Dell Shareholders Lose Appraisal Rights due to Technical Issues with the Transaction (with McDonnell Comment and Lofchie YouTube Selection)
In a recent decision stemming from the private merger transaction of Dell, Inc., the Delaware Court of Chancery ruled that certain shareholders lost their appraisal rights due to technical changes in the way their shares were held by their custodian banks. Under Delaware law, for a shareholder to preserve its appraisal rights, the "holder of record" (not the beneficial owner) must continuously hold the shares through the effective date of the merger. The court found that under Delaware law, the holder of record is the person "appearing on the corporate records as the owner of stock," and that for this purpose, the "corporate records" comprise the books maintained by the corporation and its transfer agent.
Applying Delaware law, the court found that the "holder of record" of the Dell shares was the nominee of the Depository Trust Company, Cede Company. However, in the course of the merger, the DTC arranged for Dell's transfer agent to issue separate certificates for shareholders requesting appraisal, and those certificates were physically delivered to the shareholder's custodial banks. The custodial banks, following standard policy, re-registered the shares in the name of their own nominees, thereby replacing Cede Co. The court concluded that this caused a change in the "holder of record" of the shares, notwithstanding the fact that the shareholders and their custodians held the shares continuously through the effective date of the merger. The court's determination was that this re-registration of shares effectively broke the chain. As a result, the shareholders' appraisal rights were lost.
The court opined that, while its conclusion was compelled by Delaware law, a better approach would be to look through the DTC to its participants to determine the "holder of record." Under such a system, the appraisal rights would be preserved, because the shares were continuously held by the shareholders' custodial banks.
McDonnell Comment: Beneficial owners of securities that are seeking appraisal rights must be careful that they do not unintentionally change the chain of custody while they seek such rights. Hopefully, the Delaware legislature will follow the court's suggestion and amend the law that produced this unintended result.
Lofchie YouTube Selection: You Don't Own Me.