Appraisal Claims Dismissed Due to Custodial Banks' Technical Acts

Despite being a court of equity, there are certain instances where the Delaware Court of Chancery demands “strict compliance” with procedural provisions irrespective of the potential for an inequitable outcome. For example, stockholders are required to strictly comply with the provisions of Section 220 of the Delaware General Corporation Law when seeking books and records from a Delaware corporation; see Central Laborers Pension Fund v. News Corp., 45 A.3d 139, 145 (Del. 2012). Stockholders seeking appraisal of their shares pursuant to Section 262 of the DGCL are similarly required to strictly comply with the procedural provisions of the code. Where the form and manner mandated by Delaware law is not satisfied, the Court of Chancery will dismiss a stockholder’s request for appraisal. What makes the case discussed herein more interesting is that the stockholder does not need to be directly responsible for the procedural failure in order for the court to dismiss the appraisal action.

In In re Appraisal of Dell (Del. Ch. Jul. 13, 2015), the appraisal petitioners were composed of five institutions that beneficially owned common stock of Dell (collectively referred to as the “funds”). Following Dell’s announcement of a going-private transaction, the funds rejected the proposed merger consideration for 922,975 shares of common stock they collectively held. Instead, the funds chose to exercise their right to demand appraisal of their nearly 1 million shares pursuant to Section 262 of the DGCL. Because the funds held their shares in street name through custodial banks, they caused Cede & Co., the legal title holder of the funds’ shares, to demand appraisal for their shares. As described in great detail in Vice Chancellor J. Travis Laster’s opinion, the process to perfect the funds’ appraisal rights necessitated the Depository Trust Co. (DTC) to have Dell’s transfer agent issue certificated shares in Cede’s name. Next, DTC contacted the funds’ custodial banks in order to deliver the funds’ certificated shares. However, the custodial banks instructed Dell’s transfer agent to issue the certificated shares in the name of the custodial banks’ nominees, rather than Cede. So while the funds remained the beneficial owners of the shares, the custodial banks’ nominees were now the legal owners, rather than Cede.