Merion Capital LP and Merion Capital II LP v. BMC Software, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MERION CAPITAL LP and MERION )
CAPITAL II LP, )
)
Petitioners, )
)
v. ) C.A. No. 8900-VCG
)
BMC SOFTWARE, INC., )
)
Respondent. )
MEMORANDUM OPINION
Date Submitted: October 7, 2014
Date Decided: January 5, 2015
Steven T. Margolin, Marie M. Degnan, and Phillip R. Sumpter, of ASHBY &
GEDDES, Wilmington, Delaware, Attorneys for Petitioners.
Collins J. Seitz, Jr., David E. Ross, and S. Michael Sirkin, of SEITZ ROSS
ARONSTAM & MORITZ LLP, Wilmington, Delaware; OF COUNSEL: Yosef J.
Reimer, P.C., Devora W. Allon, and Ryan D. McEnroe, of KIRKLAND & ELLIS
LLP, New York, New York, Attorneys for Respondent.
GLASSCOCK, Vice Chancellor
This action, and a similar case in which I am simultaneously issuing a
memorandum opinion,1 concern an interpretation of the standing requirements
under the appraisal statute, 8 Del. C. § 262, as amended in 2007. The respondent
company alleges that the amendment altered those standing requirements, which
precludes the petitioning stockholders’ standing here. Accordingly, the respondent
company seeks summary judgment.
I. BACKGROUND FACTS
A. The Merger
This appraisal action stems from a take-private merger between Respondent
BMC Software, Inc. (“BMC”) and two Delaware corporations formed by a
consortium of private equity buyers solely for the purpose of taking BMC
private—Boxer Parent Company Inc. and its wholly owned subsidiary Boxer
Merger Sub Inc. (collectively, “Boxer”).2 BMC, also a Delaware corporation, is
“one of the world’s largest software companies,” providing “IT management
solutions for large, mid-sized, and small enterprises and public sector organizations
around the world.”3 On May 6, 2013, BMC and Boxer entered into an Agreement
1
In re Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. Jan. 5, 2015).
2
Sirkin Aff. Ex. 2, at 19. The buyer group consists of Bain Capital, LLC, Golden Gate Private
Equity, Inc., Insight Venture Management, LLC, and Westhorpe Investment Pte Ltd. Id.
3
Id.
1
and Plan of Merger (the “Merger Agreement”) whereby Boxer was to acquire
BMC for $46.25 per share of common stock.4
Petitioners Merion Capital LP and Merion Capital II LP (collectively,
“Merion”) are self-described “event-driven investment” funds,5 or, in the words of
the Respondent, “hedge fund[s] that specialize[] in appraisal arbitrage.”6
“Appraisal arbitrage” is a phrase commonly used to denote an investment strategy
whereby an investor acquires an equity position in a cash-out merger target with
the specific intention of exercising the statutory stockholder appraisal right found
in 8 Del. C. § 262; in the subsequent appraisal action the court awards the appraisal
petitioners what the court determines to be the fair value of the target, which, if the
target was undervalued in the transaction, represents a positive return on the
arbitrage investor’s initial investment. Pursuant to this investment strategy,
Merion determined that the “consideration offered in the [BMC/Boxer] merger . . .
[was] considerably below the value of BMC” and began purchasing shares of
4
Sirkin Aff. Ex. 4, at 2. In the months following the execution of the Merger Agreement, BMC
and Boxer further negotiated an equity roll-over for a BMC stockholder and a $0.05 increase in
merger consideration. Id. The parties eventually agreed to the roll-over but not the price
increase, and executed that change in Amendment No. 1 to the Merger Agreement. Id.
5
Pet’rs’ Answering Br. in Opp’n to Resp’t’s Mot. for Summ. J. at 6; see also Sirkin Aff. Ex. 8,
at 15:23–16:8 (“Q. What did [Merion founder] Mr. Barroway tell you about what he envisioned
the business of Merion to be? A. He said that . . . they’re looking to start an event—he’s a
former lawyer, and looking to start an event-driven fund and needed someone with analytical
capability, merger experience, and that one of those strategies of the fund would be pursuing
appraisal rights.”).
6
Opening Br. in Supp. of Resp’t’s Mot. for Summ. J. at 7.
