Opinion ID: 1548673
Heading Depth: 1
Heading Rank: 16

Heading: Court of Chancery Redefines Stock Ledger

Text: The statutory mandate in section 219(c) provides that only stockholders of record who appear on the stock ledger can vote. Therefore, the Court of Chancery continued its analysis by considering whether the Cede breakdown should be part of the stock ledger for purposes of Section 219(c). It concluded: There is a straightforward basis for doing so, namely our law's long recognition that the Cede breakdown is part of the stock ledger for purposes of Section 220(b). If the Cede breakdown is part of the stock ledger, then the banks and brokers who appear on the Cede breakdown have the power to vote as record holders at a meeting of stockholders or for purposes of taking action by written consent. The history of the depository system is set forth on DTC's website. [41] The holding of securities through DTC has significance under Delaware law because it is Cede, not the DTC-participant banks and brokers, that appears on the stock ledger of a Delaware corporation. The Court of Chancery noted that Cede is typically the largest record holder on the stock ledger of most publicly traded Delaware corporations. Under Delaware law, only stockholders who appear on the stock ledger have authority to vote at a meeting or express consent. The DTC omnibus proxy currently serves as the mechanism by which the federally mandated depository system of indirect ownership through DTC comports with Delaware's system of direct ownership evidenced through the stock ledger. The DTC omnibus proxy operates to ensure the transfer of DTC's voting authority to the participant members. As one treatise explains: Because DTC has no beneficial interest in its shares . . ., it has devised a mechanism to pass on its voting rights. This mechanism, called the `omnibus proxy,' provides for the transfer of DTC's voting right to its clientsthe bank and broker participants. [42] The record reflects that DTC issues the omnibus proxy as a matter of course during the interactions between issuers and DTC that are compelled by the federal securities laws. When preparing for a meeting of stockholders or a consent solicitation, issuers are required by federal law to go through DTC to identify the participant banks and brokers for purposes of distributing voting cards and solicitation materials. [43] An issuer typically starts the process by requesting a Cede breakdown so that it can send out the broker search cards. [44] When the entire process is complete, the issuer provides each bank and broker with sufficient copies of the proxy statement, card, and other materials for distribution to the beneficial owners. [45] Thirty years ago, when the depository system was still new, the Court of Chancery held that a stockholder was entitled to a Cede breakdown under Section 220 when the stockholder sought a stocklist. [46] Subsequent Delaware decisions have consistently ordered the production of a Cede breakdown as part of the section 220 stocklist materials. [47] In this case, the Court of Chancery reasoned that if a Cede breakdown is part of the stock ledger for purposes of Section 220(b), it logically should be part of the stock ledger for purposes of Section 219(c) and should be used to create the stocklist under Section 219(a). The Court of Chancery acknowledged that this conclusion was contrary to the established understanding among practitioners, evidenced by our case law, . . . that DTC (through Cede) is the record holder and that everyone above DTC is a beneficial holder. The Court of Chancery reached that conclusion by characterizing the relationship between DTC and its participant banks and brokers as fundamentally different from the relationships further up the chain. Consequently, the court did not believe that there are any practical or policy-based impediments to treating the Cede breakdown as part of the stock ledger. Nevertheless, it concluded: My ruling does not alter the traditional distinction between record and beneficial ownership. The analysis I have followed does not apply to any entity other than DTC in its role as a federally registered clearing agency. The view from the top of the beneficial ownership chain remains as always: beneficial holders are not record holders. Having completed its analysis, the Court of Chancery declined to follow well-established prior precedents construing the meaning of the term record holder and announced a new interpretation of stock ledger under section 219 of the DGCL: The Cede breakdown showing the banks and brokers who held EMAK stock at DTC as of October 22, 2009, was part of EMAK's stock ledger for purposes of Section 219(c). Those banks and brokers were therefore stockholders of record entitled to express consent to corporate action without a meeting under Section 228(a). Accordingly, the Broadridge omnibus consents validly voted the shares held by those banks and brokers, without the need for a DTC omnibus proxy. The Court of Chancery acknowledged that under section 219(c) it is the stock ledger that determines who are the record holders. It concluded, however, that the Cede breakdown should be considered part of the stock ledger for purposes of Section 219(c), just as the Cede breakdown has long been part of the stock ledger for purposes of Section 220(b). The Court of Chancery recognized that its new interpretation represents a change in how Delaware practitioners understand the stock ledger for purposes of voting. . . . In fact, based upon prior Delaware precedents, the Court of Chancery acknowledged that its own initial view was that the absence of a DTC omnibus proxy would be dispositive. The Court of Chancery noted that the DTC system usually works well. The record reflects that the DTC omnibus proxy is routinely obtained and simply becomes another item on a preparation checklist. In this case, the absence of a DTC omnibus proxy did not result from a breakdown in the DTC system. The failure in this case was attributable to human oversight on someone's party by not making a proper and timely request. The Court of Chancery concluded that insisting on the DTC omnibus proxy would disenfranchise the beneficial owners. To avoid that result it decided that Delaware law would benefit from treating the Cede breakdown as part of the stock ledger for purposes of Section 291(c). The parties have extensively briefed and argued both sides of the issue of whether the Cede breakdown is (or is not) part of the stock ledger for section 219 purposes. Given our ruling invalidating the votes attributable to the Boutros shares, it is unnecessary for this Court to decide that issue, because a decision either way would not alter the result we have reached nor would a gratuitous statutory interpretation resolving this difficult issue be prudent. The human failures that occurred in this case are easily avoidable in the future and may be a one-time anomaly that may not again occur. Moreover, and in any event, a legislative cure is preferable. The DGCL is a comprehensive and carefully crafted statutory scheme that is periodically reviewed by the General Assembly. Indeed, the General Assembly made coordinated amendments to section 219 and section 220 in 2003. Any adjustment to the intricate scheme of which section 219 is but a part should be accomplished by the General Assembly through a coordinated amendment process. Therefore, the Court of Chancery's interpretation of stock ledger in section 219 is obiter dictum and without precedential effect.