Ashley Callaway
The Delaware Chancery Court caused quite a stir with the issuance of the opinion for In re Appraisal of Dell, Inc. last summer. Articles with titles such as “Dell Stockholders Lose Appraisal Rights as Custodial Bank’s Common Back-Office Procedures Result in Technical Failure of Continuous Holder Requirement,” “Appraisal Claims Dismissed to Custodial Banks’ Technical Acts,” and “Custodial Bank’s Technical Failure Results in Dell Stockholders Losing Appraisal Rights” fill the internet, echoing a rather obvious and common opinion – the interpretation of the Continuous Holder Requirement is too strict. Even Vice Chancellor Laster, the author of the opinion, agrees. He writes “Were I writing on a blank slate, I would account for the federal policy of share immobilization by interpreting the term “stockholder of record” as used in Section 262(a) to parallel its content under the federal securities laws.” Being that judges, attorneys, and law students alike seem to agree that the interpretation is too strict and leads to unfavorable outcomes, what needs to be done to fix it?
An extremely simplified version of the Dell opinion is required before continuing. Dell investors, known as the Funds, attempted to exercise their right to appraisal after Dell announced a merger. Similar to most investors post share immobilization, the Dell shares were held in bulk by DTC so Cede & Co. was listed on the certificates. When the Funds sought appraisal, DTC re-titled and issued the shares in the name of the custodial banks pursuant to its office procedures. Due to the office filing procedure, the Funds lost their appraisal rights because they were unable to satisfy § 262 of the Delaware General Corporation Law. Under § 262, a stockholder seeking appraisal must “continuously hold such shares through the effective date of the merger,” and “stockholder” is defined as “a holder of record of stock in a corporation.” The simple name change, without any change in beneficial ownership, resulted in a failure to satisfy the Continuous Holder Requirement set forth in the statute.
At first glance, it would appear an easy fix exists to prevent this unfavorable outcome from occurring in the future – change the meaning of “holder of record.” One way to make that change could be by changing the statute. Adding a short subsection that defines “holder of record” to include DTC, custodial banks, and other nominees of the beneficial owner would allow the beneficial owner to overcome the strict interpretation of the Continuous Holder Requirement. Simple back office filing procedures would thus no longer cause a failure on the part of beneficial owners to satisfy that requirement. Unfortunately, there are multiple problems with this remedy. First, it is unlikely to happen: the statute and the courts’ interpretation of it have been in place for many years; there has been no proposal to amend it in a relevant way; and the court in Dell advocated change through judicial interpretation rather than legislation. Second, and as explained below, if the definition of record holder were to be expanded, the requirement that the stockholders not vote in favor of the merger would have little to no meaning.
Section 262(a) requires that in order to perfect appraisal rights, stockholders must not have “voted in favor of the merger or consolidation nor consented thereto in writing.” In multiple cases, parties have attempted to argue that this language requires a “share-tracing requirement.” A share-tracing requirement would require parties seeking appraisal to show that the shares they own on the record date as well as the shares purchased after the record date were voted against the merger. However, the Delaware Court of Chancery has rejected that requirement and only requires that those seeking appraisal rights show that they had not voted for the merger.
So what is the fix? Vice Chancellor Laster stated that “the question of what constitutes the records of the corporation for purposes of determining who is a ‘holder of record’ is a quintessential issue of statutory interpretation appropriate for the judiciary to address.” Perhaps, a rule set out by the judiciary would be the best avenue to prevent further tension between the Continuous Holder Requirement and the share-tracing argument. The courts should interpret the Continuous Holder Requirement so that simple back office filing procedures such as switching the name on the certificate from Cede to the custodial bank nominee does not ruin the beneficial owner’s opportunity to exercise appraisal rights. The courts could explicitly limit this interpretation so that Cede and other custodial brokers are not granted more rights, nor is the statute expanded in any way. Rather the court could quite simply say that where the facts of an appraisal case show a technicality identical to the one in Dell, the right to appraisal is not lost.
More specifically, the court could hold that where the beneficial owner remains the same, and the only change is the retitling of the certificate from Cede to the beneficial owner’s custodial bank, the Continuous Holder Requirement may still be satisfied. The court is completely within its power to interpret § 262(a) as allowing for these types of situations. The exercise of judicial power requires courts to construe and apply statutes to specific cases. Courts use multiple approaches to judicial interpretation, one being labeled “intentionalist-based” method of interpretation. Intentionalist-based means of interpretation means the court considers legislative history and other extrinsic considerations. Section 262(a) sets forth the process to perfect appraisal rights. Appraisal rights are provided to minority shareholders to allow them to dissent from corporate actions that will adversely affect their interests. Therefore, the court can construe § 262(a) in above-said manner without offending the policy behind the Continuous Shareholder Requirement.
Ashley Callaway is a third-year extended division student at Widener University Delaware Law School. She is a staff member on the Delaware Journal of Corporate Law, a member of the Moot Court Honor Society, and a member of the Alternative Dispute Resolution Society. She previously worked as a paralegal at the Delaware Department of Justice.
Suggested Citation: Ashley Callaway, In re Appraisal of Dell Inc.: Eliminating the Tension Between a Share-Tracing Requirement and the Continuous Record Holder Requirement, Del. J. Corp. L (May 23, 2016), www.djcl.org/blog.