2
BMC stock on the public market, through a series of brokers, in July 2013.7 By
July 17, 2013, Merion had acquired 7,629,100 shares of BMC common stock and,
as the beneficial owner of those shares, moved to perfect its right under the
appraisal statute.8
Because only the record holder of shares can make the statutorily required
demand for appraisal on the corporation under Section 262,9 a beneficial owner
seeking appraisal must direct the record holder of its shares to make a demand for
appraisal on the beneficial owner’s behalf.10 Typically, according to Merion, a
beneficial owner would accomplish this by directing an intermediary broker to
direct the record holder to issue the demand; in this instance, however, when
Merion attempted to direct its broker to pass along its demand request to the record
owner of its BMC shares, Cede & Co. (“Cede”), the nominee of the Depository
Trust Company (“DTC”), the broker refused, citing a policy change within the
7
Sirkin Aff. Ex. 8, at 23:16–20, 212:20–219:12.
8
Id. at 248:13–252:17.
9
See 8 Del. C. § 262(a) (“Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this section with
respect to such shares, . . . who has otherwise complied with subsection (d) of this section . . .
shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s
shares of stock . . . . As used in this section, the word ‘stockholder’ means a holder of record of
stock in a corporation . . . .”); id. § 262(d) (“Each stockholder electing to demand the appraisal of
stockholder’s shares shall deliver to the corporation, before the taking of the vote on the merger
or consolidation, a written demand for appraisal of such stockholder’s shares.”).
10
The operation of modern securities practice, including the delineation between beneficial
owners and record holders of stock and the ubiquity of central securities depositories like the
Depository Trust Company, has been previously chronicled by this Court, and I do not find it
necessary to replicate that information here. The reader is referred to former Chancellor
Chandler’s opinion in In re Appraisal of Transkaryotic Therapies, Inc., 2007 WL 1378345, at *2
(Del. Ch. May 2, 2007), for a thorough discussion of the topic.
3
broker company.11 Merion claims that, as a result, the “unexpected news left [it]
with only one path for ensuring that its appraisal demand would be timely
submitted—i.e., take the steps necessary to have its holdings in BMC stock
withdrawn from the fungible mass at DTC/Cede and registered directly with
BMC’s transfer agent, Computershare.”12 In other words, Merion sought to
become not only the beneficial owner of its shares but also the record holder, so
that Merion itself could make the statutorily required appraisal demand on BMC.13
Over the next few days Merion carried out that task, and on July 19, 2013,
Computershare confirmed that it had transferred 7,629,100 shares of BMC
common stock from the fungible bulk at DTC/Cede to Merion, which now held the
shares in record name on its books.14 On July 22, 2013, Merion delivered its
formal demand for appraisal of those shares to BMC.15
On the heels of Merion’s appraisal demand, on July 24, 2013, BMC held a
special meeting of stockholders to vote on the proposed merger of BMC with and
11
Sirkin Aff. Ex. 8, at 277:4–20.
12
Pet’rs’ Answering Br. in Opp’n to Resp’t’s Mot. for Summ. J. at 12. Merion’s portfolio
manager, Samuel Johnson, explained that Merion itself could not petition DTC/Cede to make the
appraisal demand because Merion was not a participant in DTC/Cede, which is why it was
required to rely on a broker to communicate with DTC/Cede. See Sirkin Aff. Ex. 8, at 278:2–7
(“[A]s a street name beneficial holder of stock, which is what we were at the time, we cannot go
directly to Cede & Co. and ask them to sign this [demand] letter. Only participants in DTC are
allowed to interact with DTC or Cede.”).
13
Sirkin Aff. Ex. 8, at 278:11–279:4.
14
See Sirkin Aff. Ex. 10, at 1–2 (stock transfer confirmation).
15
See Sirkin Aff. Ex. 15 (demands for appraisal).
4
into Boxer.16 Holders of BMC common stock as of the June 24, 2013 record date,
representing 141,454,283 shares, approved the merger by over a two-thirds vote:
95,033,127 shares were voted for adopting the Merger Agreement while
46,421,156 shares were not voted for adopting the Merger Agreement.17
Subsequently, the take-private merger between Boxer and BMC closed on
September 10, 2013 with each share of BMC being converted into a right to
receive $46.25 in cash.18
B. Procedural History
On September 13, 2013, Merion commenced this action by filing its Verified
Petition for Appraisal of Stock. In that Petition, Merion represented that it “did not
vote [its 7,629,100 shares of BMC] in favor of the Merger, [has] not sought to
exchange [those shares] for payment from BMC Software in connection with the
Merger, and [has] not withdrawn [its] demand for appraisal of [those shares].”19
Following stipulated discovery between the parties, BMC filed its Motion for
Summary Judgment on July 28, 2014. I heard oral argument on this Motion in
court on October 7, 2014.
