In Re Appraisal of Dell Inc. ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE APPRAISAL OF DELL INC. ) Consol. C.A. No. 9322-VCL
MEMORANDUM OPINION
Date Submitted: May 11, 2015
Date Decided: July 13, 2015
Date Revised: July 30, 2015
Stuart M. Grant, Michael J. Barry, Christine M. Mackinstosh, Jennifer A. Williams,
Rebecca A. Musarra, GRANT & EISENHOFER P.A., Wilmington, Delaware; Attorneys
for Petitioners Curtiss-Wright Corporation Retirement Plan; Manulife US Large Cap
Value Equity Fund; The Milliken Retirement Plan; Northwestern Mutual Series Fund,
Inc., on behalf of its Equity Income Portfolio; and T. Rowe Price Funds SICAV US Large
Cap Value Equity Fund.
Gregory P. Williams, John D. Hendershot, Susan M. Hannigan, Andrew J. Peach,
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; John L. Latham,
Susan E. Hurd, ALSTON & BIRD LLP, Atlanta, Georgia; Gidon M. Caine, ALSTON &
BIRD LLP, East Palo Alto, California; Charles W. Cox, ALSTON & BIRD LLP, Los
Angeles, California; Attorneys for Respondent Dell Inc.
LASTER, Vice Chancellor.
The petitioners are five institutions1 who owned common stock of Dell Inc. They
sought appraisal after Dell announced a going-private merger. Dell contends that they did
not hold their shares continuously through the effective date of the merger and therefore
lost their appraisal rights.
The Funds held their shares through custodial banks. By virtue of this relationship,
the Funds did not have legal title to the shares; they were beneficial owners. But the
custodial banks did not have legal title either. The shares they held were registered in the
name of Cede & Co., which is the nominee of the Depository Trust Company (―DTC‖).2
DTC‘s place in the ownership structure results from the federal response to a
paperwork crisis on Wall Street during the late 1960s and early 1970s. Increased trading
volume in the securities markets overwhelmed the back offices of brokerage firms and
the capabilities of transfer agents. No one could cope with the burdens of documenting
1
The five institutions are (i) the Northwestern Mutual Series Fund, Inc. Equity
Income Portfolio (―Northwestern‖), (ii) the Manulife US Large Cap Value Equity Fund
(―Manulife‖), (iii) the T. Rowe Price Funds SICAV US Large Cap Value Equity Fund
(―T. Rowe Price‖), (iv) the Milliken Retirement Plan (―Milliken‖), and (v) the Curtiss-
Wright Corporation Retirement Plan (―Curtiss-Wright‖). Although three are ―funds‖ and
two are ―plans,‖ this decision refers to them as the Funds. The collective referent is
purely for convenience.
2
Technically, both the Funds and the custodial banks were ―entitlement holders.‖
This term defined is under Article 8 of the Delaware Uniform Commercial Code as a
―person identified in the records of a securities intermediary as the person having a
security entitlement against the securities intermediary.‖ 6 Del. C. § 8-102(a)(7). The
term ―securities intermediary‖ means either ―a clearing corporation,‖ i.e. DTC , or ―a
person, including a bank or broker, that in the ordinary course of its business maintains
securities accounts for others and is acting in that capacity,‖ i.e., the custodial banks. Id. §
8-102(a)(14).
1
stock trades using paper certificates. The markets were forced to declare trading holidays
so administrators could catch up. With trading volumes continuing to climb, it was
obvious that reform was needed. Congress directed the SEC to evaluate alternatives that
would facilitate trading.
After studying the issue, the SEC adopted a national policy of share
immobilization. To carry out its policy, the SEC placed a new entity—the depository
institution—at the bottom the ownership chain. DTC emerged as the only domestic
depository. Over 800 custodial banks and brokers are participating members of DTC and
maintain accounts with that institution. DTC holds shares on their behalf in fungible bulk,
meaning that none of the shares are issued in the names of DTC‘s participants. Instead,
all of the shares are issued in the name of Cede. Through a Fast Automated Securities
Transfer account (the ―FAST Account‖), DTC uses an electronic book entry system to
track the number of shares of stock that each participant holds.
By adding DTC to the bottom of the ownership chain, the SEC eliminated the
need for the overwhelming majority of legal transfers. Before share immobilization,
custodial banks and brokers held shares through their own nominees, so new certificates
had to be issued frequently when shares traded. With share immobilization, legal title
remains with Cede. No new certificates are required.
Although the depository system solved the paperwork crisis, it complicated other
aspects of the legal system. Appraisal is one of those areas. When a transaction triggers
appraisal rights, Section 262 of the Delaware General Corporation Law (the ―DGCL‖)
permits ―[a]ny stockholder of a corporation‖ who complies with its requirements to
2
litigate a proceeding that will result in a judicial determination of the ―fair value of the
shares.‖ 8 Del. C. §§ 262(a) & (h). The statute states that ―[a]s used in this section, the
word ‗stockholder‘ means a holder of record of stock in a corporation.‖ Id. § 262(a) (the
―Record Holder Requirement‖). One of the statutory requirements is that a stockholder
who wishes to pursue appraisal must ―continuously hold[] such shares through the
effective date of the merger.‖ Id. (the ―Continuous Holder Requirement‖).
Many appraisal decisions have involved disputes over these requirements. In one
recurring scenario, companies argued that a petitioner had lost its appraisal rights when
DTC followed its usual procedures, surrendered the shares held in fungible bulk for the
merger consideration, and distributed the merger consideration to its participants, who
then deposited it in their customers‘ accounts.3 In Alabama By-Products Corp. v. Cede &
Co., 657 A.2d 254 (Del. 1995), the Delaware Supreme Court held that if a petitioner had
3
See, e.g., S. Prod. Co. v. Sabah, 87 A.2d 128 (Del. 1952); Roam-Tel P’rs v.
AT&T Mobility Wireless Op. Hldgs. Inc., 2010 WL 5276991 (Del. Ch. Dec. 17, 2010)
(Strine, V.C.); Matter of Enstar Corp., 513 A.2d 206 (Del. Ch. 1986); LeCompte v.
Oakbrook Consol., Inc., 1986 WL 2827 (Del. Ch. Mar. 7, 1986); Engel v. Magnavox Co.,
1976 WL 1705 (Del. Ch. Feb. 5, 1976); Abraham & Co. v. Olivetti Underwood Corp.,
204 A.2d 740 (Del. Ch. 1964), aff’d sub nom. Olivetti Underwood Corp. v. Jacques Coe
& Co., 217 A.2d 683 (Del. 1966). See generally 1 R. Franklin Balotti & Jesse A.
Finkelstein, The Delaware Law of Corporations & Business Organizations § 9.44, at 9-
116 (3d ed. 2014) (―Prior to the Delaware Supreme Court‘s ruling in Alabama By-
Products Corp. v. Cede & Co., appraisal rights could be forfeited through any tender at
any time, even if the tender was inadvertent and an appraisal petition had been filed.‖
(footnote omitted)). The Delaware cases traditionally treated the receipt of the transaction
consideration as something inadvertent. Under Article 8 of the UCC, a securities
intermediary is required by law to ―take action to obtain a payment or distribution made
by the issuer of a financial asset‖ and is ―obligated to its entitlement holder for a payment
or distribution made by the issuer of a financial asset if the payment or distribution is
received by the securities intermediary.‖ 6 Del. C. § 8-505(a) & (b).
3
properly perfected its appraisal rights through Cede, then the petitioner would not lose its
appraisal rights if DTC surrendered the shares in exchange for the merger consideration.
The court reached this conclusion because the surrender did not comply with the
appraisal statute‘s requirements for withdrawing or settling a properly perfected appraisal
claim. The practical effect of this decision was to ―impose upon the corporation the
responsibility of overseeing the surrender of shares after a merger.‖ Id. at 263.
To help issuers oversee the surrender of shares, DTC modified its procedures.
Now, when a beneficial owner causes Cede to demand appraisal, DTC removes the
shares covered by the demand from the fungible bulk tracked in the FAST Account. DTC
does this by causing the issuer‘s transfer agent to issue a paper stock certificate for the
number of shares held by the beneficial owner. The paper certificate is issued in Cede‘s
name, so the same record holder continues to hold the shares for purposes of the
Continuous Holder Requirement.
In this case, DTC followed its procedures and issued paper stock certificates in
Cede‘s name for the Funds‘ shares. DTC then contacted the custodial banks to make
arrangements for delivering the resulting valuable pieces of paper. But here another back-
office procedure kicked in. For various understandable business reasons (insurance
requirements, recordkeeping for internal audit, mitigating risk of theft, etc.), some banks
and brokers only hold stock certificates that are issued in the names of their own
nominees. The Funds‘ custodial banks followed this policy.
When DTC contacted the custodial banks, each instructed Dell‘s transfer agent to
record a transfer of the shares to its nominee and issue a certificate in its nominee‘s name.
4
Dell‘s transfer agent complied. The Funds remained the beneficial owners. The
custodians remained the custodians. But now there were new nominees on the stock
ledger.
Dell has moved for summary judgment, arguing that these back-office steps
resulted in new record holders and broke the chain of title for purposes of the Continuous
Holder Requirement. Under Delaware cases that pre-dated the federal policy of share
immobilization, the record holder for purposes of the DGCL was the person that appeared
on the stock ledger. After the SEC created the depository system, the Delaware courts
adhered to this rule. They did not distinguish the voluntary relationship between a client
and its custodial bank or broker (the ―broker level‖ of ownership) from the federally
mandated relationship between the custodial bank or broker and DTC (the ―depository
level‖ of ownership). Delaware cases simply treated Cede as the holder of record and
applied the Continuous Holder Requirement strictly. Under these decisions, the motion
must be granted.
A different approach is possible and, in my view, preferable. Federal law looks
through Cede and recognizes the custodial banks and brokers as record holders, just as
before the federal mandate. If Delaware law took a similar approach, the Funds would
retain their appraisal rights, because ownership by the relevant DTC participants never
changed. Were I writing on a blank slate, I would account for the federal policy of share
immobilization by interpreting the term ―stockholder of record‖ as used in Section 262(a)
to parallel its content under the federal securities laws. In other words, the term
―stockholder of record‖ would include a DTC participant. But that is not how our cases
5
have interpreted the statutory term, and this court is bound by those precedents. Dell‘s
motion for summary judgment is therefore granted.
I. FACTUAL BACKGROUND
The facts are drawn from the parties‘ submissions in connection with Dell‘s
motion for summary judgment. There are no disputes of material fact about the Funds‘
exercise of their appraisal rights or the re-titling of their shares.
A. The Funds’ Ownership Of Dell Shares
On February 5, 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. The Funds held at least 922,975 shares of Dell
common stock. Like most investors, the Funds did not hold legal title to their shares. The
Funds owned the shares indirectly through accounts at custodial banks. Two of the Funds
used J.P. Morgan Chase (―JP Morgan‖) as their custodian. The others used The Bank of
New York Mellon (―BONY‖).
The custodial banks did not own record title either. JP Morgan and BONY are two
of more than 800 custodial banks and brokers who are participating members of DTC.
The vast majority of publicly traded shares in the United States are
registered on the companies‘ books not in the name of beneficial owners—
i.e., those investors who paid for, and have the right to vote and dispose of,
the shares—but rather in the name of ―Cede & Co.,‖ the name used by The
Depository Trust Company (―DTC‖).
Shares registered in this manner are commonly referred to as being held in
―street name.‖ . . . DTC holds the shares on behalf of banks and brokers,
which in turn hold on behalf of their clients (who are the underlying
beneficial owners or other intermediaries).
