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

Before we discuss how VC Laster got to his decision, we will dwell a bit on how he didn't get there. 

The Chancery Court in Delaware is a court of equity.  In this case, the votes collected by a group of insurgents (TBE) were threatened with disqualification because of the absence of an omnibus proxy.  The omnibus proxy is an instrument issued by DTC to the issuer.  In other words, it is not an instrument that insurgent can legally compel or acquire (except to the extent that they obtain a copy under their inspection rights).  While the usual practice is for DTC to simply issue the instrument, any failure can be best addressed by the issuer.

To not count the consents from participants in Cede in this case would not only disenfranchise street name owners but would also penalize insurgents for the absence of an instrument that they cannot compel.   It would also create an incentive for future companies to manipulate the omnibus proxy process in order to prevent insurgents from succeeding. 

This case should have been decided on equitable grounds.  Short, direct and applicable only to this case.  As we'll show in future posts, the efforts to decide the case on much broader grounds raise concerns that need not have been addressed.

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.