In In re Appraisal of Transkaryotic Therapies, Inc., 2007 WL 1378345 (Del. Ch. May 2, 2007) the Delaware Court of Chancery held that a stockholder of record who holds shares on behalf of many beneficial owners may perfect appraisal rights under § 262 of the Delaware General Corporation Law–Delaware’s stockholder appraisal or “dissenters’ rights” statute–without establishing that the particular shares for which appraisal is sought were not voted in favor of the merger, provided the total number of shares held by the record stockholder and not voted in favor of the merger exceeds the number of shares for which that record stockholder seeks appraisal. The Court reasoned that “based on the literal terms of the statutory text and under longstanding Delaware Supreme Court precedent, only a record holder…may claim and perfect appraisal rights. Thus, it necessarily follows that the record holder’s actions determine perfection of the right to seek appraisal.”

This action originated from a merger of Transkaryotic Therapies, Inc. (“TKT”) with and into a wholly owned subsidiary of Shire Pharmaceuticals Group plc (“Shire”). On April 21, 2005, TKT announced a definitive merger agreement with Shire under which Shire would acquire TKT for $37 per share in cash. The TKT board of directors set June 10, 2005, as the record date for determining which stockholders were entitled to vote on the proposed merger. On July 27, 2005, a special meeting of the TKT stockholders was held to vote on the proposed merger. At the meeting, approximately 52% of the TKT shares entitled to vote were voted in favor of the merger. The merger was consummated shortly thereafter.

As of the record date, the nominal petitioner, Cede & Co. (“Cede”), was the record holder of approximately 29.7 million shares of TKT. Cede voted approximately 12.9 million shares in favor of the merger, approximately 9.9 million shares against it, and abstained or did not vote approximately 6.9 million shares in connection with the merger. On the record date, petitioners were beneficial owners of approximately 2.9 million of the approximately 11 million shares for which petitioners sought appraisal. Petitioners purchased the remaining approximately 8 million shares after the record date, but before the effective date of the merger.

TKT moved for partial summary judgment seeking a ruling that petitioners were not entitled to appraisal of the approximately 8 million TKT shares that petitioners purchased after the record date. TKT argued that an appraisal petitioner bears the burden of proving compliance with § 262; and, where a petitioner cannot demonstrate compliance, the court shall disqualify that petitioner’s shares from the appraisal proceeding. TKT’s argument relied on its interpretation of the statutory text of § 262. TKT argued that § 262 necessitates stockholders seeking appraisal to satisfy the first three requirements of § 262(a) as to the same shares. TKT argued that § 262(a) requires the stockholders to hold “shares of stock” on the date of making demand, to make a demand for appraisal “with respect to such shares,” and to hold “such shares” continuously through the effective date of the merger. The statute’s final requirement, however, states that the “stockholder” must refrain from voting in favor of the merger. Accordingly, TKT argued that a stockholder seeking to establish compliance with § 262 must demonstrate that the particular shares as to which demand was made were not voted in favor of the merger.

TKT argued that petitioners could not establish that the disputed shares were not voted in favor of the merger. TKT also argued that petitioners could not rely on Cede’s negative votes because there was no proof that those shares were the shares that petitioners held. There were approximately 16.8 million TKT shares owned by Cede that could be considered “no votes” and, therefore, “eligible” for an appraisal demand (9.9 million “no votes” together with 6.9 million abstentions). Thus, according to TKT, petitioners were not entitled to appraisal of the disputed shares as a matter of law.

Petitioners argued that the necessary inquiry is determining what shares the record holder, not the beneficial owner, holds at the time of the record date. Petitioners stressed that the term “stockholder,” under § 262, refers only to the record holder. The Court adopted petitioner’s position and also cited to precedents prohibiting inquiry into the relationships between Cede as record holder and the beneficial owners. Thus, the Court held that only Cede’s actions were relevant and that, because the number of shares Cede held and did not vote in favor of the merger exceeded the number of shares for which Cede demanded appraisal, Cede was entitled to appraisal for all shares as to which demand had been made.

The Court noted that any policy concerns implicated by its ruling (i.e., that the goals of § 262 will be distorted “by allowing it to be used as an investment tool for arbitrageurs as opposed to a statutory safety net for objecting stockholders”), to the extent such concerns are valid, should be addressed by the legislature, because as currently drafted, § 262 dictates the Court’s conclusion.