Delaware Chancery Bars Appraisal Claims Where Evidence from Third Parties Confirms Appraisal Shares Were Voted in Favor of the Transaction
 

The Delaware Chancery in In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 11, 2016) considered whether mutual funds who were beneficial owners of Dell shares could pursue an appraisal action in the face of evidence showing that the shares were mistakenly voted in favor of a merger by an intermediary custodial bank.  The court ruled that the petitioners were barred from seeking an appraisal and, in so holding, provided a helpful framework for the burden-shifting analysis for proof of compliance with appraisal statute requirements.

Those statutory requirements comprise both the “Dissenter Requirement”—that the stockholder must not have “voted in favor of the merger [or] consented thereto in writing” —and the “Record Holder Requirement,” which defines a stockholder as the “holder of record of stock.”  8 Del. C. § 262(a).  Only the record holder’s actions, and not those of a beneficial owner or custodial holder, determine whether the Dissenter Requirement is met.  The burden of proving compliance with both requirements typically lies with the plaintiff. 

The Dell court acknowledged that recent appraisal arbitrage decisions  allowed some leeway for shifting this burden where no conclusive evidence proves how the at-issue shares were voted.  Such a situation can arise where the petitioner purchased shares on the open market after the record date but before the stockholder vote, and the record holder (often a nominee institution, such as Cede & Co., acting as the ultimate record holder for multiple owners) voted a larger number of shares than the petitioner purchased.  This can make it impossible to determine how the shares owned by the petitioner were actually voted because voting records often do not permit for “share-tracing.” 

In these circumstances, Delaware courts have found that a petitioner makes a prima facie showing of compliance with statutory appraisal requirements if the record holder held enough shares that were voted in opposition to a transaction to cover the appraisal class.  If no other evidence can be introduced, as in the appraisal arbitrage decisions, then the prima facie showing is dispositive. 

VC Laster cautioned that this prima facie showing is not the end of the analysis.  To the contrary, once the petitioner’s initial case is established, the burden shifts to the respondent corporation to adduce evidence that the appraisal class shares were voted in favor of the transaction.  The court found that information from any number of sources might be considered to determine how the appraisal class shares were voted, rejecting petitioners’ argument that the court could only consider evidence from the vote itself, which did not reveal how the appraisal shares were voted. 

On that basis, VC Laster considered evidence presented by Dell from the various intermediaries between the beneficial owners and Cede, the record holder.  Although the arrangements through which Cede came to be the record holder for the mutual funds’ shares were complex, and even though T. Rowe (which sponsored the funds) opposed the going-private transaction, the evidence proved that the funds’ shares were mistakenly voted by the record holder in favor of the merger. 

Notwithstanding this mistake, VC Laster concluded that the mutual funds were barred from pursuing an appraisal action.