6
John C. Wilcox, John J. Purcell III, & Hye-Won Choi, “Street Name” Registration &
The Proxy Solicitation Process, in A Practical Guide to SEC Proxy and Compensation
Rules 10-3, 10-3 (Amy Goodman et al. eds., 4th ed. 2007 & 2008 Supp.) [hereinafter
Street Name] (footnote omitted).
The history of how we arrived at this ownership structure is important and
informative.4
Prior to 1970, negotiation was the most common method used to transfer
stock in the United States. The owner would endorse the physical certificate
to the name of the assignee on the back of the certificate. This endorsement
instruct[ed] the corporation, upon notification, [about] the change in
ownership of the shares on its corporate books. If the parties used the
services of a broker, the seller would transfer the certificate to his brokerage
firm. The brokerage firm representing the customer buying the security
would receive the physical certificate and transfer it to the buyer as the new
record owner of the security. Occasionally, the new owner might request
that the physical certificate remain at the street address of the brokerage
firm to facilitate the transfer of the certificate in a subsequent sale.
4
A variety of sources provide consistent accounts of the origins of the depository
system. See, e.g., Securities and Exchange Commission, Study Of Unsafe And Unsound
Practices Of Brokers And Dealers, H.R. Doc. No. 92-231, 92d Cong., 2d Sess. 9-10
(1971) [hereinafter SEC Study]; Uniform Commercial Code, Prefatory Note to Article 8
(revised 1994) [hereinafter Prefatory Note]; Street Name at 10-6 n.5; Teresa Carnell &
James J. Hanks, Jr., Shareholder Voting and Proxy Solicitation: The Fundamentals,
Maryland Bar Journal 23, 26 (Jan./Feb. 2004); David C. Donald, Heart of Darkness: The
Problem at the Core of the U.S. Proxy System and Its Solution, 6 Va. L. & Bus. Rev. 41,
45, 50-61 (2011); Marcel Kahan & Edward Rock, The Hanging Chads of Corporate
Voting, 96 Geo. L. J. 1227, 1237-38 & nn.45-50, 1273-74 (2008); Emily I. Osiecki,
Alabama By-Products Corp. v. Cede & Co.: Shareholder Protection Through Strict
Statutory Construction, 22 Del. J. Corp. L. 221, 223-28 (1997); Suellen M. Wolfe,
Escheat and the Challenge of Apportionment: A Bright Line Test To Slice A Shadow, 27
Ariz. St. L.J. 173, 178-88 (1995); Businesses & Subsidiaries-The Depository Trust
Company (DTC), http://www.dtcc.com/about/businesses-and-subsidiaries/dtc.aspx (last
visited June 5, 2015).
7
Wolfe, supra, at 180 (footnotes omitted).
Transfer of securities in the traditional certificate-based system was a
complicated, labor-intensive process. Each time securities were traded, the
physical certificates had to be delivered from the seller to the buyer, and in
the case of registered securities the certificates had to be surrendered to the
issuer or its transfer agent for registration of transfer.
Prefatory Note at 2.
By the late 1960s, increased trading rendered the certificate system obsolete. The
paperwork burden reached ―crisis proportions.‖ Id.
Stock certificates and related documents were piled ―halfway to the ceiling‖
in some offices; clerical personnel were working overtime, six and seven
days a week, with some firms using a second or even a third shift to process
each day‘s transaction. Hours of trading on the exchange and over the
counter were curtailed to give back offices additional time after the closing
bell. Deliveries to customers and similar activities dropped seriously
behind, and the number of errors in brokers‘ records, as well as the time to
trace and correct these errors, exacerbated the crisis.
Wolfe, supra, at 181 n.49 (quoting SEC Study at 219 n.1). ―The difficulty that brokers
and dealers experienced in keeping their records due to the volume of transactions and
their thin capitalization caused many brokerage firms to declare bankruptcy and many
investors to realize losses.‖ Id. at 182.
Congress responded by passing the Securities Investor Protection Act of 1970,
which directed the SEC to study the practices leading to the growing crisis in securities
transfer. 15 U.S.C. § 78kkk(g). The SEC recommended discontinuing the physical
movement of certificates and adopting a depository system. Wolfe, supra, at 182 n.58
(citing SEC Study at 13). Congress then passed the Securities Acts Amendments of 1975,
which directed the SEC to ―use its authority under this chapter to end the physical
8
movement of securities certificates in connection with the settlement among brokers and
dealers of transactions in securities consummated by means of the mails or any means or
instrumentalities of interstate commerce.‖ 15 U.S.C. § 78q-1(e). In a resulting report, the
SEC found that ―registering securities in other than the name of the beneficial owner‖
was essential to establishing ―a national system for the prompt and accurate clearance and
settlement of securities transactions.‖ Kahan & Rock, supra, at 1237 n.49.
Thus was born the federal policy of immobilizing share certificates through a
depository system. ―Congress called for a more efficient process for comparison,
clearing, and settlement in a national market system, and for the end of the physical
movement of securities certificates in connection with the settlement of transactions
among brokers and dealers.‖ Egon Guttman, Transfer of Securities: State and Federal
Interaction, 12 Cardozo L. Rev. 437, 447 (1990); accord S. REP. NO. 94-75 at 5 (1975)
(―A national clearance and settlement system is clearly needed.‖). To comply,
―[b]rokerages and banks created [depositories] to allow them to deposit certificates
centrally (so-called ‗jumbo certificates,‘ often representing tens or hundreds of thousands
of shares) and leave them at rest.‖ Larry T. Garvin, The Changed (And Changing?)
Uniform Commercial Code, 26 Fla. St. U. L. Rev. 285, 315 (1999).
In 1973, just after the paperwork crisis and with the federal writing on the wall,
the members of the New York Stock Exchange created DTC to serve as a depository and
clearing agency. Originally there were three regional depositories in addition to DTC: the
Midwest Securities Depository Trust Company, which held through its nominee, Kray &
Co.; the Pacific Securities Depository Trust Company, which held through its nominee,
9
Pacific & Co; and the Philadelphia Depository Trust Company, which held through its
nominee, Philadep & Co. ―[I]n the 1990‘s DTC . . . assumed the activities of the [other]
depositories.‖ Carnell & Hanks, supra, at 26. Today DTC is the world‘s largest securities
depository and the only domestic depository. Kahan & Rock, supra, at 1238 n.50. ―DTC
is owned by its ‗participants,‘ which are the member organizations of the various national
stock exchanges (e.g., State Street Bank, Merrill Lynch, Goldman Sachs & Co.).‖ Street
Name at 10-6 to 10-7.
DTC has been estimated to hold ―about three-quarters of [the] shares in publicly
traded companies.‖ Garvin, supra, at 315; accord Kahan & Rock, supra, at 1236; Street
Name at 10-4 n.2. ―The shares of each company held by DTC are typically represented
by only one or more ‗immobilized‘ jumbo stock certificates held in DTC‘s vaults.‖ Street
Name at 10-7. ―The immobilized jumbo certificates are the direct result of Section 17A(e)
of the Exchange Act, in which Congress instructed the SEC to ‗use its authority . . . to
end the physical movement of securities certificates . . . .‘‖ Id. at 10-7 n.10.
The depository system is what enables public trading of securities to take place. In
2014, the NYSE reported average daily volume of approximately 1 billion shares and
approximately 4 million separate trades. See NYSE Factbook,
http://www.nysedata.com/factbook (last visited June 19, 2015). The failure of the
certificate-based system to keep up with much lower trading volumes in the 1960s
demonstrates that it cannot meet current demand. Prefatory Note at 2. Without
immobilization and DTC, ―implementing a system to settle securities within five business
days (T+5), much less today‘s norm of T+3 or the current goals of T+1 or T+0, would
10
simply be impossible.‖ Kahan & Rock, supra, at 1238. Trading at current levels is only
possible because of share immobilization and DTC. Street Name at 10-7; accord Garvin,
supra, at 315-16; Prefatory Note at 2-3.
Because of the federal policy of share immobilization, it is now Cede—not the
ultimate beneficial owner and not the DTC-participant banks and brokers—that appears
on the stock ledger of a Delaware corporation. Cede is typically the largest holder on the
stock ledger of most publicly traded Delaware corporations. Street Name at 10-6. To
preserve the pre-immobilization status quo—at least at the federal level—the SEC
provided that for purposes of federal law, the custodial banks and brokers remain the
record holders. Depositories are defined as ―clearing agencies.‖ 15 U.S.C. § 78c(23)(A).
The term ―record holder‖ is defined as ―any broker, dealer, voting trustee, bank,
association or other entity that exercises fiduciary powers which holds securities of
record in nominee name or otherwise or as a participant in a clearing agency registered
pursuant to section 17A of the Act.‖ 17 C.F.R. § 240.14c–1(i). The term ―entity that
exercises fiduciary powers‖ is similarly defined as ―any entity that holds securities in
nominee name or otherwise on behalf of a beneficial owner but does not include a
clearing agency registered pursuant to section 17A of the Act or a broker or a dealer.‖ Id.
§ 240.14c–1(c). Federal law thus looks through DTC when determining a corporation‘s
record holders. For example, when determining whether an issuer has 500 or more record
holders of a class of its equity securities such that it must register under 15 U.S.C. §
78l(g), DTC does not count as a single holder of record. Each DTC participant member
11
counts as a holder of record. Michael K. Molitor, Will More Sunlight Fade The Pink
Sheets?, 39 Ind. L. Rev. 309, 315-16 (2006) (citing SEC interpretive releases).
The federal regulations also ensure that a corporation can easily find out the
identities of the banks and brokers who hold shares through DTC. Federal regulations
require that DTC ―furnish a securities position listing promptly to each issuer whose
securities are held in the name of the clearing agency or its nominee.‖ 17 C.F.R. §
240.17Ad–8(b). The participant listing is known colloquially as the ―Cede breakdown,‖
and it identifies for a particular date the custodial banks and brokers that hold shares in
fungible bulk as of that date along with the number of shares held. A Delaware
corporation can obtain a Cede breakdown with ease. In 1981, this court noted that a Cede
breakdown could be obtained in a matter of minutes. Hatleigh Corp. v. Lane Bryant, Inc.,
428 A.2d 350, 354 (Del. Ch. 1981). A Cede breakdown can now be obtained through
DTC‘s website or by calling the DTC ―Proxy Services Hotline.‖ Issuers use the Cede
breakdown to understand their stockholder profile, and proxy solicitors use it when
advising clients. Commentary regards the information as reliable. Handbook for the
Conduct of Shareholders’ Meetings 40 (ABA Business Law Section, Corporate
Governance Committee ed., 2000) (identifying the ―lists of holders obtained from
depositories‖ as one of the documents that can be relied on in ―determining the shares
entitled to vote and tabulating the vote‖).
A publicly traded corporation cannot avoid going through DTC. Federal law
requires that when submitting a matter for a stockholder vote, an issuer must send a
broker search card at least twenty business days prior to the record date to any ―broker,
12
dealer, voting trustee, bank, association, or other entity that exercises fiduciary powers in
nominee name‖ that the company ―knows‖ is holding shares for beneficial owners. 17
C.F.R. § 240.14a–13(a). Rule 14a–13 provides that ―[i]f the registrant‘s list of security
holders indicates that some of its securities are registered in the name of a clearing
agency registered pursuant to Section 17A of the Act (e.g., ‗Cede & Co.,‘ nominee for
Depository Trust Company), the registrant shall make appropriate inquiry of the clearing
agency and thereafter of the participants in such clearing agency.‖ Id. § 240.14a–13(a)
n.1 (emphasis added). An issuer cannot look only at its own records and treat Cede as a
single, monolithic owner.
