Kelly, Golden and Hahn Discuss How Blockchain Share Tracing Can Change Appraisal Arbitrage

March 28, 2018

Blockchain Share Tracing Can Change Appraisal Arbitrage

Many in the securities industry are excited about the benefits that may come with the use of blockchain technology, including its potential to make transaction processing and record-keeping more accurate, expeditious, transparent and secure. Appraisal arbitrageurs, however, may be among the few industry participants that are not quite so enthusiastic about this advanced technology, because it could make possible the tracing of trades and votes of shares of corporations being acquired by merger. Provenance is one of the primary facilities of blockchain technology, and it may someday require appraisal arbitrageurs to ensure — and prove in court — that the shares for which they seek appraisal were not voted in favor of the merger. 

Why is Share Tracing Relevant to Appraisal Arbitrage?

Among other statutory requirements that must be satisfied to pursue appraisal under Section 262 of the Delaware General Corporation Law, a stockholder must have “neither voted in favor of the merger or consolidation nor consented thereto in writing.”[1] Read literally, the appraisal statute supports an interpretation that a petitioner must prove its shares were not voted in favor of the merger. 

However, in a series of decisions concerning the practice of appraisal arbitrage, the Delaware Court of Chancery was confronted with a record where, in a system where a central securities depository is the record holder of the vast majority of a public company’s stock, it appeared difficult, if not impossible, to determine which of the shares the record holder did not vote in favor of the merger were attributable to shares for which appraisal was demanded. Consequently, the court in In re Appraisal of Transkaryotic Therapies Inc. held that a beneficial owner need not show that the specific shares for which appraisal is sought were not voted in favor of the merger, but rather need only demonstrate that the central depository held of record more shares that were not voted in favor of the merger than the number of shares it held of record for which appraisal is sought, reasoning that the appraisal statute is concerned solely with the actions of the record holder.[2]  The court reaffirmed this holding in In re Appraisal of Inc.,[3] and even extended it in Merion Capital LP v. BMC Software Inc., ruling that an appraisal petitioner that was a record holder and had obtained its shares from the “fungible mass” at the central depository after the record date did not need to show that the specific shares it obtained had not been voted by the previous record holder in favor of the merger, but only that the petitioner did not do so and the previous record holder had enough shares not voted in favor of the merger to cover the total number of shares for which appraisal had been demanded.[4]

Although these decisions may have suggested an absence of a share-tracing requirement, the court recently confirmed its presence in In re Appraisal of Dell Inc., precluding a stockholder from seeking appraisal where the company showed that the petitioner had instructed the record holder (inadvertently) to vote the petitioner’s beneficially owned shares in favor of the merger.[5] 

What Are the Implications of Blockchain-Enabled Share Tracing for Appraisal Arbitrage?

In the wake of Dell, if a corporate respondent can show that the specific shares for which a petitioner seeks appraisal were voted in favor of the merger, then the petitioner would be denied standing to seek appraisal. That is, while share tracing was not a requirement when there was no way to discern how the appraised shares were voted in connection with the merger, if advancements in technology made tracing of the ownership and voting of the appraised shares possible, then the Delaware courts appear willing to disqualify a petitioner if the evidence showed that the appraised shares were voted in favor of the merger. 

Blockchain technology may enable appraisal respondents to make that showing in the future, potentially establishing an “exact chain of title for any single share of stock,”[6] as well as possibly providing a “[f]ull track record of assigned proxies (i.e. chain of proxies) and casted votes.”[7] Appraisal arbitrageurs may need to re-evaluate their current investment thesis and strategies as a result, because they may no longer be able to “buy shares up to the last minute without worrying about how to link specific stock to a negative vote by the sellers” in order to exercise appraisal rights with respect to a merger.[8] Rather, they may need to, for example, purchase their shares before the record date for the stockholder vote on the merger or secure the digital proxy rights from the stockholders selling shares to them after the record date.[9] In either case, the costs, burdens and risks of appraisal arbitrage may change and need to be re-evaluated.

