Travis Laster has become a forceful advocate for reform of the system for voting corporate stock and tracking share ownership, and in a Feb. 15 decision he confronted yet another drawback of that system. The Delaware vice chancellor presided over a case in which Dole Food Co. agreed to pay stockholders an additional $2.74 a share plus interest to settle claims that the controlling stockholder David Murdock violated his fiduciary duties to minority stockholders in buying Dole for $1.2 billion, or $13.50 a share, in 2013.
There were 36.8 million shares eligible for the settlement, but claimants submitted "facially valid claims" for 49.2 million shares, a discrepancy that the settlement administrator and class counsel could not resolve because the Depository Trust Co. and Cede Co., which keep the stockholder ledger for public companies, did not receive information about trades made in the three trading days before the deal closed on Nov. 1, 2013, a period in which 32 million Dole shares changed hands. Nor could the DTC/Cede system track short sales made in those three days.
There is no cost-effective way to determine who did own the shares at closing, Laster wrote. Instead, he held that the counsel for stockholders, who were led by Stuart Grant of Grant & Eisenhofer PA in Wilmington and Randall Baron of Robbins Geller Rudman & Dowd LLP should distribute the settlement consideration to Cede and thereby to the custodial banks and brokers whose clients are the economic owners of the shares and let those institutions sort the problem out.
Laster wrote at the end of the opinion that the Dole case raises broader issues: "The problems raised by short sales and trades during the three days before closing appear endemic to the depository system and hence likely infect every claims process. Nothing about either factor was unique to Dole. The only difference was the magnitude of the discrepancy, which made the issues visible."
The judge grappled with another drawback of the current depository system last year when he found that mutual funds sponsored by T. Rowe Price & Associates Inc. could not seek appraisal on the 27 million Dell Inc. shares they owned because the funds had inadvertently voted for the deal, thanks to a clerical error that ended up costing the mutual fund company's investors over $100 million. The error stemmed from the byzantine way in which stock is owned and voted-a "daisy chain," as Laster called it.
He offered a way to untangle the daisy chain in "The Block Chain Plunger: Using Technology to Clean Up Proxy Plumbing and Take Back the Vote," a paper he delivered last fall to the Council of Institutional Investors. Like almost all shareholders, the T. Rowe funds did not own their Dell stock directly. Instead, they were beneficial owners, holding their shares through a custodial bank, State Street Bank & Trust Co., which in turn is a member of the Depository Trust Co., whose nominee Cede was the stockholder of record, as it is for most public companies. State Street in turn used Broadridge Financial Solutions Inc. to collect and implement voting instructions from account holders. Laster noted in his speech that Broadridge "controls over 98% of the U.S. market for proxy vote processing services." T. Rowe added yet another intermediary, since it uses Institutional Shareholder Services Inc. to notify its funds about upcoming votes, provide voting recommendations, collect voting instructions and deliver them to Broadridge.
Laster argued in his speech that the contorted way in which shares are held and voted makes precise vote counting impossible. He noted that one prominent Wilmington lawyer estimated that in a corporate election closer than 55% to 45%, "There is no verifiable answer to the question, 'Who won?'"
Many lawyers have also warned that the number of shares on which appraisal could be sought is theoretically infinite because of the oddities of the DTC/Cede system, but those fears had never been borne out until the Dole case, which gives Laster one more powerful example to argue for a much-needed reform of the system.
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