B. The Funds Seek Appraisal, And DTC Certificates The Shares.
Dell was a publicly traded company and the merger involved a stockholder vote,
so Dell had to go through the federally mandated process to identify the custodial banks
and brokers that held its shares through DTC, then send information through them to the
beneficial holders. The list of DTC-participants included JP Morgan and BONY.
Through JP Morgan and BONY, information reached the Funds.
The Funds exercised appraisal rights for the 922,975 shares that are the subject of
this motion. Because they owned their shares in street name through their custodial
banks, the Funds caused Cede to demand appraisal on their behalf. On July 12, 2013,
before the vote on the merger, Cede made appraisal demands for the Funds.
DTC held all of the Dell shares registered in street name in fungible bulk, which
enabled DTC to track their ownership through electronic bookkeeping entries in the
FAST Account. When the Funds caused Cede to make appraisal demands for their
13
shares, DTC moved a corresponding number of shares out of the FAST Account by
directing Dell‘s transfer agent to issue uniquely numbered certificates. By issuing paper
certificates, DTC sought to avoid inadvertently surrendering the shares for the merger
consideration along with other shares in the FAST Account. This procedure protected
Dell, which effectively had ―the responsibility of overseeing the surrender of shares after
a merger.‖ Ala. By-Prods., 857 A.2d at 263.
Dell‘s transfer agent is the American Stock Transfer & Trust Company, LLC (the
―Transfer Agent‖). On July 24, 2013, at DTC‘s request, the Transfer Agent issued paper
stock certificates in Cede‘s name for the shares owned beneficially by the Funds
C. DTC Delivers The Certificates To The Custodians, Who Re-Title Them.
As a matter of course, DTC does not act as a custodian of paper stock certificates
for its participants, even if those certificates are issued in Cede‘s name. A participant can
pay to have a vault at DTC for its certificates, but that is a separate service. Unless a
participant has arranged for a vault, DTC will contact the participant and deliver the
paper certificate to the participant for safekeeping.
JP Morgan and BONY do not have vaults at DTC. Therefore, after the Transfer
Agent delivered the paper certificates for the Funds‘ shares, DTC made arrangements to
deliver them to JP Morgan and BONY.
When a DTC participant receives a paper certificate from DTC, procedures differ.
Some leave the certificates in Cede‘s name and place them in their vaults. Others require
that the certificates be re-registered in the names of their own nominees. JP Morgan‘s and
BONY‘s internal policies do not permit them to hold paper certificates unless the shares
14
are titled in the names of their own nominees. The custodial banks therefore instructed
Cede to authorize the shares to be re-titled in the names of their nominees.
On August 5, 2014, Cede endorsed the Funds‘ certificates to the custodial banks.
Over the next three weeks, the custodial banks arranged for the Transfer Agent to reissue
the shares in the names of their nominees. The Transfer Agent reissued the shares held
for Milliken and Manulife in the name of Hare & Co. and the shares held for Curtiss-
Wright in the name of Mac & Co., which are BONY‘s nominees. The Transfer Agent
reissued the shares held for T. Rowe Price in the name of Kane & Co. and the shares held
for Northwestern in the name of Cudd & Co., which are JP Morgan‘s nominees.
There was an additional hiccough at BONY. Shortly after the Transfer Agent
reissued the shares, BONY conducted a routine weekly sweep of its vault. BONY found
the stock certificates for the shares beneficially owned by Manulife and Milliken and re-
deposited them with DTC in the FAST Account.
On September 12, 2013, a majority of Dell‘s shares voted in favor of the merger.
A few weeks later, on October 4, BONY realized that the shares beneficially owned by
Manulife and Milliken had been re-deposited in the FAST Account. BONY withdrew
them from DTC and had new certificates issued in the name of Hare & Co.
Other than taking steps to cause DTC to demand appraisal for their shares through
Cede, the Funds had no involvement in any of the transfers. The Funds did not explicitly
approve any or the transfers or cause any of them to take place. The Funds concede that
under their agreements with their custodial banks, they gave their custodians authority to
make these types of back-office transfers.
15
D. The Merger Closes, And The Funds Seek Appraisal.
The merger closed on October 29, 2013. The Funds filed timely petitions seeking
appraisal. They disclosed the issues relating to the re-titling of their shares. Dell moved
for summary judgment.
II. LEGAL ANALYSIS
Under Court of Chancery Rule 56, summary judgment ―shall be rendered
forthwith if . . . there is no genuine issue as to any material fact and . . . the moving party
is entitled to a judgment as a matter of law.‖ Ct. Ch. R. 56(c). The facts underlying the
motion are undisputed, and its outcome turns purely on the following question of law:
Does the Continuous Holder Requirement bar a beneficial owner from pursuing appraisal
if there has been an administrative transfer at the depository level? Under current law, the
answer is yes.
Read together, the Continuous Holder Requirement and the Record Holder
Requirement mandate that an appraisal petitioner ―continuously hold‖ the shares for
which appraisal is sought as a ―holder of record‖ through the effective date of the merger.
8 Del. C. § 262(a). There is no dispute that the Funds continuously held their shares as
beneficial owners through the effective date of the merger. There is also no dispute that
the Funds‘ custodial banks continuously held the shares on behalf of the Funds through
the effective date of the merger. The outcome of the motion turns on the implications of a
single event for ―holder of record‖ status: a change in the name on the shares from DTC‘s
nominee to the custodial banks‘ nominees.
16
The appraisal statute does not define what it means to be a ―holder of record.‖ No
other provision of the DGCL defines what it means to be a ―holder of record.‖ The
current interpretation is circular: ―The appraisal statute confers the right to an appraisal
only upon the stockholder of record in the corporation. Consequently, only the person
appearing on the corporate records as the owner of stock in the corporation may qualify
for an appraisal . . . .‖ Engel v. Magnavox Co., 1976 WL 1705, at *1 (Del. Ch. Apr. 22,
1976). But that statement begs the question: What are the records of the corporation for
purposes of determining legal ownership?
In a simplified model of a Delaware corporation, the corporate secretary maintains
a document called the stock ledger. From the corporation‘s standpoint, the stock ledger
identifies all of the legally relevant transactions in the corporation‘s shares, including the
date when any person acquires shares and the number of shares acquired, and the date
when any person transfers shares and the number of shares sold. If a holder transfers
shares without notifying the corporation, the corporation is not required to discover that
fact, nor need the corporation voluntarily treat the new holder as the legal owner. The
corporation can rely on its records until a stockholder takes proper steps to transfer title to
the shares. Under this system, a paper stock certificate is not actually a share of stock. It
is only evidence of ownership of a share of stock.5
5
See 8 Del. C. § 158 (―The shares of a corporation shall be represented by
certificates, provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of its stock shall be
uncertificated shares.‖) (emphasis added); Testa v. Jarvis, 1994 WL 30517, at *6 (Del.
Ch. Jan. 12, 1994) (Allen, C.) (noting that ―possession of a certificate does not itself
17
If the corporation needs to determine who its current stockholders are as of a
particular date, the corporate secretary uses the stock ledger to prepare a stock list. The
stock list identifies those stockholders who own stock as of a given date, together with
the number and type of shares owned, based on the records. See 8 Del. C. § 219(a) & (c).
Evidencing the connection between this process and the concept of a record holder, the
date used for preparing the stock list is called the ―record date.‖6
For most contemporary public corporations, the simplified model no longer holds.
Virtually all public corporations have outsourced the maintaining of the stock ledger to a
transfer agent, as Dell did. The stock ledger and the stock list as of a particular record
date are corporate records, but they exist and are maintained outside the corporation.
constitute ownership of shares‖); Haskell v. Middle States Petroleum Corp., 165 A. 562,
563 (Del. Ch. 1933) (―[A] person may be the legal owner of stock even though he has
received no certificate; therefore, the certificate is only evidence of ownership.‖); Smith
v. Universal Serv. Motors Co., 147 A. 247, 248 (Del. Ch. 1929) (―The status of
stockholder in a corporation is not dependent on the issuance to him of a certificate of
stock. The certificate is only an evidence of ownership—a muniment of title.‖); Mau v.
Mont. Pac. Oil Co., 141 A. 828, 831 (Del. Ch. 1928) (―Possession of a certificate is not
essential to the ownership of stock.‖); Baker v. Bankers’ Mortg. Co., 135 A. 486, 488
(Del. Ch. 1926) (―Certificates of stock are themselves only evidence of shares. They are
not the shares.‖) (Wolcott, Jos., C.), aff’d sub nom. Sohland v. Baker, 141 A. 277 (Del.
1927).
6
See id. § 213 (establishing procedures for fixing a record date for determining the
stockholders of record entitled (i) to notice of any meeting of stockholders (§ 213(a)), (ii)
to vote at any meeting of stockholders (§ 213(a)), (iii) to act by written consent without a
meeting (§ 213(b)), or (iv) to receive a dividend or other distribution or allotment of
rights (§ 213(c))).
18
A. Existing Delaware Law Applied To This Case
If the only relevant records are those maintained by Dell or the Transfer Agent,
then summary judgment must be granted in favor of Dell. Under existing precedent, Cede
was the stockholder of record for purposes of the Funds‘ shares and therefore made the
appraisal demand. ―The record holder must . . . continuously hold such shares [seeking
appraisal] through the effective date of the merger . . . .‖ In re Appraisal of Transkaryotic
Therapies, Inc., 2007 WL 1378345, at *3 (Del. Ch. May 2, 2007). It is the ―record
holder—not the beneficial owner—[that] is subject to the statutory requirements for
showing entitlement to appraisal and demonstrating perfection of appraisal rights under
Sections 262(a) and (d).‖ In re Ancestry.com, Inc., 2015 WL 66825, at *8 (Del. Ch. Jan.
5, 2015). The re-titling of a certificated share after the demand but before the effective
date violates the Continuous Holder Requirement by causing record ownership to change.
See Nelson v. Frank E. Best Inc., 768 A.2d 473, 477 (Del. Ch. 2000) (Strine, V.C.)
(noting that after Cede transferred record ownership of shares seeking appraisal to
appraisal petitioner ―Cede‘s demand was invalid, because Cede would not ‗continuously‘
be the holder of record between the . . . date of Cede‘s demand and the effective date of
the Merger, as is required by 8 Del. C. § 262(a).‖).
There is no dispute that on Dell‘s records as maintained by the Transfer Agent,
legal ownership of Funds‘ shares changed from Cede to the four current nominees: Mac
& Co., Kane & Co., Hare & Co., and Cudd & Co. When the shares were re-titled, the
Funds lost their appraisal rights.
19
In an effort avoid this result, the Funds cite Alabama By-Products and contend that
―because the right to appraisal vests at the time of perfection, the redemption of the
beneficial owners‘ shares by the custodian and record holder without the knowledge of
the beneficial owners [does] not extinguish the beneficial owners‘ right to appraisal of the
fair value of their shares.‖ Petitioners‘ Br. at 13. The issue in Alabama By-Products was
whether the surrender by DTC of the appraisal petitioners‘ shares and the subsequent
distribution of the merger consideration deprived the appraisal petitioners of properly
perfected appraisal rights. At the time of the surrender, more than sixty days had elapsed
since the closing of the merger, and an appraisal petition had been filed within the
statutory time period. Under the appraisal statute, a stockholder cannot unilaterally
withdraw an appraisal demand more than sixty days after the merger closes, and any
withdrawal after the filing of a petition requires court approval. 8 Del. C. § 262(h). The
Delaware Supreme Court held that DTC‘s surrender of the shares more than sixty days
after the merger closed, post petition, and without court approval did not compromise the
petitioners‘ appraisal rights because the surrender did not satisfy the statutory
requirements.
