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From Securities Regulation Daily, July 13, 2015

Beneficial owners lost appraisal rights with custodial banks’ share retitling

By Amy Leisinger, J.D.

The Delaware Court of Chancery denied a motion for appraisal by several institutions that owned common stock of Dell, Inc. after Dell announced a going-private merger. According to the court, Delaware law requires that an appraisal petitioner “continuously hold” its shares as a “holder of record” through the effective date of the merger, and the retitling of shares from Cede & Co., the Depository Trust Company’s (DTC) nominee, as part of the demand process caused record ownership to change and the petitioners to lose their appraisal rights. However, in lengthy dicta, the court opined that Delaware should take an approach similar to federal law and recognize that funds such as these should retain their appraisal rights because ownership by the relevant DTC participants never changed (In re Appraisal of Dell Inc., July 13, 2015, Laster, J.).

Background. As of Dell’s agreement to a merger in February 2013, the funds held at least 922,975 shares of Dell common stock, owned indirectly through accounts at custodial banks. The shares they held were registered in the name of Cede & Co. on behalf of the banks, which in turn held them on behalf of the clients. As a publicly traded company, Dell had to go through a federally mandated merger process to identify the custodial banks and brokers that held its shares through DTC and to send information through them to the beneficial holders regarding the merger.

Because they owned their shares in street name through the custodial banks, the funds had Cede & Co. demand appraisal on their behalf. DTC moved a corresponding number of shares out of a FAST Account by directing Dell‘s transfer agent to issue certificates and made arrangements to deliver them to the custodial banks. Thereafter, the custodial banks instructed Cede & Co. to authorize the shares to be retitled in the names of their nominees in order to comply with internal policies, resulting in new nominees on the stock ledger.

In response to the appraisal demand, Dell moved for summary judgment, arguing that these steps resulted in new record holders and broke the “continuously held” chain.

Appraisal demand denied. The court noted that, under Delaware law, the record holder of shares is the person that appears on the stock ledger. After the SEC created the depository system, the Delaware courts continued to adhere to this rule and treated Cede & Co. as the holder of record and applied the “continuously held” requirement strictly, the court explained. Under these decisions, the court found, the custodial banks’ nominees are the ones that appear on the stock ledger and, as such, the motion for summary judgment to deny appraisal must be granted.

New approach suggested. However, Vice Chancellor Laster went on to discuss a preference for a different approach. Federal law looks through DTC and Cede & Co. and recognizes custodial banks and brokers as record holders. If Delaware law took this approach, the opinion explained, the funds would retain their appraisal rights because there was no change of ownership at the DTC-participant level.

“Were I writing on a blank slate, I would hold that the ‘records’ of the corporation for purposes of determining who is a ‘stockholder of record’ include the DTC participant list. Under this interpretation, the custodial banks and brokers who appear on the DTC participant list would be stockholders of record for purposes of Delaware law, just as they are for federal law,” the vice chancellor concluded.

The case is No. 9322-VCL.

Attorneys: Stuart M. Grant (Grant & Eisenhofer P.A.) for Curtiss-Wright Corporation Retirement Plan, Manulife US Large Cap Value Equity Fund, The Milliken Retirement Plan, Northwestern Mutual Series Fund, Inc. and T. Rowe Price Funds SICAV US Large Cap Value Equity Fund.

Companies: Curtiss-Wright Corporation Retirement Plan; Manulife US Large Cap Value Equity Fund; The Milliken Retirement Plan; Northwestern Mutual Series Fund, Inc.; T. Rowe Price Funds SICAV US Large Cap Value Equity Fund

MainStory: TopStory MergersAcquisitions FinancialIntermediaries DelawareNews

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