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.