Corporate Governance

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

By J Robert Brown Jr.

Vice Chancellor Laster only recently joined the bench of the Delaware Chancery Court.  He had considerable experience practicing before the Delaware courts, something that shows in his decision making on the Chancery Court to date.  He has already written a number of opinions, some lengthy, that are generally thorough but accessible in their prose.   Take a look at Paolino v. Mace Security, for example, a case involving advancement of attorneys fees by a CEO subjected to counterclaims in an action arising out of his dismissal. 

Any notion that he would enter the legal fray quietly and gradually was dispelled with his 70 page decision in Kurz v. Holbrook, 2010 Del. Ch. LEXIS 24 (Del. Ch. Feb. 9, 2010).  The case is to some degree a tutorial on various aspects of Delaware law.  There is a detailed discussion about the appropriate methods of removing directors from the board.  The wide ranging discussion, however, likely invalidates certain types of bylaws that mandate the resignation of directors who cease to be qualified after joining the board.

Most interestingly is the discussion of the voting system for owners using street name accounts.  In public companies, these shares are typically held by brokers (and sometimes banks) who then place them into a central depository (The Depository Trust & Clearing Corporation or DTC).   It is the depository that ultimately holds record title and is treated as the owner under state law.  Typically, however, DTC executes an omnibus proxy in favor of the depositing banks and brokers, tranfering voting rights to them.

In this case, the parties engaged in a consent contest.  Both, however, failed to obtain the omnibus proxy.  The Chancery Court had to determine whether the votes cast by assorted brokers could be counted in the absence of the formalistic but necessary piece of paper.   In concluding that they could, VC Laster effectively set aside the obligation to focus on record ownership.  The case raises any number of questions about the continued reliance on record ownership in other circumstances.

We will spend a few posts exploring the case and its implications. 

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 08, 2010 (boomark / email).