16
Sirkin Aff. Ex. 2, at 21.
17
Sirkin Aff. Ex. 4, at 4. A majority vote was required for BMC to adopt the Merger
Agreement. Sirkin Aff. Ex. 2, at 22.
18
Sirkin Aff. Ex. 5, at 2.
19
Pet. for Appraisal ¶ 5.
5
C. The Parties’ Contentions
The narrow legal issue before this Court arises out of the specific factual
circumstances surrounding Merion’s appraisal demand. Under the statute, had
Merion simply been successful in getting its original record holder Cede to make
the appraisal demand, Merion would have proper standing to file its appraisal
action.20 However, because Merion withdrew its BMC shares from DTC/Cede and
itself became the record holder demanding appraisal, BMC claims Merion can no
longer satisfy the statute’s standing requirements. In support of that contention,
BMC argues that Section 262 only permits the appraisal of shares not voted in
favor of the merger and that, consequently, Merion, as the record holder, bears the
burden of proving that each share it seeks to have appraised was not voted by any
previous owner in favor of the merger—a burden, if it exists, that Merion
concededly has not met.21 Conversely, Merion argues that no such burden exists in
Section 262 and, in fact, has been previously rejected by this Court. Rather,
20
See 8 Del. C. § 262(a); infra note 49; In re Appraisal of Ancestry.com, Inc., C.A. No. 8173-
VCG, at 12–14 (Del. Ch. Jan. 5, 2015) (finding that Transkaryotic remains in force to permit a
record holder to perfect appraisal rights for beneficial owners as long as the record holder holds
sufficient shares in fungible bulk not voted in favor of the merger to cover the number of shares
for which the beneficial owner seeks to have appraised).
21
Johnson explained in his deposition that, because Merion purchased its shares on the open
market, it cannot identify the entities from which it purchased its shares. Sirkin Aff. Ex. 8, at
216:11–14. In addition, because Merion’s shares were transferred from the “fungible mass at
DTC/Cede,” Merion is not able to say how the specific shares it came to hold on record were
voted in the transaction; nor did Merion take any additional steps to ensure that those shares were
not voted in favor of the merger, such as acquiring proxies from the prior owners of the shares.
Id. at 217:15–219:12.
6
Merion argues that, under the appraisal statute, it is only required to show that it
has not voted the shares for which it seeks appraisal in favor of the merger—a
standard that Merion concededly has met.
1. The Appraisal Statute
In Section 262 of the Delaware General Corporation Law, the Delaware
General Assembly has granted stockholders appraisal rights in certain
transactions—including, relevantly here, cash-out mergers—so long as the
standing requirements of the statute are met. Those requirements are set forth in
Section 262(a), which provides that:
Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection
(d) of this section with respect to such shares, who continuously holds
such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and
who has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to § 228 of this title shall be
entitled to an appraisal by the Court of Chancery of the fair value of
the stockholder’s shares of stock under the circumstances described in
subsection (b) and (c) of this section. As used in this section, the
word “stockholder” means a holder of record of stock in a
corporation . . . .22
Thus, in order for a petitioner to perfect the appraisal remedy according to the plain
language of Section 262(a), the petitioner need only show that the record holder of
the stock for which appraisal is sought: (1) held those shares on the date it made a
statutorily compliant demand for appraisal on the corporation; (2) continuously
22
8 Del C. § 262(a).
7
held those shares through the effective date of the merger; (3) has otherwise
complied with subsection (d) of the statute, concerning the form and timeliness of
the appraisal demand; and (4) has not voted in favor of or consented to the merger
with regard to those shares.23
Noticeably absent from this language, or any language in the statute, is an
explicit requirement that the stockholder seeking appraisal prove that the specific
shares it seeks to have appraised were not voted in favor of the merger.
Regardless, BMC argues that this Court should find such a share-tracing
requirement24 implicit in the statute’s requirements, considering the overall
purpose of Section 262, references in other subsections of the statute to how
specific shares were voted, and the policy concern that, without a share-tracing
requirement, stockholders could have purchased shares voted by their predecessors
in favor of the merger, resulting in a theoretical possibility that appraisal could be
sought for more shares than actually dissented in the merger vote.
