entitled to an appraisal of those shares.
Related Files
Read the Opinion: In re Appraisal of Dell
Inc.
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Richards, Layton & Finger, PA |
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