Voting Against the Merger

CLS BlueSky Blog posts that the Delaware Supreme Court’s recent decision in Dell–and the Delaware appraisal decisions awarding below deal-price in certain appraisal actions–may give cover to Dell Technologies (the Dell of the Dell decision) in its potential rollup of VMware. Dell already owns 82% of VMware stock, according to the post, and may seek to cash out the remaining shareholders. The post expresses concern about the effect of recent Delaware precedent on public stockholders, especially those who face a transaction like VMware, where the only real remedy may be appraisal.

We note the comment of Tom Vos, research associate at the Jan Ronse Institute, who has less concern for public shareholders. Arguing that Dell did not concern a controlling shareholder (as Dell would be of VMware), Vos suggests that Delaware courts would be stricter toward the buyer when that buyer is basically the only bidder.

If the VMware deal comes to pass and there is an appraisal action, we may yet see how the Delaware courts will handle application of the Dell decision to the situation of a controlling shareholder.

In this post by Professor Afra Afsharipour of the UC Davis School of Law, she discussed what she identifies as the bidder overpayment problem, where bidders often pay more for publicly traded targets due to managerial agency costs and behavioral biases. The article notes that there are less monitoring mechanisms for bidder shareholders than there are for target shareholders to ensure a fair price. For instance, while target shareholders can bring appraisal proceedings in some transactions, bidder shareholders do not receive any appraisal rights even in transactions where they have the right to vote. The author ultimately argues for a “shareholder voice in situations of high importance to firm value and share price.”

 

The Harvard Law School Forum on Corporate Governance and Financial Regulation has published a post by authors Professor Yair Listokin and Mr. Inho Andrew Mun, regarding corporate law in a financial crisis. Reviewing the crisis in 2008 and the rescue mergers that occurred, the authors propose that during a financial crisis, corporate law changes–in particular with respect to mergers. By replacing voting rights with appraisal rights, the authors propose that the efficiency gains pre-merger, whereby crisis actors would be able to move with more alacrity and fewer technical issue holdups, would be balanced by the protection of shareholder rights post-merger: by appraisal.

The authors certainly hit upon a basic reality: Appraisal rights remain a viable protection for shareholder interests and rights, and are one of the few post-merger remedies that exist. The authors’ idea to apply what would effectively be “super-appraisal” in a crisis–collapsing pre-merger remedies into the post-merger appraisal remedy–is certainly an innovative suggestion.

The article is available here.

Some authors have noted that appraisal has become the disciplining remedy for the fiduciary duties of corporate managers. This may be true, regardless of the fact that appraisal is an independent and distinct remedy from fiduciary duty litigation. But sometimes the two are inextricably bound.

In late February 2018, the Delaware Supreme Court handed down a decision in Appel v. Berkman, No. 316, 2017, 2018 WL 947893 (Del. Feb. 20, 2018), wherein stockholder-plaintiffs brought an action against the corporate directors of Diamond Resorts, alleging breaches of fiduciary duties with respect to merger disclosures. In Appel the plaintiff alleged that, pre-merger, Diamond failed to disclose to shareholders the concerns of the board chairman (and founder of the company), who was also abstaining on the merger itself–what the Supreme Court described as “no common thing.”

In discussing the importance of the disclosures, the Court observed that the “founder and Chairman’s views regarding the wisdom of selling the Company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal …” And further, it observed that the lack of the disclosure in this case was not inactionable just because the stockholder plaintiff tendered his shares–concerns outside the disclosures, such as the costs of litigation and the fact that capital can be tied up in appraisal (subsequently mitigated in some respects by legislative changes providing for prepayment), may well motivate a shareholder.

Here we have an example of disclosure litigation and appraisal being intertwined. While appraisal is a post-closing remedy, and thus a shareholder seeking appraisal does so after the merger and with whatever disclosures were made as they are, the Supreme Court recognizes that the disclosures themselves, if fulsome and sufficient, may motivate investors to seek appraisal. When those disclosures are deficient, one of the impacts may be denying investors who have rightful appraisal remedies a fair chance to decide.

See the decision in Appel here.

Yes, according to this posting.  Delaware law requires that a shareholder seeking appraisal must not have “voted in favor of the merger” (which is impossible for nonvoting common stock) nor “consented thereto in writing pursuant to Section 228.”  The mere fact that stock is issued as non-voting, as some recent IPOs have done, does not strip it of appraisal rights.

Seven years ago this week, in Roam-Tel Partners v. AT&T Mobility, C.A. 5745-VCS (Del. Ch. Dec. 17, 2010), then-Vice Chancellor Strine held that in a short-form merger, a stockholder can revoke its prior waiver of its appraisal rights within the twenty-day statutory election period, absent any prejudice to the corporation.  In that case, the stockholder submitted to the company a letter of transmittal along with his stock certificates, but then changed his mind, returning their (uncashed) check and timely demanding appraisal.  The court compared his initial decision in accepting the merger consideration to that of submitting a proxy in a long-form merger, which is freely revocable at any time prior to the shareholder vote.

In such transactions, shareholders are thus permitted to reverse their tender and opt instead to appraise so long as they do not actually accept the merger consideration and submit a timely appraisal demand within the statutory period.

The Vanderbilt Law Review published this note on Vice Chancellor Laster’s disqualification of stockholders in Dell who had inadvertently voted in favor of the merger, about which ruling we’ve posted before.  This note breaks down that ruling and discusses the court’s strict requirements for appraisal procedure and its affirmation that share-tracing is not required of appraisal petitioners.

On May 11, Vice Chancellor Laster issued an opinion in the Dell case denying the T. Rowe Price lead petitioner’s entitlement to proceed with its appraisal case on the grounds that it (inadvertently) voted in favor of the merger, when it should have abstained or voted against.  The ruling did not address the underlying valuation issue, which is still outstanding.

The highlights of this ruling:

  • The record evidence shows that T. Rowe instructed Cede via its custodian to vote in favor of the merger; the arguments that those instructions were mistaken and unintended are irrelevant.
  • The Transkaryotic, BMC Software and com line of cases allowing appraisal arbitrage is irrelevant, as those cases involved an absence of proof regarding how the petitioners’ shares were voted; here there is record evidence of how those shares voted. It is not enough to rely on Cede having generally voted enough shares against the merger as was true in the Transkaryotic cases. To read more from previous posts on this topic, click here and here.
  • Also irrelevant was the apparent confusion caused by the proxy statement that was issued after the shareholder meeting was rescheduled, telling shareholders that that there was no need to re-vote if they had previously voted (and here, T. Rowe had previously voted “Against”).
  • The court was unapologetic and unequivocal in reaching this decision. This is unlike the court’s July 2015 opinion which dismissed approximately 1 million petitioning shares based on the violation of the continuous holder requirement, in which the chancery court so much as asked the Supreme Court to reverse that decision.  That decision arose from certain petitioners’ custodians having directed Cede to re-certificate the shares in the names of their own nominees rather than that of Cede.
  • Rowe was given the merger price, without interest (the merger closed in October 2013).