23
BMC conceded at oral argument that where Section 262(a) refers to a stockholder “who has
neither voted in favor of the merger or consolidation nor consented thereto in writing,” the
statute means the stockholder has not voted in favor of the merger or consented to it with respect
to the shares it seeks to have appraised. See Oral Arg. Tr. 12:13–17 (“THE COURT: Well,
when it says the stockholder voted, I assume that we all agree that the statute means with respect
to those shares. MR. REIMER: And I think it means with respect to those shares.”).
24
I use the term “share-tracing requirement” as a shorthand for the burden that BMC suggests
the statute imposes on appraisal petitioners; it is somewhat imprecise, as BMC suggests that the
petitioner could meet the burden in a number of ways, some of which do not involve tracing—
speaking strictly—the voting history of a particular share, such as a post record-date purchaser of
shares purchasing sufficient proxies to cover the number of shares for which it seeks appraisal.
See infra note 53.
8
According to BMC, the legislative purpose behind Section 262 favors an
interpretation of the statute that includes a share-tracing requirement. Citing the
appraisal statute’s origin as a reaction to the common-law rule whereby a single
dissenting stockholder could prevent a merger,25 BMC explains that “Section 262
represents ‘a limited legislative remedy . . . intended to provide shareholders, who
dissent from a merger asserting the inadequacy of the offering price, with an
independent judicial determination of the fair value of their shares.’”26 From this
genesis, BMC extrapolates that it was always the General Assembly’s intent that
“only shares that did not vote in favor of the merger [be] eligible for appraisal
under the language of Section 262.”27
As further proof of an implicit share-tracing requirement, BMC points to
Section 262(e), as amended in 2007, which provides that:
Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) of this section hereof, upon
written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the
merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of
such shares.28
25
For a brief history of the appraisal statute, see In re Appraisal of Ancestry.com, Inc., C.A. No.
8173-VCG, at 6–9 (Del. Ch. Jan. 5, 2015).
26
Opening Br. in Supp. of Resp’t’s Mot. for Summ. J. at 14 (quoting Ala. By-Products Corp. v.
Neal, 588 A.2d 255, 256 (Del. 1991)).
27
Id. at 15.
28
8 Del. C. § 262(e).
9
BMC concedes that subsection (e) is designed to be an informational tool “to
permit dissenting stockholders ‘to learn how many shares might qualify for
appraisal,’” so that these dissenting stockholders might share the costs of the
appraisal action.29 Nonetheless, BMC argues that the reference in this subsection
specifically to “shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received” indicates the General
Assembly’s intent that appraisal only be available for shares that can be shown to
have not been voted in favor of the merger. In other words, BMC asks this Court
to interpret the requirements of subsection (a) in light of the reference to specific
shares in subsection (e), such that “not only does an appraisal petitioner carry the
burden of showing that it ‘did not vote in favor of the merger,’ § 262(a), it also
must show the shares for which it seeks appraisal are ‘shares not voted in favor of
the merger,’ § 262(e).”30 Any other interpretation of the statute, BMC argues,
would not give effect to the statute’s purpose or all of its provisions, and,
specifically, would frustrate the informational goal of subsection (e).31
29
Opening Br. in Supp. of Resp’t’s Mot. for Summ. J. at 15 (quoting H.R. 16, 131st Gen.
Assembly 11, 63 Del. Laws c. 25, § 14 (Del. 1981) (legislative synopsis)); see also Oral Arg. Tr.
5:21–6:3 (“[Subsection] (e) talks about there having—there needing to be—the information that
can be obtained, which, of course, the legislature tells us is in order for the party seeking
appraisal to know with whom they can share the costs and so on, is to let them know how many
shares might qualify for appraisal is the legislative purpose.”).
30
Opening Br. in Supp. of Resp’t’s Mot. for Summ. J. at 15–16.
