mentions, in a footnote no less, these systemic issues could be prevented by using a decentralized ledger, where every broker-dealer could instantly record trades expeditiously made available to all participants, clarifying ownership for every share within the system at every moment with minimal delays. Ample case law demonstrates similar identification issues with proxy voting and merger consideration payouts. Even more difficult to trace are short sales where holders of record are unaware that their stock was borrowed by other investors for sale to third parties and returned after closing out their short position, which may result in contemporaneous ownership claims to the same share. For actively traded stock, this can result in volumes of millions of shares temporarily unregistered by DTC. That means even if DTC applies a one-day freeze on trading a company’s stock, pending merger to determine shareholders of record, this snapshot still does not reflect trades within the previous two days. equity market convention based on applicable law, market structures and technological determinants requires stock trades settled T+3, within three business days. In re Dole Food Co.’s main culprits for the discrepancy were delays in registering trades and short-selling. But it was still impossible to ascertain the valid claimants.
An investigation helped to clarify what had produced a disparity as striking as 25% between holders of record with DTC and beneficial owners able to prove a valid claim. This reflects a systemic issue affecting transactions where a centralized ledger held by DTC proves unable to determine ownership of registered shares at a specific point. The Court cut the Gordian knot by disregarding present claims and ordering settlement proceeds distributed to holders of record identified for purposes of merger consideration – foregoing some valid beneficial owners but also preventing dilution of settlement proceeds by disbursing them to 25% more shareholders than should have existed at the time of merger. and foreign securities by retaining custody and changing title by book-entry. DTC was created in 1973 to facilitate clearing and settlement of U.S.
clearing house and equivalent of Euroclear and Clearstream. Investigation by class attorneys failed to establish the “current” owners of class shares, as did investigation at their request by the Depository Trust Company (“DTC”), a subsidiary of the Depository Trust & Clearing Corporation (“DTCC”), the major U.S. By definition, holders of over 12 million of these shares must have lacked entitlement to settlement disbursements, yet all claimant shareholders presented valid evidence of ownership. In February 2017, the Delaware Court of Chancery faced a conundrum: following settlement of a shareholder action after a contested merger, shareholders representing 49,164,415 shares claimed settlement proceeds, but the class contained only 36,793,758 shares.
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