To bring themselves within the scope of Alabama By-Products, the Funds describe
their appraisal rights as ―perfected,‖ but the only step in the statutory process that had
been completed at the time of the re-titling was the making of a demand. The merger had
not yet closed, the time for unilateral withdrawals had not yet elapsed, and no appraisal
petition had been filed. When the Funds‘ shares were re-titled, their appraisal rights
remained fragile and easily lost through voluntary action by the holder. The custodial
20
banks instructed DTC and the Transfer Agent to re-title the shares, and under current law,
ownership changes driven by DTC‘s role in the depository system are regarded as
voluntary transfers. At the stage when the re-titling occurred, the statutory provisions
found controlling in Alabama By-Products did not yet apply.
The Funds also contend that the Continuous Holder Requirement should be
―liberally construed for the protection of objecting stockholders, within the boundaries of
orderly corporate procedures and the purpose of the requirement,‖ which is a passage
quoted from Raab v. Villager Industries, Inc., 355 A.2d 888, 891 (Del. 1976). But as the
language of this passage shows, Raab addressed the procedure for making objections
under the version of the appraisal statute that existed before 1976. In that statutory
scheme, a stockholder who wanted to exercise appraisal rights had to send a written
objection to the corporation before the merger vote, then submit a written demand for
appraisal after the merger vote. See 2 Balotti & Finkelstein, supra, § 262 at IX-159. The
purpose of the first step—the written objection—was ―merely to give notice.‖ Zeeb v.
Atlas Powder Co., 87 A.2d 123, 127 (Del. 1952). The Delaware Supreme Court
construed the objection requirement more liberally than the demand requirement because
―[t]he purpose of the objection [was] of lesser importance than the demand for payment.‖
Raab, 355 A.2d at 891.
Stockholders seeking appraisal no longer have to make a separate objection, so
Raab‘s language regarding the ―liberal construction‖ of this requirement is no longer
relevant. Delaware decisions have not generally construed other aspects of the appraisal
statute liberally in favor of stockholders. See generally Jesse A. Finkelstein & John D.
21
Hendershot, Appraisal Rights in Mergers & Consolidations at A-97 (5th ed. 2010)
(collecting cases). The Delaware Supreme Court has endorsed a principle of strict
construction, explaining that ―[b]y exacting strict compliance . . . , the appraisal statute
ensures the expedient and certain appraisal of stock.‖ Ala. By-Prods., 657 A.2d at 263. In
subsequently re-affirming its adherence to the principle, the Delaware Supreme Court
cautioned that strict construction should be applied ―even-handedly, not as a one-way
street.‖ Berger v. Pubco Corp., 976 A.2d 132, 144 (Del. 2009). In other words, both
petitioners and the corporation must adhere strictly to the appraisal statute‘s
requirements; neither gets the benefit of the doubt under more a lenient rule of ―liberal
construction.‖ Given these pronouncements and existing precedent, the Funds cannot rely
on a principle of liberal construction to preserve their appraisal rights.
Finally, the Funds have pointed to the fact that they did not know about or approve
the nominee-level transfers. It is undisputed that their agreements with their custodial
banks permitted the banks to re-title the shares. Our law currently treats ownership
changes driven by the depository system as voluntary transfers, making this a risk that the
Funds accepted. By choosing to hold through intermediaries, the Funds assumed the risk
that the intermediaries might ―act contrary to [their] interests.‖ Ala. By-Prods., 657 A.2d
at 262.
B. The Possibility Of A Different Approach
There is another possible interpretation of the Record Holder Requirement. When
Congress and the SEC created the depository system, they added DTC at the bottom of
the ownership chain and introduced Cede as the new omnibus record holder, but the
22
identities of the custodial banks and brokers did not go away. They continue to appear on
the DTC participant list. As discussed in the Factual Background, the DTC participant list
is an integral part of the federally mandated ownership scheme. A publicly traded
corporation cannot avoid going through DTC. See 17 C.F.R. § 240.14a–13(a). Rule 14a–
13 requires that the issuer ―make appropriate inquiry‖ of DTC to identify the custodial
banks and brokers who own shares through Cede. Id. § 240.14a–13(a) n.1. An issuer
cannot rely on the stock ledger maintained by its transfer agent, pretend that Cede is a
single record holder, and ignore the Cede breakdown. For purposes of federal law, Cede
is not a record holder. 15 U.S.C. § 78c(23)(A). The record holders are the banks and
brokers on the DTC participant list. 17 C.F.R. § 240.14c–1(i).
Were I writing on a blank slate, I would hold that the ―records‖ of the corporation
for purposes of determining who is a ―stockholder of record‖ include the DTC participant
list. Under this interpretation, the custodial banks and brokers who appear on the DTC
participant list would be stockholders of record for purposes of Delaware law, just as they
are for federal law and just as they were before share immobilization. If that rule applied,
then the motion for summary judgment would be denied, because there was no change of
ownership at the DTC participant level.
In my view, this interpretation better reflects current reality. Viewed
pragmatically, the federal policy of share immobilization compelled publicly traded
Delaware corporations to outsource one part of the stock ledger—the DTC participant
list—to DTC, just as Delaware corporations have chosen to outsource other parts of the
stock ledger to transfer agents. Before share immobilization, banks and brokers appeared
23
on the stock ledger as registered holders. After share immobilization, the same banks and
brokers appear on the stock ledger indirectly through DTC and the Cede breakdown. Just
as Delaware law treats the outsourced stock ledger as a record of the corporation, albeit
one maintained by a third party, Delaware law likewise should treat the outsourced DTC
participant list as a record of the corporation, albeit one maintained by DTC.
Adopting this approach would recognize that the changes in ownership driven by
the role of DTC in the depository system result from the federal policy of share
immobilization. This case provides a fitting example. But for the federal mandate, JP
Morgan and BONY would have appeared through their nominees on the stock ledger
maintained by the Transfer Agent. There would have been no need to re-title the shares.
The Funds lost their appraisal rights because of a system imposed by federal law.
But in light of existing precedent, I do not believe that this court is free to interpret
the ―holder of record‖ language in this manner. I previously advocated treating DTC
participants as holders of record for purposes of analyzing whether the shares they held
could be voted without a DTC omnibus proxy. See Kurz v. Holbrook, 989 A.2d 140 (Del.
Ch.), aff’d in part, rev’d on other grounds sub nom. Crown EMAK P’rs, LLC v. Kurz,
992 A.2d 377 (Del. 2010). The Kurz decision posited that recognizing DTC participants
as record owners would have beneficial effects for other areas of Delaware law, including
appraisal. See Kurz, 989 A.2d at 174 (―In some circumstances, Delaware corporations
should benefit from looking through DTC to the holdings of the participant banks and
brokers. Reducing the number of shares available for appraisal arbitrage is one area that
springs to mind.‖).
24
On appeal, the Delaware Supreme Court reversed the Kurz decision on other
grounds, rendering it unnecessary for the high court to consider whether DTC
participants should be treated as record holders. The Delaware Supreme Court
nevertheless characterized the discussion of the DTC participant list as ―obiter dictum‖
that was ―without precedential effect.‖7 The high court stated that
a legislative cure is preferable. The DGCL is a comprehensive and carefully
crafted statutory scheme that is periodically reviewed by the General
Assembly. Indeed, the General Assembly made coordinated amendments to
section 219 and section 220 in 2003. Any adjustment to the intricate
scheme of which section 219 is but a part should be accomplished by the
General Assembly through a coordinated amendment process.
7
EMAK P’rs, 992 A.2d at 398. There is perhaps some irony in using dictum to
characterize a portion of a decision as dictum, although perhaps greater irony in using
dictum to instruct trial judges not to use dictum. See Gatz Props., LLC v. Auriga Capital
Corp., 59 A.3d 1206 (Del. 2012). See generally Mohsen Manesh, Damning Dictum: The
Default Duty Debate In Delaware, 39 J. Corp. L. 35, 54-63 (2013) (exploring tensions in
Gatz). My discussion of an alternative approach to the Record Holder Requirement is
admittedly dictum. I considered the alternative of setting forth these views in a law
review article or speech, as Gatz suggested, but it seemed to me that to the extent a trial
judge wished to suggest to an alternative approach that the Delaware Supreme Court
might consider, a judicial opinion that could be reviewed by the Delaware Supreme Court
would provide an appropriate and efficient vehicle. See, e.g., In re Cox Commc’ns, Inc.
S’holder Litig., 879 A.2d 604, 642-48 (Del. Ch. 2005) (Strine, V.C.) (recommending
change in standard of review for controller squeeze-outs); Agostino v. Hicks, 845 A.2d
1110, 1121 (Del. Ch. 2004) (recommending change in standard for distinguishing
between direct and derivative actions); In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d
959, 967-70 (Del. Ch. 1996) (Allen, C.) (recommending change in the law‘s approach to
the duty of oversight). One obvious benefit is that in the event of an appeal, should there
by one, the Delaware Supreme Court will have all of the arguments before it in one place.
Unless and until the alternative approach discussed in this opinion is adopted by the
Delaware Supreme Court, no one should be misled into believing that it has precedential
effect. Cf. Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 817 A.2d 160, 167 (Del.
2002) (expressing concern that dictum in trial court opinion ―should not be ignored
because it could be misinterpreted in future cases as a correct rule of law‖ and ―could be
relied upon adversely by courts, commentators and practitioners in the future‖).
25
EMAK P’rs, 992 A.2d at 398.
I respectfully disagree with expressed preference for a legislative cure. In my
view, the question of what constitutes the records of the corporation for purposes of
determining who is a ―holder of record‖ is a quintessential issue of statutory
interpretation appropriate for the judiciary to address. As the Delaware Supreme Court
has explained, ―[i]n our constitutional system, this court‘s role is to interpret the statutory
language that the General Assembly actually adopts, even if unclear and explain what we
ascertain to be the legislative intent without rewriting the statute to fit a particular policy
position.‖ Taylor v. Diamond State Port Corp., 14 A.3d 536, 542 (Del. 2011). ―[T]he
Constitution invests the Judiciary, not the Legislature, with the final power to construe
the law.‖ Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 325 (1992). The
interpretation of statutory text is ―one of the Judiciary‘s characteristic roles.‖ Japan
Whaling Ass’n v. Am. Cetacean Soc., 478 U.S. 221, 230 (1986).
The Delaware courts play a particularly significant role in the corporate arena.8
Historically the judiciary, rather than the General Assembly, has taken the lead when
8
Lawrence Hamermesh, How We Make Law in Delaware, and What to Expect
from Us in the Future, 2 J. Bus. & Tech. L. 409, 409 (2007) (―The best-known of the
principal policymakers in Delaware are the members of the judiciary.‖); Marcel Kahan &
Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 Vand. L.
Rev. 1573, 1591 (2005) (―The most noteworthy trait of Delaware‘s corporate law is the
extent to which important and controversial legal rules are promulgated by the judiciary,
rather than enacted by the legislature.‖); Jill E. Fisch, The Peculiar Role of the Delaware
Courts in the Competition for Corporate Charters, 68 U. Cin. L. Rev. 1061, 1075 (2000)
(―Delaware corporate law relies on judicial lawmaking to a greater extent than other
states.‖).
