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

The "inevitability" of the omnibus proxy was not the only basis for concluding that the shares of the brokers and banks could be voted.  The opinion also, in a more far reaching manner, opted to integrate the Cede breakdown into the stock ledger, eliminating Cede from the voting process and treating brokers and banks as if they were record owners.  This approach promised to have broad consequences, despite the Vice Chancellor's efforts to suggest otherwise.  

In arriving at the conclusion, the opinion relied on cases involving the disclosure of shareholder lists under Section 220.  Courts in Delaware have required companies to include the Cede breakdown with the list.  This is true even where the company must request the breakdown from Cede.  Yet information produced with the list does not automatically become part of the ledger.   This is true, presumably, with respect to NOBO lists.   See Weisman v. Plains Resources, Inc., 1989 Del. Ch. LEXIS 64  (Del. Ch. June 1, 1989)("In the event Plains has or obtains a list of the names, addresses and number of shares of Plains stock held by beneficial owners (the "non-objecting beneficial owners" or "NOBO" list) under Securities and Exchange Commission Rule 14b-1(c), it shall supply such list immediately to the plaintiff").   

Moreover, there is a significant difference between the type of information in the shareholder list and the information provided by Cede as part of the breakdown.  Companies (particularly large ones) rely on transfer agents to keep ownership records.  VC Laster noted their use as a justification for merging the breakdown into the ledger.  "As I have already noted, many Delaware corporations currently out source their stock ledger to transfer agents. For these corporations, determining whether a holder appears on the stock ledger is already a matter of reaching outside the corporation and asking for the information." 

The focus on "reaching outside the corporation," however, does not capture the true role of transfer agents.  First, companies do not have to use them.  Second, even if they do, these entities are called “agents” for a reason.  Transfer agents are agents of the company.  As such, they are under the control and supervision of the company and, more importantly, the transfer records belong to the company.  What are the records?  In most cases, this means the documentation associated with share transfers, usually the issued or canceled stock certificates.  As a result, record ownership can be verified at any time by the company and its transfer agent.  

The Cede breakdown is a very different form of documentation.  It is not maintained by the company or an agent of the company.  DTC may have a contractual relationship with the company but it is likely not an agent.  Moreover, the records that go into the DTC/Cede determinations of ownership below to DTC.  As such, they are not necessarily available to the company.  Said another way, DTC reports the number of shares owned by brokers and banks and there is no easy way for the company to verify their accuracy.  Thus, to the extent there is a mistake (for example, shares are incorrectly allocated among the brokers and banks), there is little room or opportunity for the company to know about it, much less correct it.  The opinion does not take these types of differences into account.

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.