In re Appraisal of Dell Inc., C.A. No. 9322 (Del. Ch. May 11, 2016) (Laster, V.C.)
In this opinion, the Court of Chancery held that, through the “Byzantine and path-dependent system by which stockholders voted on a proposed merger,” fourteen mutual funds sponsored by T. Rowe Price & Associates, Inc. (“T. Rowe”) as well as institutions that relied on T. Rowe to direct the voting of their shares (the “T. Rowe Petitioners”) failed to satisfy the dissenter requirement of Section 262 of Delaware’s General Corporation Law (“DGCL”) despite their public opposition to the merger. As a result, the T. Rowe Petitioners lacked standing to seek appraisal of their stock in Dell Inc. (“Dell”).
The T. Rowe Petitioners invested in Dell common stock but did not hold legal title to any shares. Rather, as is common, they were beneficial owners who held the shares through a custodian, State Street Bank & Trust Company. The custodian was a participant of the Depository Trust Company, which held shares in the name of its nominee, Cede & Co. (“Cede”). Legal title rested with Cede.
To facilitate its voting procedures, T. Rowe retained Institutional Shareholder Services Inc. (“ISS”). As part of their agreement, T. Rowe employed a computerized system that automatically generated default voting instructions and provided them to ISS. The default voting instruction for a management-supported merger was to vote in favor.
On February 5, 2013, Dell’s board of directors approved an agreement and plan of merger between Dell and three affiliates of Dell’s founder, Michael Dell, and Silver Lake Management. Dell originally scheduled a special meeting of stockholders on July 18, 2013 to vote on the merger. For this meeting, T. Rowe submitted its instructions to ISS to vote against the merger. However, no vote on the merger was held at this meeting, which was adjourned. After further adjournments, Dell held a special meeting on September 4, 2013, at which the stockholders voted on the merger. In connection with this meeting, ISS replaced the prior meeting record with a new record which had the effect of replacing T. Rowe’s prior instructions to vote against the merger with the default instructions to vote for any management sponsored merger. No one from T. Rowe checked the status of the vote and these instructions were automatically conveyed to ISS, in accordance with their prior agreement.
In holding that the T. Rowe Petitioners failed to satisfy the dissenter requirement, the Court rejected an “all or nothing” reading of Section 262 that would render the dissenter requirement satisfied where a stockholder of record, like Cede, would be foreclosed from asserting appraisal rights if it voted a single share in favor of the merger. According to the Court, such a rule would ignore the fact that entities, like Cede, hold shares for different clients who may have different views on the merger. Relying on precedent, the Court instead applied a two-part inquiry for satisfying Section 262 of the DGCL: (1) did the specific record holder meet the statutory prerequisites with respect to the (2) specific shares for which appraisal is being sought.
In reaching its decision, the Court discussed recent “appraisal arbitrage” opinions and noted, if read literally, those cases would preclude consideration of anything other than Cede’s aggregated votes on a merger. Those cases rejected a share-tracing requirement by equating the analysis of the record holder’s voting behavior with an exclusive focus on the aggregate voting totals. The Court linked that line of reasoning to situations where there was an absence of proof as to how the particular shares were voted. Distinguishing those cases, the Court noted that they do not apply to a situation where an investor, like T. Rowe, actually directs that its shares be voted in favor of the merger, and when a record holder, like Cede, actually votes the shares in accordance with the investor’s instructions. In such a situation, the Court held, the investor cannot avoid the implications of the dissenter requirement by relying on Cede’s aggregate votes on behalf of other investors.
For the Court, the solution to squaring the “appraisal arbitrage” opinions with this opinion was to provide that a petitioner can satisfy the dissenter requirement by showing that there were sufficient shares with the record holder that were not voted in favor of the merger to cover the appraisal class. Once a prima facie case has been made, the burden shifts to the corporation to show that the record holder actually voted the shares for which the petitioner seeks appraisal in favor of the merger. The corporation may point to publicly available documents such as a Form N-PX or introduce evidence from providers of voting services, such as internal control numbers or voting authentication records. Because Dell was able to satisfy that burden, the T. Rowe Petitioners’ appraisal claims were dismissed.
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