26
addressing corporate law issues.9 Two leading commentators have noted that the
Delaware Supreme Court has not traditionally deferred to the prospect of legislative
action. Rather, ―the Delaware Supreme Court has shown a certain degree of discomfort
with, perhaps even hostility to, legislative intrusions into its domain.‖10
The significant role played by the Delaware courts stems from the fact that, contra
EMAK, the DGCL has not been viewed traditionally as a comprehensive code, but rather
as a broadly enabling statute that leaves ample room for private ordering and
interpretation.11 In an article written while serving as a Vice Chancellor, Chief Justice
9
See, e.g., Hamermesh, supra, at 414 (―[W]e view the courts as the first line of
defense, the first responders in dealing with complex situations. When drafting
legislation, we abstain from addressing complicated matters that are hard to figure out,
allowing them to develop through the common law.‖); Omari Scott Simmons, Branding
the Small Wonder: Delaware’s Dominance and the Market for Corporate Law, 42 U.
Rich. L. Rev. 1129, 1159 (2008) (―As a result of the legislature‘s preference against
regulatory prescription and its deference to the judicial branch, Delaware courts are often
the first responders to corporate law controversies.‖); see also Lawrence A. Hamermesh
& Norman M. Monhait, A Delaware Response to Delaware‘s Choice, 39 Del. J. Corp. L.
71, 75 (2014) (agreeing that the Corporation Law Council and the General Assembly
―have often subscribed to a . . . ‗wait-and-see approach‘ proposing and enacting,
respectively, amendments to the DGCL only when there are persuasive reasons to do so‖
and endorsing a continuing policy of ―reticence to initiate legislative action‖).
10
Kahan & Rock, Symbiotic Federalism, supra, at 1594. The commentators
referred to ―numerous examples of this tendency‖ and provided five examples. Id. at
1594-96. All involved statutory interpretation. Id. One involved the interpretation of the
appraisal statute. Id. (citing the narrow interpretation given to language in 8 Del. C. §
262(h) in Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983)).
11
See, e.g., Shintom Co. v. Audiovox Corp., 888 A.2d 225, 227 (Del. 2005)
(describing the DGCL as ―an enabling statute that provides great flexibility for creating
the capital structure of a Delaware corporation.‖); In re Topps Co. S’holders Litig., 924
A.2d 951, 958 (Del. Ch. 2007) (Strine, V.C.) (describing the DGCL as ―a broadly
enabling statute‖); Jones Apparel Gp., Inc. v. Maxwell Shoe Co., 883 A.2d 837, 845 (Del.
27
Strine distinguished between the ―Delaware Model,‖ in which the statute is ―largely
enabling and provides a wide realm for private ordering,‖ and the ―Mandatory Statutory
Model,‖ under which the corporate code would be ―quite detailed and prescriptive.‖ Leo
E. Strine, Jr., Delaware’s Corporate-Law System: Is Corporate America Buying an
Exquisite Jewel or A Diamond in the Rough? A Response to Kahan & Kamar’s Price
Discrimination in the Market for Corporate Law, 86 Cornell L. Rev. 1257, 1260 (2001).
Because the latter type of statute ―would dictate how things should happen, there would
be less room for judicial interpretation, but also less space for director choice.‖ Id. Chief
Justice Veasey has drawn a similar distinction in his own scholarly writings:
A flexible or indeterminate regime, such as we have had in Delaware, is
distinct from a rigid codification system that prevails in many systems
outside the United States. That is part of the genius of our law. Life in the
boardroom is not black and white; directors and officers make decisions in
shades of gray all the time. A ―clear‖ law, in the sense of one that is
codified, is simply not realistic . . . . There can be no viable corporate
governance regime that is founded on a ―one size fits all‖ notion.
Ch. 2004) (Strine, V.C.) (noting that the DGCL is ―is widely regarded as the most
flexible in the nation because it leaves the parties to the corporate contract (managers and
stockholders) with great leeway to structure their relations, subject to relatively loose
statutory constraints‖); Matter of Appraisal of Ford Hldgs., Inc. Preferred Stock, 698
A.2d 973, 976 (Del. Ch. 1997) (Allen, C.) (explaining that ―unlike the corporation law of
the nineteenth century, modern corporation law contains few mandatory terms; it is
largely enabling in character‖); accord E. Norman Veasey & Christine T. Di Guglielmo,
History Informs American Corporate Law: The Necessity of Maintaining A Delicate
Balance in the Federal “Ecosystem”, 1 Va. L. & Bus. Rev. 201, 204 (2006) (―Corporate
statutes, like the Delaware General Corporation Law, continue to take an enabling
approach and allow wide latitude for private ordering.‖); Edward P. Welch & Robert S.
Saunders, Freedom and Its Limits in the Delaware General Corporation Law, 33 Del. J.
Corp. L. 845, 847 (2008) (―The DGCL gives incorporators enormous freedom to adopt
the terms they believe are most appropriate for the organization, finance, and governance
of their particular enterprise.‖).
28
E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware
Corporate Law and Governance from 1992-2004? A Retrospective on Some Key
Developments, 153 U. Pa. L. Rev. 1399, 1412-13 (2005) (footnotes omitted). The
―skeletal framework‖ set forth in the flexible DGCL necessarily requires judicial
interpretation. Id. at 1411.
A review of applicable precedent teaches that for purposes of the issue discussed
in this case, there is ample room for a continuing judicial role. A statutory amendment is
one method of modernizing the law, but it is not the only way.
1. The Creation Of The Record Holder Requirement
The statutory appraisal remedy dates back to the adoption of the DGCL in 1899.
The original statute contained a section that stated:
If any stockholder in either corporation consolidating aforesaid, who
objected thereto in writing, shall within twenty days after the agreement of
consolidation has been filed and recorded, as aforesaid, demand in writing
from the consolidated corporation payment of his stock, such consolidated
corporation shall, within three months thereafter, pay to him the value of
the stock at the date of consolidation.
21 Del. Laws c. 273 § 56 (1899). The provision referred only to the right of ―any
stockholder‖ to seek payment of the value of his stock, without specifying whether the
stockholder had to be a holder of record.
Nearly five decades later, despite a series of intervening amendments, the
Delaware appraisal statute continued to refer to ―any stockholder‖ having the right to
seek appraisal. The question of whether a beneficial owner could seek appraisal was
finally raised in a proceeding arising out of the merger between Salt Dome Oil
29
Corporation and Gulfboard Oil Corporation. See Schenck v. Salt Dome Oil Corp., 34
A.2d 249 (Del. Ch. 1943), rev’d, 41 A.2d 583 (Del. 1945).
William Schenck and his fellow petitioners owned a total of 7,100 shares of Salt
Dome common stock, which were registered on its books in the name of Guido
Pantaleoni, Jr. They also owned a total of 10,000 shares of Gulfboard common stock,
which were registered on its books in the name of Berberich & Co. The petitioners made
timely objections to the merger and submitted timely demands for appraisal. They did so
in their own names, although their objections and demands identified the record holders
and the number of shares for which appraisal was sought. The respondent corporations
argued that the petitioners could not seek appraisal unless their names appeared on the
stock ledger, regardless of whatever other information they might provide or
documentation they might introduce to substantiate their ownership.
Chancellor Harrington rejected this argument, reasoning that on the facts
presented, a court of equity could recognize the petitioners as the real owners of the
shares. Schenck, 34 A.2d at 252. He declined to construe the term stockholder ―in a
strictly legal sense‖ as limited to holders of record. Id. Instead, he reasoned that ―Section
61 of the General Corporation Law [the appraisal statute] is clearly for the protection of
objecting shareholders [and] should be liberally construed to that end.‖ Id. Although the
Chancellor acknowledged that a corporation can only look to its stock list to determine
who its stockholders are, he concluded that ―the real owner of the shares, nevertheless,
has substantial rights that may be materially affected by a corporate consolidation.‖ Id.
30
The companies appealed, and the Delaware Supreme Court took the opposite
view. In reaching its conclusion, the high court discussed (i) the nature of the appraisal
remedy, which it regarded as an action at law rather than a proceeding in equity, (ii)
existing authorities which said that a corporation could rely exclusively on the
information in its records to determine stockholder status, and (iii) a balancing of
competing public policies, in which the importance of certainty and predictability
prevailed, particularly given the absence of any benefit to the corporation from the then-
prevailing system of beneficial ownership.
First, the Delaware Supreme Court viewed the appraisal proceeding as a legal
rather than equitable proceeding. Because appraisal was a statutory remedy, the high
court reasoned that ―[t]he right of an unregistered transferee of stock to object to a
proposed agreement of merger must be looked for in the statute.‖ Salt Dome, 41 A.2d at
587. The court found ―nothing in the language of the statute that makes clear the
legislative intent to bestow the remedy provided upon an equitable owner of stock, but
much, indeed, to the contrary.‖ Id. at 588. Rather than an equitable action for breach of
fiduciary duty, the appraisal proceeding resembled a debt collection action. A stockholder
could collect an appraisal award ―as other debts are by law collectible, that is, by suit at
law, judgment at law, and by the usual legal process.‖ Id.
Second, the Delaware Supreme Court summarized existing authorities addressing
the rights that a beneficial owner had at law:
The term, ‗stockholder‘, ordinarily, is taken to apply to the holder of the
legal title to shares of stock. In most jurisdictions registration, or its
equivalent, is essential to pass the legal title as against the corporation; and
31
the unregistered transferee is not entitled to the rights and privileges of a
stockholder in his relations with the corporation. Whatever may be the
equitable rights that may arise by a delivery of the stock certificate
accompanied with a power of attorney for its transfer, the legal title and
legal rights and liabilities of the stockholder of record remain unchanged
until the transfer is actually accomplished. The record owner may be but the
nominal owner, and, technically, a trustee for the holder of the certificate,
but legally he is still a stockholder, and may be treated as the owner by the
corporation.
Id. at 585 (citations omitted). After reviewing Delaware authorities addressing other
stockholder rights, most notably the right to vote, the court concluded that only a
registered stockholder was entitled to exercise legal rights and be treated as a stockholder
by the corporation. See id. at 585-89.
Third, the Salt Dome court turned to considerations of public policy:
With respect to matters intracorporate affecting the internal economy of the
corporation, or involving a change in the relationship which the members
bear to the corporation, there must be order and certainty, and a sure source
of information, so that the corporation may know who its members are and
with whom it must treat, and that the members may know, in a proper case,
who their associates are. Especially is this true in a merger proceeding
which is essentially an intracorporate affair. The merging corporations are
entitled to know who the objecting stockholders are so that the amount of
money to be paid to them may be provided. The stockholders in general are
entitled to know the dissentients and the extent of the dissent. The
corporation ought not to be involved in possible misunderstandings or
clashes of opinion between the non-registered and registered holder of
shares. It may rightfully look to the corporate books as the sole evidence of
membership.
Id. at 589 (citation omitted). The Supreme Court reasoned that the relationship between
the customer and the broker was a voluntary one, making it appropriate to place any
attendant risk on the stockholder: ―If, for any reason, [a stockholder] chooses to allow his
shares to be registered on the corporate books in the name of another, it is not a denial of
32
his right of actual ownership to require him to establish his rights and pursue his remedy
through the nominee of his own selection.‖ Salt Dome, 41 A.2d at 589. The high court
therefore held that ―only the registered holder of stock is a ‗stockholder‘ within the sense
of the word as used in‖ the appraisal statute. Id.
