Delaware Chancery Court Expands on Dissenter Requirement under DGCL Section 262
By: Naomi R. Ogan and Stephanie S. Liu
In In re Appraisal of Dell Inc., C.A. No. 9322-VCL, (Del. Ch. May 11, 2016), the Delaware Court of Chancery held that the shares held by fourteen mutual funds through a sponsor or institutions that relied on such parties to direct the voting of their shares (collectively, the “Petitioners”) did not qualify for appraisal in connection with Dell Inc.’s go-private merger because the dissenter requirement under the Delaware General Corporation Law (“DGCL”) was not met as the shares were voted in favor of the merger.
To facilitate the voting process in connection with numerous stockholder meetings to vote on the Dell merger, the sponsor retained Institutional Shareholder Services Inc. (“ISS”). The sponsor used a computerized system to automatically generate default voting instructions, and provided those instructions to ISS. The default voting instructions for a management-supported merger was to vote in favor. Dell initially scheduled a stockholders’ meeting for July 18, 2013 to vote on the merger. The sponsor submitted instructions to ISS to vote against the merger. However, no vote occurred at that meeting, and Dell re-scheduled the meeting for September 12, 2013. For this September meeting, the ISS voting system generated a new meeting record, which had the effect of replacing the July meeting record along with its associated voting instructions. In accordance with the new default instructions generated for the September meeting, Cede ultimately voted the shares in favor of the merger.
In finding that the Petitioners failed to meet the dissenter requirement, the court rejected an all-or-nothing reading of the prerequisites in DGCL Section 262(a). Under that reading, a stockholder could not seek appraisal if it voted a single share in favor of the merger. Instead, the court summarized the Section 262(a) requirements as a two-part inquiry: first, did the specific record holder meet the statutory prerequisite of not voting at least some of its shares in favor of the merger, and second, was that prerequisite met with respect to the specific shares for which appraisal is being sought? The court stated that this two-part analysis would allow a broker-as-record-holder to split its shares and vote differently on behalf of different clients without losing the ability to pursue appraisal on behalf of the dissenting client. The court noted that permitting a broker as a record holder to split is shares and vote differently on behalf of different clients is crucial, because brokers who hold shares of record typically hold them in a single block and not in separate client accounts.
The court also distinguished this case from recent “appraisal arbitrage” cases, in which investors purchase shares after the record date for the merger in order to pursue appraisal, by highlighting the existence of evidence in the case at issue which demonstrated how Cede actually voted the shares. In particular, internal control numbers generated during the voting process showed the specific number of shares that were voted in favor of the merger on behalf of each of the nominees. The court in the earlier appraisal arbitrage cases declined to place a “share-tracing requirement” burden on the petitioner due to the lack of evidence in each case with both parties agreeing that it was impossible to show how the record holder voted particular shares. Thus, the holdings of those decisions provide that a petitioner can establish a prima facie case that the dissenter requirement was met by showing that the record holder held a sufficient number of shares that were not voted in favor of a merger to cover the appraisal class. However, in this case, the court stated that if the corporation can rebut the petitioner’s prima facie case and demonstrate how the record holder actually voted the particular shares in favor of the merger (e.g., internal control numbers and voting authentication records from providers of voting services, Form N-PX, etc.), then the petitioner cannot satisfy the dissenter requirement for those shares. The court noted that although a share-tracing requirement is not appropriate in all cases, it would be absurd to refuse to consider share-tracing evidence where available. Allowing the court to consider evidence of how the particular shares were voted, rather than just the record holder’s aggregated votes on the merger, gives “recognition of the realities of modern stock practices.”
Additionally, although the court acknowledged that the change in voting instructions between the July and September meetings in 2013 was not intentional, intent was not enough to invalidate the automatically generated voting instructions that authorized Cede to properly vote the shares in favor of the merger.
Here, since Dell proved that Cede voted the shares in favor, the dissenter requirement was not met, and thus the Petitioners do not have appraisal rights. Responding to the Petitioners’ alternative request to substitute Cede as the petitioner, the court also held that neither Cede, nor any of the other intermediaries acting on behalf of the Petitioners during the voting process, would be entitled to exercise appraisal rights with respect to the shares that Cede voted in favor of the merger.