31
See id. at 16 (“If any stockholder who did not itself vote in favor of the merger could seek
appraisal for the shares it held at closing, without regard to how those shares were voted, then
Section 262(e)’s statement of shares requirement would be entirely superfluous, as it would not
10
Finally, BMC argues that policy concerns dictate that this Court find an
implicit share-tracing requirement in Section 262:
[I]f an appraisal petitioner need only demonstrate that it did not vote
in favor of the merger itself, . . . nothing would prevent a majority, or
even all of a corporation’s shares from seeking appraisal,
notwithstanding the fact that for a transaction to have been approved,
at least a majority of the shares would have had to have been voted in
favor of it.32
Theoretically, BMC points out, absent a share-tracing requirement “an appraisal
arbitrageur, like Merion, [could] purchase[] most or all of a corporation’s shares
after the record date without securing proxies or revocations of proxies, and then
[seek] appraisal for those shares even though the record-date holder voted them for
the merger.”33 Considering the purpose of Section 262 “to provide a remedy to
minority stockholders who dissented from the merger,” such a possible outcome
would be absurd, BMC argues, and must be precluded by construing the statute so
that “only shares not voted in favor of a merger are eligible for appraisal.”34
2. The Teachings of Transkaryotic
This case is not the first time this Court has visited the conflicts that arise
when the alleged intent of the appraisal statute collides with the realities of modern
securities practice. In 2007, then-Chancellor Chandler considered a similar, but
show ‘how many shares might qualify for appraisal.’” (quoting Cordero v. Gulfstream Dev.
Corp., 56 A.3d 1030, 1035–36 (Del. 2012))).
32
Id. at 16–17.
33
Id. at 17.
34
Id.
11
factually distinct, situation in In re Appraisal of Transkaryotic Therapies, Inc.35 In
Transkaryotic, the record holder of stock, Cede, petitioned for appraisal on behalf
of a group of beneficial owners for over ten million shares of a merger target,
including over eight million shares that the beneficial owners had acquired after
the record date but before the effective date of the merger.36 On a motion for
partial summary judgment, the Court considered whether “a beneficial shareholder,
who purchased shares after the record date but before the merger vote, [must]
prove, by documentation that each newly acquired share (i.e., after the record date)
is a share not voted in favor of the merger by the previous beneficial
shareholder.”37 Relying on the plain language of Section 262, as it existed at the
time, the Court answered in the negative, determining that since “only a record
holder . . . may claim and perfect appraisal rights,” “it necessarily follows that the
record holder’s actions determine perfection of the right to seek appraisal.”38 Since
Cede held over 16 million shares that it did not vote in favor of the merger, the
Court concluded that Cede could, and did, perfect appraisal rights for all of the
beneficial owners’ 10 million shares.39
35
2007 WL 1378345 (Del. Ch. May 2, 2007).
36
Id. at *1.
37
Id. at *3.
38
Id.
39
Id. at *4.
12
In the wake of Transkaryotic, the General Assembly amended Section 262
to explicitly allow beneficial owners to directly file petitions for appraisal,40
potentially raising questions about the continuing impact of the case.41 Despite this
fact, and despite that Transkaryotic is factually distinct from this case, both Merion
and BMC argue that Transkaryotic supports their diametric positions. Merion
highlights that the Transkaryotic decision rejected imposing a share-tracing
requirement on Section 262 and underscores the Court’s discussion, en route to
that holding, of the difficulties of tracing votes to specific shares due to the reality
of modern securities practice, where most securities are “held in an
undifferentiated manner known as ‘fungible bulk’” on deposit at central securities
depositories, such as DTC.42 Conversely, BMC emphasizes the Court’s reliance in
its holding on Cede’s ability to prove it held an amount of shares that had not been
voted in favor of the merger greater than the amount being sought for appraisal,
claiming this as proof that under Transkaryotic, “at a minimum, record holders like
Merion bear the burden to show that the shares they seek to have appraised were
not voted in favor of the merger.”43
40
See 8 Del. C. § 262(e) (“Notwithstanding subsection (a) of this section, a person who is the
beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of
such person may, in such person’s own name, file a petition or request from the corporation the
statement described in this subsection.”).
41
But see infra note 49.
42
Transkaryotic, 2007 WL 1378345, at *2.
43
Opening Br. in Supp. of Resp’t’s Mot. for Summ. J. at 22.
13
II. STANDARD OF REVIEW
Summary judgment is appropriate only where “the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits, if
any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law.”44 In making that determination,
the court must “view the facts in the light most favorable to the nonmoving party,
and the moving party has the burden of demonstrating that there is no material
question of fact.”45 The parties have agreed that there is no dispute as to the
material facts of the case, and so the only issue that remains is whether, as a matter
of law, Merion has met the statutory requirements of Section 262.
