July 15, 2015

Whoa! Dell Shareholders Lose Appraisal Rights Due to Custodial’s Back-Office Procedures

Here’s news from this Fried Frank memo (also see this Bloomberg article – we’re posting memos in our “Appraisal Rights” Practice Area):

In a decision with the potential for immediate impact on stockholders’ access to appraisal rights, Delaware Vice Chancellor Laster, in In re Appraisal of Dell (July 13, 2015), held that the funds seeking appraisal of their Dell shares (acquired by them after announcement of the Dell going-private transaction) had not met the “Continuous Holder Requirement” of the appraisal statute. Ruling that the funds had therefore lost their right to appraisal, the Vice Chancellor granted summary judgment in favor of Dell.

After the appraisal petition had been filed, The Depository Trust Company (DTC), following standard procedure, had transferred the shares owned by the funds to the funds’ custodial banks. As is not uncommon, the banks changed the name of the record holder of the shares from Cede & Co. (DTC’s nominee) to the banks’ nominees. The Vice Chancellor ruled that the name change caused a change in the record ownership of the shares. The Vice Chancellor characterized the result as not reflecting the “reality” that the beneficial owners of the shares had remained unchanged and should have been entitled to appraisal rights.

The result was compelled, however, according to the Vice Chancellor, by Delaware Supreme Court precedent that, under these circumstances, treats Cede for all purposes as the record holder (without “looking through” Cede or considering the beneficial owner’s custodial bank as being in the same position as Cede), as well as the Supreme Court’s emphasis on the need for “strict construction” of the appraisal statue requirements. Companies, stockholders, and custodial banks and brokers should evaluate the impact of the decision on their current situations.