Corporate Governance

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

By J Robert Brown Jr.

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

The opinion reemphasized that only record owners had the right to execute a consent (despite the fact that Section 228 applied only to "holders" of outstanding stock).   Cede, however, constituted the record owner.  In order to get the voting rights to the depository participants, the court relied on the "inevitability" of the omnibus proxy.  See Id.  ('I view Olson as recognizing the reality that DTC inevitably transfers voting authority to its participant member banks and brokers, making it unnecessary to provide specific evidence of proxy authority at the time the broker consent is delivered.').  Moreover, this inevitability was supported by strong policy justifications.  See Id. ('I believe it will help rather than harm our law to treat the DTC participant banks and brokers who appear on the Cede breakdown as stockholders of record.'). 

It is hard to argue with the characterization of the omnibus proxy as a formality.  Yet such a characterization is not typically a basis for disregarding legal requirements.  See In re Appraisal of Transkaryotic Therapies, Inc., 2007 Del. Ch. LEXIS 57  (Del. Ch. May 2, 2007)(noting that with respect to appraisal rights, "compliance with the statutory formalities has been strictly enforced").  Nor can we disagree with the "inevitability" of the omnibus proxy. 

Nonetheless, the analysis is unusual.  The "inevitability" of the omnibus proxy is a byproduct of private ordering, a concept favored by the Delaware courts.  See Williams v. Geier, 671 A.2d 1368, 1381 (Del. 1996)("At its core, the Delaware General Corporation Law is a broad enabling act which leaves latitude for substantial private ordering, provided the statutory parameters and judicially imposed principles of fiduciary duty are honored.").  The court is, therefore, taking the practice of private parties and allowing it to fulfill a statutory requirement.  The analysis does not take into account the possibility that, under private ordering, the common practice could change. 

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.

Full post as published by The Race to the Bottom on March 18, 2010 (boomark / email).