Importantly for present purposes, Salt Dome only addressed the broker level of the
beneficial ownership chain. The decision obviously pre-dated the federal policy of share
immobilization—still three decades in the future—so the Delaware Supreme Court could
not have considered whether any distinctions were warranted at the depository level of
ownership, the competing policy considerations raised by the federal response to Wall
Street‘s paperwork crisis, or the benefits that the system provided to issuers. At the time,
the decision to hold in street name properly could be regarded as a matter of choice,
rather than involving at least one level of beneficial ownership (the depository level) that
resulted from federal law. The Delaware Supreme Court also could regard exclusive
reliance on the stock ledger as promoting ―order and certainty‖ and providing a ―sure
source of information.‖ After the federal policy of share immobilization, a legal rule that
looks no further than Cede has the opposite effect. It masks the implications of beneficial
ownership and promotes uncertainty.
Perhaps most important, the Salt Dome decision did not pre-judge what documents
might encompass the appropriate records for determining registered status and whether,
after the adoption of the depository system, those records should include the DTC
participant list. What the Salt Dome decision does show, however, is that interpreting the
33
appraisal statute to determine which stockholders are entitled to appraisal is an
appropriate subject for the courts.
2. Post-Salt Dome, Pre-Codification Cases
After Salt Dome, the Delaware Supreme Court adhered to the Record Holder
Requirement in Olivetti Underwood Corp. v. Jacques Coe & Co., 217 A.2d 683 (Del.
1966) and Carl M. Loeb, Rhoades & Co. v. Hilton Hotels Corp., 222 A.2d 789 (Del.
1966). The Court of Chancery applied it in Application of General Realty & Utilities
Corp., 42 A.2d 24 (Del. Ch. 1945). The Olivetti decision is noteworthy because it re-
framed the corporation‘s prerogative to rely on its records as a restriction on the
corporation‘s ability to look any further than its records.
The petitioners in Olivetti were brokers who were registered stockholders of
Olivetti Underwood Corporation. The brokers made appraisal demands in which they
notified Olivetti that they were record holders and did not beneficially own the stock
registered in their names. Underwood moved to dismiss the petitions, arguing that the
brokers failed to submit proof of their authority to act for the beneficial owners. Citing
Salt Dome, the Court of Chancery reasoned that the corporation ―ha[d] no right to raise
any issue as to the right of a registered owner to seek a statutory appraisal and such a
stockholder has no duty to supply proof as to that issue.‖ Abraham & Co. v. Olivetti
Underwood Corp., 204 A.2d 740, 741 (Del. Ch. 1964). Underwood appealed.
The Delaware Supreme Court affirmed. After quoting Salt Dome at length, the
high court summarized ―the rule of the Salt Dome case‖ as follows: ―[T]here is no
recognizable stockowner under the merger-appraisal provisions of our Corporation Law
34
except a registered stockholder.‖ Olivetti, 217 A.2d at 686. By restating the holding of the
earlier decision in this fashion, the Delaware Supreme Court expanded the rule. Where
the Salt Dome decision permitted a corporation to confine itself to dealing with registered
stockholders in intra-corporate affairs, the Olivetti opinion required it. The court went
further and stated that the corporation ―should avoid becoming involved in the affairs of
registered stockholders vis-á-vis beneficial owners,‖ admonishing that ―the relationship
between, and the rights and obligations of, a registered stockholder and his beneficial
owner are not relevant issues in a proceeding of this kind.‖ Id. at 686, 687.
3. The Codification Of The Record Holder Requirement
During the 1967 revisions to the DGCL, the General Assembly codified the
Record Holder Requirement. The new version of the appraisal statute included the
following language:
When used in this section, the word ―stockholder‖ means a holder of record
of stock in a stock corporation and as a member of record of a non-stock
corporation; the words ―stock‖ and ―share‖ mean and include what is
ordinarily meant by those words and also membership or membership
interest of a member of a non-stock corporation.
56 Del. Laws c. 50 § 262(a) (1967). In his landmark treatise, Professor Folk explained the
purpose of the new text.
Section 262(a), as revised in 1967, defines ―stockholder,‖ for purposes of
the appraisal remedy, as a holder of record. Although the prior statute was
not couched in terms so confined, the prior cases consistently limited the
remedy to record owners on the theory that a corporation should, in
estimating the number of dissenters, be able to rely exclusively upon
corporate records of stock ownership and should not become involved in
disputes between registered and nonregistered stockholders. Moreover, the
unregistered stockholder is not harmed, since it is within the power to
obtain the advantages of record ownership by a transfer into his own name.
35
Ernest L. Folk, III, The Delaware General Corporation Law: A Commentary and
Analysis 373 (1972) (footnotes omitted). Professor Folk also warned that the concept of
record ownership did not operate only as an impediment to appraisal petitioners: ―The
registered stockholder requirement cuts both ways. Not only is the corporation entitled to
look solely to record ownership, but in fact it may ordinarily not inquire into the authority
of a registered holder to act for beneficial owners.‖ Id. at 374 (footnotes omitted).
All of the qualifications and limitations of the common law version of the Record
Holder Requirement apply to the statutory version. The amendment pre-dated the federal
policy of share immobilization, although that initiative soon would loom on the horizon.
Because the depository system had not yet been established, the General Assembly had
no ability to consider the depository level of ownership or the competing policy
considerations that led to its creation. Notably, the language of the statutory provision
only required that the stockholder be ―a holder of record of stock in a stock corporation
and as a member of record of a non-stock corporation . . . .‖ It did not specify what
documents might encompass the appropriate records for determining registered status and
whether, after the adoption of the depository system, those records should include the
DTC participant list.
4. Delaware’s Limited Acknowledgement Of Share Immobilization
During the mid-1970s, the SEC implemented the federal policy of share
immobilization. Delaware decisions largely ignored this development. Rather than
distinguishing between the broker level and the depository level, they treated both as a
36
matter of convenience that resulted exclusively from the private contractual relationship
between a broker and its clients. That perception was inaccurate.
A representative decision is Carico v. McCrory Corp., 4 Del. J. Corp. L. 595 (Del.
Ch. July 13, 1978). The defendant corporation received a timely written objection from
the beneficial holder of the corporation‘s stock. The objection failed to disclose the
identity of the record holder, Cede. The corporation objected to the claim on the ground
that a proper written objection was not received from or on behalf of the record holder of
the stock in issue. This court agreed, noting that ―[t]t is well established that an objection
which does not enable the resulting corporation to identify the actual record holder is
insufficient.‖ Id. at 598. The court reasoned similarly in Engel v. Magnavox Co., 1976
WL 1705, as did the Delaware Supreme Court in Raab. In fairness, these decisions
involved merger objections made by beneficial owners at the top of the ownership chain,
so it did not matter whether the record owner was Cede or a broker or custodial bank. In
either case, the wrong party made the objection.
In contrast to these decisions, when considering actions brought under a different
section of the DGCL, the Court of Chancery showed greater sensitivity to the depository
revolution. When stockholders sought to obtain a stock list under Section 220, Delaware
decisions held that the Cede breakdown was part of the list.12 Ever since, Delaware
12
See Hatleigh Corp. v. Lane Bryant, Inc., 428 A.2d 350 (Del. Ch. 1981);
Giovanini v. Horizon Corp., 1979 WL 178568 (Del. Ch. Sept. 10, 1979).
37
decisions have ordered the production of a Cede breakdown as part of the stock list.13 The
decisions did not limit stockholder status to the names appearing on the stock ledger, in
which case the inquiry would have stopped with Cede and the breakdown would have
been irrelevant. See Olson v. Buffington, 1985 WL 11575, at *3 (Del. Ch. July 17, 1985)
(―This Court has recognized that a party entitled to a stocklist pursuant to § 220 is also
entitled to a Cede breakdown even though technically Cede is the record holder on the
company‘s books.‖).
5. An Opportunity Lost: The Enstar Decisions
An opportunity to confront the implications of the depository system for appraisal
finally arose in litigation arising out of a merger involving Enstar Corporation. See In re
Appraisal of Enstar Corp. (Enstar I), 1986 WL 8062 (Del. Ch. July 17, 1986), rev’d sub
nom. Enstar Corp. v. Senouf (Enstar II), 535 A.2d 1351 (Del. 1987). The litigation began
as an appraisal proceeding, but Enstar reached a global settlement of the appraisal
litigation. After Enstar refused to pay two of the appraisal petitioners, the matter
transformed itself into a breach of contract case, with the petitioners seeking to enforce
their entitlement to the settlement consideration.
13
E.g., Berger v. Pubco Corp., 2008 WL 4173860, at *3 (Del. Ch. Sept. 8, 2008);
Wynnefield P’rs Small Cap Value, L.P. v. Niagara Corp., 2006 WL 2521434, at *2 (Del.
Ch. Aug. 9, 2006); Envtl. Diagnostics, Inc. v. Disease Detection Intern., Inc., 1988 WL
909658, at *3 (Del. Ch. July 15, 1988) (Allen, C.); RB Assocs. of N.J., L.P. v. Gillette
Co., 1988 WL 27731, at *2 (Del. Ch. Mar. 22, 1988) (Allen, C.); Shamrock Assocs. v.
Tex. Am. Energy Corp., 517 A.2d 658, 661 (Del. Ch. 1986); Weiss v. Anderson, Clayton
& Co., 1986 WL 5970, at *4 (Del. Ch. May 22, 1986) (Allen, C.).
38
One petitioner was Lucie Senouf. Before the merger, she held 10,441 shares in an
account with Drexel Burnham Lambert Incorporated, which in turn held them through
DTC. The other petitioner was Margaret Earle. Before the merger, she held 20,000 shares
in an account with Prudential-Bache Securities Inc., which in turn held them through
DTC. Neither Senouf nor Earle caused Cede to make an appraisal demand. An individual
named Mr. Champy made the demand for Senouf. Prudential-Bache made a demand for
Earle. Enstar argued that neither petitioner had validly perfected appraisal rights and was
not entitled to participate in the settlement.
Senouf and Earle sought to take advantage of the settlement, and the case went to
trial before then-Vice Chancellor, later Justice Hartnett. The petitioners did not argue
that, by virtue of the depository system and the DTC participant list, Drexel and
Prudential-Bache should be considered stockholders of record. Instead, they contended
that the disclosures in Enstar‘s proxy statement did not accurately describe the role of
DTC and Cede and misleadingly stated that ―[a] record holder such as a broker who
holds Common Shares . . . as nominee for beneficial owners . . . must exercise appraisal
rights on behalf of such beneficial owners . . . .‖ Enstar I, 1986 WL 8062, at *4
(emphasis added).
Vice Chancellor Hartnett held that on the facts presented, Senouf and Earle had
satisfied the Record Holder Requirement. He described the depository system in some
detail, although predominantly as a voluntary choice by brokers. To get the flavor, it is
worth quoting his description at length:
39
CEDE & Co. is a partnership used by The Depository Trust Company as its
nominee to hold securities for its participants—all of which are brokerage
firms, banks and other financial institutions. Neither The Depository Trust
Company nor CEDE & CO. hold any shares for themselves but only hold
shares as nominees for the participants in The Depository Trust Company.
At the time of the merger CEDE & Co. was listed on the books of
ENSTAR as holding over 7 million shares of its stock and there was no
breakdown on the books of ENSTAR of the actual beneficial ownership of
the CEDE holdings.
The use of CEDE & Co. and similar central security depositories to hold
shares for stockbrokers, which shares are in turn held by the stockbrokers
for their customers, has emerged as a major, if not dominant, method for
the holding of shares of publicly traded corporations. The function
performed by the central security depositories is to provide a central facility
for the storage of enormous numbers of stock certificates and to provide a
means for the transfer of shares without the actual transfer of certificates.