III. ANALYSIS
Merion is an arbitrageur which seeks to capitalize on what it perceives to be
an undervalued transaction. Section 262 permits the existence of appraisal
arbitrage by allowing investors to petition for appraisal of stock purchased after a
merger is announced.46 The parties dispute whether the arbitrageur here has fully
44
Ch. Ct. R. 56(c).
45
E.g., Transkaryotic, 2007 WL 137835, at *3 (quoting Elite Cleaning Co. v. Walter Capel and
Artesian Water Co., 2006 WL 1565161, at *3 (Del Ch. June 2, 2006)).
46
See 8 Del. C. § 262(a) (“Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this section with
respect to such shares, who continuously holds such shares through the effective date of the
merger or consolidation . . . shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder’s shares of stock . . . .” (emphasis added)); cf. Transkaryotic, 2007 WL
137835, at *5 (“Respondents raise one policy concern that deserves mentioning. They argue that
this decision will ‘pervert the goals of the appraisal statute by allowing it to be used as an
14
perfected its right to appraisal under the statute. Specifically, BMC asks this Court
to determine whether Section 262 requires Merion to demonstrate that each share it
seeks to have appraised is a share that was never voted in favor of the merger, not
just by itself, but by any owner. Because I find that the unambiguous language of
the statute does not give rise to any such share-tracing requirement, and that
Merion has otherwise complied with the requirements of Section 262, I hold that
Merion has perfected its right to appraisal.
A. The Standing Requirements of Section 262
As mentioned above, in order to properly perfect the appraisal remedy under
the plain language of Section 262(a), a petitioner need only show that the record
holder of the stock for which appraisal is sought: (1) “[held such] shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares;” (2) “continuously [held] such shares through the
effective date of the merger or consolidation;” (3) “has otherwise complied with
subsection (d) of this section;” and (4) “has neither voted [such shares] in favor of
the merger or consolidation nor consented thereto in writing.”47 The statute’s
requirements are directed to the stockholder—expressly defined as the record
investment tool for arbitrageurs as opposed to a statutory safety net for objecting stockholders.’
That is, the result I reach here may, argue respondents, encourage appraisal litigation initiated by
arbitrageurs who buy into appraisal suits by free-riding on Cede’s votes on behalf of other
beneficial holders—a disfavored outcome. To the extent that this concern has validity, relief
more properly lies with the Legislature. Section 262, as currently drafted, dictates the conclusion
reached here.” (footnotes omitted)).
47
8 Del. C. § 262(a).
15
holder—and whether it has owned the stock at the appropriate times, whether it
has made a sufficient demand, and whether it has voted the shares it seeks to have
appraised in favor of the merger. My interpretation of Section 262(a) as clear in
that regard is consistent with Transkaryotic. In that case, then-Chancellor
Chandler determined that Cede did not have to demonstrate that each individual
share it sought to have appraised was a share it did not vote in favor of the merger,
but was only required to show that it held a quantity of shares it had not voted in
favor of the merger equal to or greater than the quantity of shares for which it
sought appraisal.48 The Court’s focus was on the petitioner/record holder, not on
the shares—in other words, on whether Cede had sufficient shares it had not voted
in favor of the merger to satisfy the demand, not whether those specific shares
were shares Cede had voted in favor of the merger.49
48
See Transkaryotic, 2007 WL 137835, at *4 (“It is uncontested that Cede voted 12,882,200
shares in favor of the merger and 16,838,074 against, abstained, or not voted in connection with
the merger. It is further uncontested that Cede otherwise properly perfected appraisal rights as to
all of the 10,972,650 shares that petitioners own and for which appraisal is now sought. Thus,
because the actions of the beneficial holders are irrelevant in appraisal matters, the inquiry ends
here. Cede, the record holder, properly perfected appraisal rights under §262. As a result, Cede
may exercise appraisal rights for all 10,972,650 contested shares.”).
49
This principle is unaffected by the post-Transkaryotic amendment to Section 262(e) granting
beneficial owners the right to file appraisal petitions and receive a report of appraisal shares. In
making this amendment, the General Assembly left the standing requirements of Section 262(a)
entirely untouched, including notably the statute’s definition of “stockholder” as “a holder of
record.” 8 Del. C. § 262(a). Therefore, although procedurally a beneficial owner may now
initiate the legal action, its substantive right to appraisal is still dependent on whether the record
holder has perfected appraisal according to Section 262(a). For a more in-depth discussion of the
status of Transkaryotic following the 2007 amendment, see In re Appraisal of Ancestry.com,
Inc., C.A. No. 8173-VCG, at 12–14 (Del. Ch. Jan. 5, 2015).
