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Court Defines Responsibility for Voting in Appraisal Demands
Court guidance on determining responsibility for voting
Reliability of proxy plumbing to execute and trace voting instructions
Investor’s risk of procedural errors
The recent decision of the Delaware Chancery Court concerning the T.
Rowe Price voting error in the Dell appraisal case (“Opinion Enforcing
Dissenter Requirement”)[1]
has provided important guidance for compliance with the procedural
requirements of appraisal rights, as well as valuable observations
about the “proxy plumbing” that must be relied upon for a much broader
range of purposes.
Some initial views of the Opinion’s relevance, applicable to both long
term shareholders and “appraisal arbitrage” investors, are summarized
below.[2]
Further comments, either for private discussion or for reporting to
Forum participants, will of course be welcomed.
Court guidance on determining responsibility for voting
The Opinion distinguishes the T. Rowe case from the “appraisal
arbitrage” cases based on an investor’s control of the vote relating
to particular shares for which appraisal is demanded, and on the
availability of evidence to determine how those shares were in fact
voted.[3]
In the appraisal arbitrage cases, the Opinion explains, the investors
purchased their shares after the record date for voting so that it was
not possible to determine who had controlled the vote and how the
particular shares were voted. It is therefore reasonable in those
cases to allow an appraisal demand based on the investor’s beneficial
ownership of shares held in “fungible bulk” by the record holder (the
Cede affiliate of Depository Trust Company) that were not voted in
favor of a transaction. The new Opinion thus supports the recent
decisions allowing appraisal arbitrage investors to rely upon the
voting actions or inactions of other, unidentified beneficial owners.
What is different about the T. Rowe case is that the investor was the
beneficial owner of shares on the record date, and controlled the
voting of those shares. This makes it possible to obtain evidence of
how the investor caused those particular shares to be voted. The
records of T. Rowe as well as those of the service providers that
executed T. Rowe’s instructions could be examined to determine how
each of the T. Rowe accounts voted their Dell shares, and the court
found that the evidence proved that the shares for which appraisal was
sought had been voted in favor of the merger, and as a result do not
qualify for appraisal.[4]
Reliability of proxy plumbing to execute and trace voting instructions
The ability to establish facts about T. Rowe’s votes would not have
been possible without recent efforts to improve the shareholder proxy
process.[5]
The Opinion starts with a remarkably understandable summary of the
“Byzantine” system through which T. Rowe and most other professionally
managed investors vote their corporate shares. Then, in more than
twenty pages that follow, the Opinion describes how the votes of each
beneficial owner account were executed and identifies the records by
which the votes can be traced. The court concludes not only that the
facts of votes can be established, but that the “daisy chain” of
service providers are to be respected for making a badly designed
regulatory process function reliably.
Investor’s risk of procedural errors
The observation of T. Rowe’s losing a couple of years of its
investors’ earnings – according to the Opinion, the shares are
entitled to only the October 2013 merger price, without any interest[6]
– has naturally focused attention on the risks and potential costs of
procedural errors in appraisal rights investments.
The example clearly demonstrates a need to comply with the strict
administrative requirements of the legal process for appraisal rights,
but the following observations suggest that investors can reasonably
expect to satisfy these requirements if they rely upon informed
professional guidance and normal levels of care.
■ This is the only known case of an investor voting the wrong way,
in this or any other recent appraisal case.
■ As noted in the Opinion, the T. Rowe officials responsible for
proxy voting had processed the voting instructions properly and
confirmed them three times for repeated adjournments of the
shareholder meeting, demonstrating that they understood how to
manage the process. However, in the final vote that ultimately
counted, nobody from the proxy staff logged into the system.[7]
■
The same fund managers made two other unusual, completely
different processing errors in their administration of the Dell
shares for which they were responsible: they failed to maintain
the required continuous ownership of stock in 5 accounts, losing
appraisal rights for an additional 922,975 shares;[8]
and for one account, they failed to process any voting
instructions at all, which error made that account the only one of
the twenty petitioners managed by T. Rowe that is now entitled to
appraisal rights.[9]
ttt
Please let me know if you have any questions about these observations.
GL – May 25, 2016
Gary Lutin
Chairman, The Shareholder Forum
575 Madison Avenue, New York, New York 10022
Tel: 212-605-0335
Email:
gl@shareholderforum.com
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