***
The publicly held corporations are well aware of the system and it is
obviously to their advantage to have their shares held by central security
depositories because this aids capital formation and it relieves the
corporation of the paperwork which would be required if every owner of a
share of stock had his shares listed in his own name on the books of the
corporation.
Id. at *1-2.
Vice Chancellor Hartnett contrasted the petitioners‘ knowledge about Cede with
what Enstar knew. In short, he found that neither Senouf nor Earle knew that her broker
was a DTC participant or that her shares were registered in Cede‘s name. By contrast,
there was
no question that ENSTAR knew that a large number of its shares were held
in the name of CEDE . . . and that CEDE . . . was a nominee used by [DTC]
which in turn held the shares for [its] participants—stock brokerage firms,
banks and other financial institutions which in turn held them for their
customers, the actual beneficial owners.
Id. at *2. He also discussed the Cede breakdown, finding that
40
ENSTAR received a monthly breakdown from [DTC] of all the shares held
in CEDE[‘s] name which showed the name of the stock broker, etc., for
whom the shares were being held and which purportedly listed the number
of shares held for each broker. ENSTAR was also entitled to receive, on
request, supplementary lists.
Id. At the time of the merger, Enstar knew from participant list that Cede ―held 379,268
shares for customers of Prudential-Bache and 40,169 shares for customers of Drexel-
Burnham Lambert.‖ Id. Vice Chancellor Hartnett stressed that despite knowing about
Cede, Enstar‘s proxy materials made no mention of it.
Vice Chancellor Hartnett ultimately resolved the case on equitable grounds. He
concluded that
[w]hen the totality of the circumstances present here are considered, it is
clear that ENSTAR had reasonable constructive notice that Mrs. Earle‘s
and Mrs. Senouf‘s shares were listed on the corporation records under the
name ―CEDE & CO.‖ and that its refusal to permit Mrs. Earle and Mrs.
Senouf to receive the settlement consideration [provided to appraisal
claimants] is based on impermissible hypertechnicalities.
Id. at *7. He thus ordered Enstar to pay the settlement consideration to the petitioners.
Enstar appealed, and the Delaware Supreme Court reversed. The high court
viewed the case as a traditional dispute involving beneficial holder status, rather than a
new scenario resulting from the depository system. The high court thus relied
predominantly on existing precedent, such as Salt Dome, and subsequent cases
interpreting the statutory language of the Record Holder Requirement. Enstar II, 535
A.2d at 1354. The court also observed that requiring record holder status was consistent
with cases interpreting of other sections of the DGCL, including 8 Del. C. § 219(c), and
that the rule was ―harmonious with the Uniform Commercial Code,‖ which permits a
41
corporation to ―treat the registered owner as the person exclusively entitled to vote, to
receive notifications and otherwise to exercise all the rights and powers of an owner.‖ Id.
(emphasis in original) (quoting 6 Del. C. § 8-207(1)). The court does not appear to have
been presented with the argument that by virtue of the DTC participant list, Drexel and
Prudential-Bache should have been considered registered owners.
Although the Delaware Supreme Court touched on the practice of holding through
DTC, the high court did not consider the origins of the requirement or the overlay of
federal law. The Supreme Court regarded DTC as simply a new form of doing business,
observing that that ―[t]he use of security depositories by brokerage firms now is a
common practice.‖ Id. Of particular note, the court commented that ―[t]he decision [to
use DTC] is a matter which is strictly between the broker and its clients.‖ Id. As support
for this proposition, the Supreme Court cited the testimony of Mr. Karasek, an employee
of Prudential-Bache who signed the appraisal demand for Earle. He had testified that
[i]f the client wants their (sic) stock in street name, then Prudential–Bache
will buy the securities for the client ...; the client has determined she wants
it in street name. That‘s how it‘s done.
***
The choice is up to the client.
Id. (alterations in original). Reflecting on Mr. Karasek‘s testimony and citing Delaware
cases pre-dating share immobilization, the high court commented that ―[i]n making that
choice [i.e., the choice to hold in street name], the burden must be upon the stockholder
to obtain the advantages of record ownership. The legal and practical effects of having
one‘s stock registered in street name cannot be visited upon the issuer. The attendant
42
risks are those of the stockholder, and where appropriate, the broker.‖ Id. (citations
omitted).
Later in the decision, the Supreme Court reiterated its view that Cede‘s role in the
case resulted from a private decision made by the petitioners and their brokers:
Here, the problem is one between the plaintiffs and their brokers. Enstar
cannot, and should not, be blamed for the failure of a nominee or broker to
correctly perfect appraisal rights for a beneficial owner. Several other
brokers properly instructed CEDE & Co. to demand an appraisal on behalf
of their customers. The failures of Prudential–Bache or Drexel in that
regard should not be shifted to, or borne by, Enstar. The dispute, if any, is
between these brokers and their clients.
Enstar II, 535 A.2d at 1355. Elsewhere, the Supreme Court quoted at length from Salt
Dome and held:
Thus, in the interest of promoting certainty in the appraisal process . . ., a
valid demand must be executed by or on behalf of the holder of record,
whether that holder is the beneficial owner, a trustee, agent or nominee.
Any other result would embroil merging corporations in a morass of
confusion and uncertainty, none of which was of their making.
Id. at 1356.
Finally, the Delaware Supreme Court rejected the argument that Enstar‘s
disclosures about perfecting appraisal rights were misleading. The high court held that
the disclosures gave proper instructions for perfecting appraisal rights and that ―the
relationship between a beneficial stockholder and a nominee are not relevant matters of
concern to the merging corporations.‖ Id. at 1357.
In my view, the Delaware Supreme Court‘s decision in Enstar II reflected
incorrect assumptions about the depository system. First, Enstar II assumed that custodial
banks and brokers freely chose to move to the depository system for their own
43
convenience.14 To the contrary, the depository system was a necessary response to the
late 1960s paperwork crisis and embodied in a federal mandate. The Enstar II court
similarly treated the holding of shares through depositaries as something that is optional
for end-users, i.e., actual investors. While it is true theoretically that any particular
investor could opt out of the depository system and chose to hold in record name,15 only a
few could do so before the system would break down. Just as some individuals can
choose not to receive vaccinations and free ride on the immunity of the group, so too can
a small minority of stockholders elect to hold shares directly. But without widespread
14
See Enstar II, 535 A.2d at 1354 (―The decision [to use DTC] is a matter which
is strictly between the broker and its clients.‖). Other Delaware decisions during this
period reflected the same assumption. See, e.g., RB Assocs., 1988 WL 27731, at *3
(describing DTC system as a ―mechanism of convenience for the brokerage firms‖);
Olson, 1985 WL 11575, at *3 (describing Cede as ―but a name used for the convenience
of the brokerage houses‖); Hatleigh, 428 A.2d at 353 (remarking that DTC exists ―for the
benefit of those firms participating in the Depository Trust Company so as to simplify
their stock transfer transactions on behalf of their customers‖); Giovanini, 1979 WL
178568, at *1 (describing Cede as a ―mechanism of convenience for the brokerage
firms‖).
15
See, e.g., 6 Del. C. § 8-508 (―A securities intermediary shall act at the direction
of an entitlement holder to change a security entitlement into another available form of
holding for which the entitlement holder is eligible, or to cause the financial asset to be
transferred to a securities account of the entitlement holder with another securities
intermediary.‖); id. cmt. 1 (―If security certificates in registered form are issued for the
security, and individuals are eligible to have the security registered in their own name, the
entitlement holder can request that the intermediary deliver or cause to be delivered to the
entitlement holder a certificate registered in the name of the entitlement holder or a
certificate indorsed in blank or specially indorsed to the entitlement holder . . . . If the
security can be held by individuals directly in uncertificated form, the entitlement holder
can request that the security be registered in its name.‖); see also 8 Del. C. § 158 (―Every
holder of stock represented by a certificate shall be entitled to have a certificate . . .
representing the number of shares registered in certificate form.‖).
44
participation in the depository system, securities markets would again drown in
paperwork. The system was imposed by Congress and the SEC, and almost-universal
participation is a de facto requirement.
Second, Enstar II assumed that the depository system imposes only costs on
issuers and yielded them no benefits.16 Yet by the time of the Enstar II decision, the
depository system was what enabled public trading of securities to take place. Issuers
could not undertake an initial public offering or otherwise access the equity markets
without depository ownership. Being able to raise capital through the public markets is an
obvious benefit to issuers. So is avoiding the costly paperwork burdens that previously
brought the markets to a stop. See Part I.A., supra. These benefits have only grown more
profound since Enstar II.
Third, Enstar II reiterated the Salt Dome decision‘s concern about the uncertainty
and practical difficulties a Delaware corporation would face in identifying its
stockholders if asked to look beyond the stock ledger. With the Cede breakdown, those
concerns do not exist. When Enstar II was written, a Cede breakdown could be obtained
easily, and it provided a reliable listing of the depository institutions that held through
16
See Enstar II, 535 A.2d at 1353 n.2 (―Whether a beneficial stockholder
participates in a depository system is a matter between the beneficial stockholder and his
broker, and is not a consideration for issuers.‖); accord Wynnefield P’rs Small Cap Value
L.P. v. Niagara Corp., 2006 WL 1737862, at *3 (Del. Ch. June 19, 2006) (same), rev’d
on other grounds, 907 A.2d 146 (Del. 2006) (ORDER); Am. Hardware Corp. v. Savage
Arms Co., 136 A.2d 690, 692 (Del. 1957) (―If an owner of stock chooses to register his
shares in the name of a nominee, he takes the risks attendant upon such an arrangement . .
. .‖).
45
DTC. Today, it is even easier to obtain a Cede breakdown, and because trades are now
tracked in real time rather than awaiting an end-of-the-day netting-out process, the list is
even more accurate.
Finally, Enstar II asserted at several points that the nominee relationship was not a
matter of concern for the merging corporation.17 That is not accurate either. Under federal
law, the corporation whose stockholders would vote on the merger—and who could be
eligible for appraisal rights—must go through DTC to identify its custodian banks and
brokers for purposes of mailing out proxy materials. The issuer cannot ignore DTC and
pretend that Cede is a single holder of record.
Notably, Enstar II did not address whether DTC participants should be regarded as
record holders for purposes of Delaware law, as they are for federal law. No one seems to
have made the argument, and neither court considered it. Although Enstar II seems to
have collapsed the distinction between the broker level of beneficial ownership and the
depository level, it did so on the assumption that the pertinent legislative facts had not
changed since Salt Dome.18 In my view, that was misguided.
17
Enstar II, 535 A.2d at 1354 (―The legal and practical effects of having one‘s
stock registered in street name cannot be visited upon the issuer. The attendant risks are
those of the stockholder, and where appropriate, the broker.‖); id. at 1355 (―Here, the
problem is one between the plaintiffs and their brokers. Enstar cannot, and should not, be
blamed for the failure of a nominee or broker to correctly perfect appraisal rights for a
beneficial owner . . . . The dispute, if any, is between these brokers and their clients.‖)
18
The concept of ―legislative facts‖ refers to the empirical assumptions about the
world that courts necessarily make when deciding cases. See In re Oracle Corp. Deriv.
Litig., 824 A.2d 917, 940 (Del. Ch. 2003) (Strine, V.C.) (deploying concept and citing
Kenneth Culp Davis, An Approach to Problems of Evidence in the Administrative
46
Enstar II does appear to have regarded construing the Record Holder Requirement
as an appropriate exercise of judicial authority. As I see it, the question of whether DTC
participants should be regarded as holders of record remains open for the Delaware
Supreme Court to decide, should it wish to do so.
