In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. July 13, 2015) (rev'd July 30, 2015) (Laster, V.C.)
In this memorandum opinion, the Delaware Court of Chancery granted a defendant’s motion for summary judgment, holding that the continuous holder requirement set forth in Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”) bars a beneficial owner from pursuing appraisal if there has been an administrative transfer of the shares at the depository level. The Court nevertheless expressed its concerns with such a strict interpretation of the continuous holder requirement, and recommended that the Delaware Supreme Court recognize custodial banks and brokers as record holders, in parallel with the approach taken by the federal securities laws.
In this action, five institutions petitioned for appraisal after Dell Inc. (“Dell”) announced a going-private merger. The petitioners did not have legal title to their Dell shares and instead were beneficial holders who held the shares through custodial banks. The custodial banks likewise did not have legal title to the shares, and instead held the shares through Depository Trust Company (“DTC”). The shares therefore were registered in the name of Cede & Co. (“Cede”), which is the nominee of the DTC.
Under DTC’s procedures, when a beneficial owner causes Cede to demand appraisal, DTC requests that the issuer’s transfer agent issue a paper stock certificate in Cede’s name for the number of shares held by the beneficial owner. DTC followed this procedure in connection with the petitioners’ appraisal demand and obtained certificates for petitioners’ shares. DTC then delivered the certificates to the custodial banks for safekeeping. Upon receipt of the certificates, each of the custodial banks followed internal protocols and instructed Dell’s transfer agent to record a transfer of the shares to the nominee of each such custodial bank and to issue a certificate in the name of each such nominee. As a result, each such nominee became a registered holder on Dell’s stock ledger. Dell argued in its motion for summary judgment that the custodial banks’ procedures broke the chain of title for purposes of the continuous holder requirement set forth in Section 262 of the DGCL.
Section 262 of the DGCL defines a “stockholder” as “a holder of record of stock in a corporation.” Section 262 further provides that a stockholder must continuously hold the shares for which they are seeking appraisal through the effective date of the merger. In this case, the Court found that Cede was the stockholder of record, and the re-titling of the shares after the demand for appraisal but before the effective date of the merger violated the continuous holder requirement by causing record ownership to change. Petitioners argued that the right to appraisal vests at the time of perfection and therefore the redemption of the beneficial owners’ shares by the custodian and record holder without the knowledge of the beneficial owners did not extinguish the beneficial owners’ right to appraisal. In support of that argument, the petitioners cited to Alabama By-Products Corp. v. Cede & Co., 657 A.2d 254 (Del. 1995), in which the Delaware Supreme Court held that DTC’s surrender of shares in exchange for merger consideration did not comply with the appraisal statute’s requirements for withdrawing or settling a properly perfected appraisal claim. The Court rejected this argument because, at the time the shares were re-titled, the only step in the statutory process that had been completed was the making of a demand – the merger had not closed, the time for unilateral withdrawals had not elapsed, and no appraisal petition had been filed; thus, there was no perfection of appraisal rights. The Court therefore granted Dell’s motion for summary judgment.
Nevertheless, the Court expressed its view that there was another possible interpretation of the record holder requirement set forth in Section 262 of the DGCL. The Court noted as follows: “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,” consistent with the federal law approach. Federal regulations require the DTC to “furnish a securities position listing promptly to each issuer whose securities are held in the name of the clearing agency or its nominee,” ensuring that a corporation can easily find out the identities of the banks and brokers who hold shares through DTC. Under such interpretation, the custodial banks and brokers would remain the record holders for purposes of Delaware law, as they would appear through their nominees on the stock ledger. Using this approach, the motion for summary judgment would be denied in this action. The Court suggested that the Delaware Supreme Court could revisit how Delaware case law interprets the record holder requirement.