16
Contrary to BMC’s position, the meaning of the unambiguous language in
Section 262(a) does not change in light of a reading of Section 262(e), such that
the two subsections together imply a limitation that only shares not voted in favor
of the merger are eligible for appraisal and, consequently, a requirement that the
petitioner must identify how each share was voted. Subsection (e) of the appraisal
statute exists to aid those seeking appraisal by, among other things, providing
similarly situated petitioners with information that may aid in pooling resources
and granting beneficial owners the ability to file appraisal actions. It is antithetical
to that intention to interpret the language of subsection (e) to impose, on the statute
as a whole, an additional hurdle for appraisal petitioners; rather, the effect of the
language in subsection (e) referencing how individual shares were voted is
necessarily limited to defining the scope of the petitioner’s informational right, in
which that language is found. It is true, as BMC argues, that the language chosen
by the General Assembly may theoretically be ineffective, in light of appraisal
arbitrage, in facilitating disclosure of the total number of shares for which appraisal
is sought. At most, this fact indicates that the General Assembly may not have
picked a fail-safe method to achieve its goals; it may not have fully considered the
theoretical possibility that shares acquired after the record date not voted in favor
of the merger by the acquirer may nonetheless have been so voted by the seller,
leading, hypothetically, to the number of shares for which appraisal is sought
17
exceeding the number not voted for the merger. This fact does not show that the
General Assembly meant to impose an additional standing requirement for
appraisal petitioners, let alone one that is contrary to the plain language of Section
262(a). Had the General Assembly intended the statute to include a share-tracing
requirement, I conclude it would have explicitly written that requirement into the
provision governing standing, subsection (a), rather than utilizing the backhanded
method of introducing language in subsection (e)—a portion of the statute meant to
enhance, not limit, rights to appraisal.50
Finally, I do not consider it appropriate to weigh the public policy concern
raised by BMC, namely that a failure of this Court to read a share-tracing
requirement into the statute could allow “a majority, or even all of a corporation’s
shares from seeking appraisal, notwithstanding the fact that for a transaction to
have been approved, at least a majority of the shares would have had to have been
voted in favor of it.”51 It is undisputed that such a situation is not present here:
Merion has sought appraisal for 7,629,100 shares stemming from a transaction
where 95,033,127 of the total 141,454,283 voting shares voted to approve the
merger.52 As a member of the judicial branch, it is inappropriate for me to
50
See Giuricich v. Emtrol Corp., 449 A.2d 232, 238 (Del. 1982) (“[W]here a provision is
expressly included in one section of a statute, but is omitted from another, it is reasonable to
assume that the Legislature was aware of the omission and intended it. The courts may not
engraft upon a statute language which has been clearly excluded therefrom by the Legislature.”).
51
Opening Br. in Supp. of Resp’t’s Mot. for Summ. J. at 16–17.
52
Sirkin Aff. Ex. 4, at 4.
18
presume to rewrite an unambiguous statute to address a problem that has not
occurred, may not occur, and, in any event, is certainly not before me now.53 It
may be true that the plain language of Section 262 does not adequately serve all the
purposes of that statute. It is possible that appraisal arbitrage itself leads to
unwholesome litigation.54 However, in evaluating my role in alleviating these
53
See, e.g., In re Adoption of Swanson, 623 A.2d 1095, 1099 (Del. 1993) (“It is beyond the
province of courts to question the policy or wisdom of an otherwise valid law. Instead, each
judge must take and apply the law as they find it, leaving any changes to the duly elected
representatives of the people.” (internal citation omitted)); Great Hill Equity Partners IV, LP v.
SIG Growth Equity Fund I, LLLP, 80 A.3d 155, 160 (Del. Ch. 2013) (“[A]s has long been
recognized by the Delaware Courts, when the General Assembly has addressed an issue within
its authority with clarity, there is no policy gap for the court to fill. If a valid statute is not
ambiguous, the court will apply the plain meaning of the statutory language to the facts before it.
