Kurz v. Holbrook: Shareholder Voting, Omnibus Proxies, and the Role of DTC: The Role of the Omnibus Proxy

We are discussing Kurz v. Holbrook, 2010 Del. Ch. LEXIS 24 (Del. Ch. Feb. 9, 2010).

The most significant long term consequence of the decision, however, was probably the analysis of voting and the implications for a state law system built around record ownership. 

The consents solicited by the TBE Group included shares held by street name owners.  Street name owners operate in a system that involves at least three layers.  These owners hold shares in accounts at brokers (and sometimes banks).  The brokers and banks, in turn, place the shares owned by all of their customers in a depository, DTC (actually held in the name of Cede).  It is Cede that appears on the list of record owners and has voting rights under state law. 

DTC, however, has no interest in voting the shares.  Instead, voting rights are transferred to brokers and banks through the mechanism of an omnibus proxy.  Exchange Act Release No. 48008 (June 10, 2003)(“Specifically, for solicitations when an issuer has announced an annual or special shareholders meeting or consent solicitation and where a record date has been established, DTC will assign applicable Cede & Co. voting rights or consenting rights to its participants that have securities credited to their accounts on the record date, will issues an omnibus proxy, and will forward it to the issuer or trustee.”)

Brokers and banks handle this authority differently.  Banks typically execute a proxy in favor of their  account holders, giving them the right to vote the shares.  Brokers, in contrast, retain voting rights and seek from street name owners the instructions on how to vote.  It is the broker, however, that actually executes the proxy card.

With respect to consents, the rules are the same.  Section 228(c) provides that consents must be executed by the “"holders of outstanding stock.”  This has been interpreted to mean record owners. See Freeman v. Fabiniak, 1985 Del. Ch. Lexis 486 (Del. Ch. Aug. 15, 1985); Grynberg v. Burke, 1981 Del. Ch. Lexis 487 (Del. Ch. Aug. 13, 1981).  

In this case, however, DTC never executed the omnibus proxy.  As a result, under a conventional analysis, voting rights remained with DTC.  They were never transferred to the brokers and banks.  The brokers therefore lacked the authority to vote the shares.  The case nonetheless did not follow the predictable pattern.  VC Laster held that the omnibus proxy was not necessary and that the brokers in fact had the voting rights.  As a result, the consents were deemed valid. 

VC Laster got to the result in two ways.  First, he concluded that the omnibus proxy was a “formality” and could simply be ignored.  Second, he concluded that the Cede breakdown (the list of the participants in DTC and their holdings) was part of the ownership list of the company.  We discuss these reasons in the next few posts. 

For more on the entire system of beneficial ownership and the role of the depositories, see The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?

The opinion and a number of primary materials are posted at the DU Corporate Governance web site.

2007 Del. Ch. LEXIS 57, 2007 WL 1378345, at *3-4 (declining under present law to look behind the 16 million shares of stock not voted by Cede in favor of a merger to determine whether hedge funds could seek appraisal for 11 million shares).