6. The Rise Of Appraisal Arbitrage
The most recent decisions to consider the role of DTC have involved the practice
of appraisal arbitrage, a strategy in which investors purchase shares in order to pursue
appraisal. In Transkaryotic, this court held that funds who bought shares after the record
date for a merger could seek an appraisal for the shares purchased after the record date,
without having to show that the shares were not voted in favor of the merger. 2007 WL
1378345, at *3. Subsequent decisions have followed Transkaryotic.19
The outcome in Transkaryotic turned on the role of Cede as the omnibus holder of
record. On the record date for the merger, Cede held 29,720,074 shares. Acting in
accordance with the instructions of its participants, Cede voted 12,882,000 shares in
favor of the merger, leaving 16,838,074 shares eligible for appraisal. The petitioners
beneficially owned 2,901,433 shares on the record date and acquired another 8,071,217
shares after the record date. They sought appraisal for all 10,972,650 shares, which was
Process, 55 Harv. L. Rev. 364, 402-403 (1942)). See generally Leo E. Strine, Jr., The
Inescapably Empirical Foundation of the Common Law of Corporations, 27 Del. J. Corp.
L. 499, 502-503 (2002) (describing concept at greater length).
19
See, e.g., Merion Capital LP v. BMC Software, Inc., 2015 WL 67586 (Del. Ch.
Jan. 5, 2015); Ancestry.com, 2015 WL 66825.
47
less than the total number of appraisal-eligible shares. This court regarded that fact as
dispositive because under Olivetti, ―the actions of the beneficial holders are irrelevant,‖
and only ―the record holder‘s actions determine perfection of the right to seek appraisal.‖
Id. at *4, *3. Elaborating, the court explained that
[t]he issue here mirrors that in Olivetti . . . . [Transkaryotic] seeks to
examine relationships between Cede (the record holder) and certain non-
registered, beneficial holders in order to determine the existence of
appraisal rights. But the Supreme Court has already deemed this
relationship to be an improper and impermissible subject of inquiry in the
context of an appraisal. The law is unequivocal. A corporation need not and
should not delve into the intricacies of the relationship between the record
holder and the beneficial holder and, instead, must rely on its records as the
sole determinant of membership in the context of appraisal.
Id. at *4.
In my view, the rise of appraisal arbitrage suggests the need for a more realistic
assessment of the depository system that looks through Cede to the DTC participants. But
first, a caveat: Looking through DTC would not eliminate the ability of appraisal
petitioners to seek appraisal for shares acquired after the record date, which is an
outcome that opponents of appraisal arbitrage frequently advocate. As to that possibility,
it is not clear to me why the law should treat a stockholder‘s right to seek an appraisal
differently than how it treats other legal rights. An appraisal claim is simply a chose in
action. As such, the claim passes with the shares.20 In a market economy, the ability to
20
See generally In re Activision Blizzard Inc. S’holder Litig., ___ A.3d ___, 2015
WL 2438067, *13-25 (Del. Ch. May 21, 2015). Choses in action are transferrable under
Delaware law when they are the types of claims that would survive the death of the
transferor and pass to his personal representative. See Indus. Trust Co. v. Stidham, 33
A.2d 159, 160-61 (Del. Super. 1942). By statute in Delaware, ―[a]ll causes of action,
48
transfer property, including intangible property, is generally thought to be a good thing; it
allows the property to flow to the highest-valuing holder, thereby increasing societal
wealth. For creditors, the ability to sell a bundle of property rights that the buyer can
enforce is unquestioned. When a creditor assigns a loan, even one in default, the right to
enforce the loan passes to the new holder. No one objects that the assignee purchased a
lawsuit. It is not apparent to me why a right held by the equity side of the capital structure
should be treated differently, particularly when the right to bring an appraisal proceeding
has been compared by the Delaware Supreme Court to a debt collection action.21
Consequently, no one should view my arguments in favor of looking through DTC as a
way to eliminate appraisal arbitrage entirely—itself a debatable policy goal.22 Custodial
except actions for defamation, malicious prosecution, or upon penal statutes, shall
survive. . . .‖ 10 Del. C. § 3701.
21
See Salt Dome, 41 A.2d at 588. Indeed, even the right to control how shares vote
transfers with the shares, notwithstanding the legal expedient of the record date, because
the subsequent holder can compel the seller to issue him a proxy (assuming the seller can
be identified). Commonwealth Assocs. v. Providence Health Care, Inc., 641 A.2d 155,
158 (Del. Ch. 1993) (Allen, C.); In re Giant Portland Cement Co., 21 A.2d 697, 701
(Del. Ch. 1941); In re Canal Constr. Co., 182 A. 545, 547-48 (Del. 1936) (Wolcott, Jos.,
C.); Italo Petroleum Corp. of Am. v. Producers’ Oil Corp. of Am., 174 A. 276, 280 (Del.
Ch. 1934) (Wolcott, Jos., C.).
22
Strong arguments can be made that appraisal represents a more rational and
efficient alternative to traditional fiduciary duty litigation. See Charles R. Korsmo &
Minor Myers, Competition and the Future of M&A Litigation, 100 Iowa L. Rev. Bull. 19,
25-28 (2015); Charles R. Korsmo & Minor Myers, Appraisal Arbitrage and the Future of
Public Company M&A, 92 Wash U. L. Rev. (forthcoming 2015); Charles Korsmo &
Minor Myers, The Structure of Stockholder Litigation: When Do The Merits Matter, 75
Ohio State L.J. 829, 859-67 (2014). At one point, the Delaware Supreme Court appeared
to prioritize appraisal over fiduciary duty litigation by holding that ―a plaintiff‘s monetary
remedy [following a merger] ordinarily should be confined to the more liberalized
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banks and brokers still could buy shares after the record date and seek appraisal for those
shares. And of course, even under a regime that denied appraisal rights to shares
purchased after the record date, investors still could accumulate large appraisal-eligible
stakes between the time of deal announcement and the record date. See Salomon Bros.
Inc. v. Interstate Bakeries Corp., 576 A.2d 650, 654 (Del. Ch. 1989) (finding ―nothing
inequitable about an investor purchasing stock in a company after a merger has been
announced with the thought that, if the merger is consummated on the announced terms,
the investor may seek appraisal‖).
Nevertheless, in my view, looking through Cede to the DTC participants would be
an improvement. Under the appraisal statute, a record holder is only supposed to be able
to seek appraisal for shares (i) owned on the date of statutorily compliant demand for
appraisal, (ii) held continuously through the effective date of the merger, and (iii) not
voted in favor of the merger. Ancestry.com, 2015 WL 66825, at *4. Taken together,
Cede‘s dominant holdings and the current one-size-fits-all interpretation of the Record
Holder Requirement prevent courts from applying these requirements effectively. Cede
owns too many shares, and with share immobilization, ownership does not change.
appraisal proceeding herein established.‖ Weinberger v. UOP, Inc., 457 A.2d 701, 714
(Del. 1983). That promise did not survive the decisions in Rabkin v. Philip A. Hunt
Chemical Corp., 498 A.2d 1099 (Del. 1985), and Cede & Co. v. Technicolor, Inc., 542
A.2d 1182 (Del. 1988). See generally Andra v. Blount, 772 A.2d 183, 192 (Del. Ch.
2000) (Strine, V.C.) (explaining that Rabkin and Cede effectively overruled the appraisal-
as-basic-remedy aspect of Weinberger).
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By contrast, if the focus were to move beyond Cede, it should be possible to
develop a more nuanced jurisprudence. The number of shares held by banks and brokers
does change, and those changes may have legal salience. Or situations may arise that lend
themselves to specific rulings, such as if a broker acquires a large block of shares after
the record date in a negotiated transaction. In that case, the seller should be readily
identifiable, and it should be an easy matter to determine how the shares were voted. The
federal securities laws require that banks and brokers obtain voting instructions from their
clients, and banks and brokers satisfy this requirement by sending out voting instruction
forms. See generally Keir D. Gumbs et al., Debunking the Myths Behind Voting
Instruction Forms and Vote Reporting, 21 Corp. Gov. Adv. 1 (July/Aug. 2013). It also
may be possible to use voter instruction forms for other purposes, such as confirming
whether or not particular shares held by an appraisal claimant on the record date were
voted in favor of the merger. And as this case shows, there also may be records at the
broker level which, if examined, would allow the courts to apply other statutory
limitations more accurately. We already make these types of distinctions when dealing
with the right to vote, which was the principal right relied on by analogy in Salt Dome for
the creation of the Record Holder Requirement.23 Under this more flexible approach, the
23
See, supra, n.19 (citing cases in which court permitted post-record date acquirer
of shares to determine how shares were voted, notwithstanding legal ownership on stock
list); Preston v. Allison, 650 A.2d 646, 649 (Del. 1994) (looking through name of
registered holder on stock list and recognizing voting rights of beneficial owners where
form of ownership was mandated by federal law); Sutter Opportunity Fund 2 LLC v.
Cede & Co., 838 A.2d 1123, 1129 (Del. Ch. 2003) (permitting issuer to look through
Cede for purposes of analyzing whether proponents of a proposal for a matter to be
51
corporation ―generally is entitled to rely on its own stock list,‖ but the list is not
conclusive; questions of ownership and the ability to exercise associated rights can be the
subject of proof. Preston, 650 A.2d at 649.
It would have been preferable, in my view, to begin developing this case law in
2010. See Kurz, 989 A.2d at 174 (arguing that treating DTC participants as holders of
record could help ―[r]educ[e] the number of shares available for appraisal arbitrage‖). Yet
the need for a more flexible approach has not gone away. Looking through Cede is
obviously imperfect, but until share tracing becomes possible, the perfect should not be
the enemy of the good. Viewed pragmatically, looking through Cede to the custodial
banks and brokers on the participant list merely returns Delaware law to the state in
which it existed before the federal policy of share immobilization, restoring the
conditions that prevailed when Salt Dome was written and later when the Record Holder
Requirement was codified.
submitted to a vote met a 10% minimum threshold in partnership agreement); Seidman &
Assocs., L.L.C. v. G.A. Fin., Inc., 837 A.2d 21, 29 (Del. Ch. 2003) (same); In re Ne.
Water Co., 38 A.2d 918, 923 (Del. Ch. 1944) (treating statutory reference to stockholder
status being determined by name on stock list as ―a limited but practical rule of evidence
for the ready ascertainment of persons entitled to notice of and to vote at a stockholders‘
meeting‖ but not dispositive in all cases); In re Diamond State Brewery, Inc., 2 A.2d 254,
257 (Del. Ch. 1938) (Wolcott, Jos., C.) (―The court is not bound in a review proceeding
[of an election] by the showing of stockholders made on the corporation‘s books.‖); cf.
Rainbow Navigation, Inc. v. Pan Ocean Navigation, Inc., 535 A.2d 1357, 1359 (Del.
1987) (―We now hold that when the stock ledger is blank or non-existent, the Court of
Chancery has the power to consider other evidence to ascertain and establish stockholder
status.‖).
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III. CONCLUSION
Under current law, Dell‘s motion for summary judgment must be granted. The
Funds lost their appraisal rights when their shares were re-titled in the names of their
custodial banks‘ nominees. Were it up to me, I would hold that the concept of a
―stockholder of record‖ includes the custodial banks and brokers on the DTC participant
list. But given existing precedent, I believe that only the Delaware Supreme Court can
change how our case law interprets the Record Holder Requirement. This court obviously
has no ability to tell the Delaware Supreme Court what to do. This decision has attempted
only to present the reasons why one trial judge believes that a different approach would
be superior.
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