Share Purchases Before Record Date

Pre-record date purchases may be challenging and increase the costs and risks of the appraisal investment. “It often can be difficult to buy large positions before the record date, because the proxy statement has been available only for a short time and there may not be enough trading volume in a stock to permit the acquisition of a significant position.”[10] Further, acquiring shares prior to the record date could negate arbitrageurs’ timing and informational advantages by advancing their purchases earlier in the merger cycle; it also could increase the duration of their investment without receiving statutory interest, which does not begin to accrue until closing.[11]

Share Purchases After Record Date

The alternative may cause the arbitrageur to incur additional burdens and expenses as well. A purchaser of stock after the record date “is not the legal owner as of the record date and is not permitted to vote this stock directly.”[12] Accordingly, the post-record date purchaser must secure proxy rights from the selling stockholder in order to vote the shares.[13] While the purchaser has the right to request this of the seller,[14] in the past it usually was difficult, if not impossible, to obtain the required proxies where large positions are assembled by open-market purchases from numerous selling stockholders[15] (and it was unnecessary to do so in the appraisal arbitrage context). Arbitrageurs may need to secure these voting rights in the future, a step they did not need to take previously and which arguably adds a potential pitfall with respect to their assertion of an appraisal claim.

Every Vote Counts

Furthermore, appraisal arbitrageurs’ inability to continue to free-ride on the votes or nonvotes of other stockholders[16] could increase the risk that a proposed sale of the company would be abandoned or voted down due to a lack of support from target company stockholders, which could result in a decline in the target’s stock price and, in turn, investment losses for the arbitrageurs. While that risk generally is low,[17] a close vote conceivably could turn negative if appraisal arbitrageurs were unable to take cover in the fungible mass of shares held by a central depository and instead were required to make sure their shares were not voted in favor of the merger.[18]


The advent of blockchain technology and its future utilization in the securities industry present the possibility for the tracing of ownership and votes of shares of corporations being acquired by merger. Appraisal arbitrageurs may need to evaluate the continuing attractiveness of their investment strategy as a result, or at least alter their investment approach to ensure that the shares they acquire for purposes of seeking appraisal are eligible for the remedy by not having been voted in favor of the sale of the company.

This article was originally published on March 28, 2018 in Law360.

Christopher Kelly recently contributed to special commentary, "Restoring Balance to Delaware Appraisal Proceedings," featured in the spring 2018 edition of Delaware Laws Governing Business Entities.

This article is excerpted from Lexis Practice Advisor®, a comprehensive practical guidance resource that includes practice notes, checklists, and model annotated forms drafted by experienced attorneys to help lawyers effectively and efficiently complete their daily tasks. For more information on Lexis Practice Advisor or to sign up for a free trial, please click here. Lexis is a registered trademark of Reed Elsevier Properties Inc., used under license.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the university or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 8 Del. C. § 262(a).

[2] In re Appraisal of Transkaryotic Therapies Inc., 2007 WL 1378345, at *4 (Del. Ch. May 2, 2007).

[3] In re Appraisal of Inc., 2015 WL 66825, at *6-7 (Del. Ch. Jan. 5, 2015).

[4] Merion Capital LP v. BMC Software Inc., 2015 WL 67586, at *2-6 (Del. Ch. Jan. 5, 2015).

[5] In re Appraisal of Dell Inc., 143 A.3d 20, 21-23 (Del. Ch. 2016).

[6] George S. Geis, An Appraisal Puzzle, 105 Nw. U. L. Rev. 1635, 1666-67 (2011).

[7] Nasdaq to Deliver Blockchain E-Voting Solution to Strate (Nov. 22, 2017).

[8] Geis, supra n.7, at 1656.

[9] See Richard DeMarinis & Hedi Uustalu, Is Blockchain The Answer To E-Voting? Nasdaq Believes So, (Jan. 23, 2017).

[10] Thomas Kirchner, Merger Arbitrage: How to Profit from Global Event-Driven Arbitrage at 425 (2d ed. 2016).

[11] 8 Del. C. § 262(h).

[12] Amy Goodman et al., A Practical Guide to SEC Proxy and Compensation Rules § 11.05[A] at 11-28–11-29 (5th ed. 2017 supp.).

[13] Id. at 11-29.

[14] See Crown EMAK Partners LLC v. Kurz, 992 A.2d 377, 388-89 (Del. 2010); Commonwealth Assocs. v. Providence Health Care Inc., 641 A.2d 155, 158 (Del. Ch. 1993). 

[15] See R. Franklin Balotti et al., Meetings of Stockholders, § 7.15 at 7-41 (3d ed. 2006 supp.).

[16] Transkaryotic, 2007 WL 1378345, at *5.

[17] See Matteo Gatti, Reconsidering the Merger Process: Approval Patterns, Timeline, and Shareholders’ Role, Forthcoming 69 Hastings L. J. at 16-17 (2017).

[18] See Transkaryotic, 2007 WL 1378345, at *4; Geis, supra n.7, at 1654-55.

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