It would usurp the authority of our elected branches for this court to create a judicial exception to
the words ‘all . . . privileges’ for pre-merger attorney-client communications regarding the
merger negotiations. That sort of micro-surgery on a clear statute is not an appropriate act for a
court to take.” (internal footnotes omitted)). Even assuming, arguendo, that the “over-appraisal”
concern was before me in this case and I found it necessary to fix that problem, I would still be
unclear as to the practical framework of the solution. BMC generally argues for a share-tracing
requirement that would allow only shares not voted in favor of the merger to be appraised, but
BMC does not champion any specific requirement; rather, BMC suggests that an appraisal
arbitrageur could satisfy this general burden in various ways, such as by purchasing its shares
prior to the record date and itself voting the shares, or by securing proxies or revocations of
proxies for shares acquired after the record date. Opening Br. in Supp. of Resp’t’s Mot. for
Summ. J. at 26–27. The fact that multiple avenues exist to remedy what Merion sees as a
problem with the statute—none of which have been vetted by the General Assembly—further
illustrates that BMC’s concern requires legislative, not judicial, deliberation.
54
But see Minor Myers & Charles R. Korsmo, Appraisal Arbitrage & the Future of Public
Company M&A, 92 Wash. U. L. Rev. (forthcoming 2015), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2424935 (arguing that the recent rapid
growth in appraisal arbitrage should be welcomed as a benefit to stockholders and corporate law
generally, because empirical evidence suggests “appraisal arbitrage focuses private enforcement
resources on the transactions that are most likely to deserve scrutiny, and the benefits of this kind
of appraisal accrue to minority shareholders even when they do not themselves seek appraisal”);
George S. Geis, An Appraisal Puzzle, 105 Nw. U. L. Rev. 1635, 1661–77 (2011) (suggesting that
expanded appraisal rights could serve as a “back-end market check on controller abuses,”
whereby, “if the controller hopes to expropriate value from minority shareholders through a cut-
rate offer, outside investors will have incentives to purchase the shares and seek appraisal under
19
concerns through the adjudication of this case, I find former Chancellor Chandler’s
words in Transkaryotic—wherein over seven years ago he considered whether his
decision would “pervert the goals of the appraisal statute by allowing it to be used
as an investment tool for arbitrageurs”—to be particularly apposite:
To the extent that [these] concern[s] ha[ve] validity, relief more
properly lies with the Legislature. Section 262, as currently drafted,
dictates the conclusion reached here. . . . The Legislature, not this
Court, possesses the power to modify § 262 to avoid the evil[s], if
[they are] evil[s], that purportedly concern[] [the Respondent].55
B. Application of Standing Requirements
Having not found any implicit share-tracing requirement present in the
statute, I turn to the four explicit standing requirements set forth in Section 262(a).
It is undisputed that Merion has satisfied all of these requirements. Merion made a
written demand for appraisal of 7,629,100 shares of BMC common stock on July
22, 2013, at which time it held all shares for which it sought appraisal. The
appraisal demand Merion delivered to BMC was timely and sufficiently
informative. After delivering its demand for appraisal of the 7,629,100 shares of
BMC common stock that it owned, Merion continued to hold those shares
throughout the date that the merger of BMC into Boxer became effective, on
September 10, 2013. Finally, at no point did Merion ever vote any of the shares
Transkaryotic,” but arguing that, in order to curb meritless litigation, the appraisal statute should
be amended to include an embedded put option).
55
In re Appraisal of Transkaryotic Therapies, Inc., 2007 WL 137835, at *5 (Del. Ch. May 2,
2007).
20
for which it seeks appraisal in favor of the BMC/Boxer merger. Consequently,
Merion has perfected its right to have its 7,629,100 shares of BMC common stock
appraised by this Court.
IV. CONCLUSION
For the foregoing reasons, BMC’s Motion for Summary Judgment is denied.
An appropriate order accompanies this Opinion.
21
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MERION CAPITAL LP and MERION )
CAPITAL II LP, )
)
Petitioners, )
)
v. ) C.A. No. 8900-VCG
)
BMC SOFTWARE, INC., )
)
Respondent. )
)
ORDER
AND NOW, this 5th day of January, 2015,
The Court having considered the Respondent’s Motion for Summary
Judgment, and for the reasons set forth in the Memorandum Opinion dated January
5, 2015, IT IS HEREBY ORDERED that the Respondent’s Motion is DENIED.
SO ORDERED:
/s/ Sam Glasscock III
Vice Chancellor
22