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Merion Capital LP v. BMC Software, Inc.

Court of Chancery of Delaware

January 5, 2015

MERION CAPITAL LP and MERION CAPITAL II LP, Petitioners,
v.
BMC SOFTWARE, INC., Respondent.

Date Submitted: October 7, 2014

Steven T. Margolin, Marie M. Degnan, and Phillip R. Sumpter, of ASHBY & GEDDES, Wilmington, Delaware, Attorneys for Petitioners.

Collins J. Seitz, Jr., David E. Ross, and S. Michael Sirkin, of SEITZ ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; OF COUNSEL: Yosef J. Reimer, P.C., Devora W. Allon, and Ryan D. McEnroe, of KIRKLAND & ELLIS LLP, New York, New York, Attorneys for Respondent.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor

This action, and a similar case in which I am simultaneously issuing a memorandum opinion, [1] concern an interpretation of the standing requirements under the appraisal statute, 8 Del. C. § 262, as amended in 2007. The respondent company alleges that the amendment altered those standing requirements, which precludes the petitioning stockholders' standing here. Accordingly, the respondent company seeks summary judgment.

I. BACKGROUND FACTS

A. The Merger

This appraisal action stems from a take-private merger between Respondent BMC Software, Inc. ("BMC") and two Delaware corporations formed by a consortium of private equity buyers solely for the purpose of taking BMC private-Boxer Parent Company Inc. and its wholly owned subsidiary Boxer Merger Sub Inc. (collectively, "Boxer").[2] BMC, also a Delaware corporation, is "one of the world's largest software companies, " providing "IT management solutions for large, mid-sized, and small enterprises and public sector organizations around the world."[3] On May 6, 2013, BMC and Boxer entered into an Agreement and Plan of Merger (the "Merger Agreement") whereby Boxer was to acquire BMC for $46.25 per share of common stock.[4]

Petitioners Merion Capital LP and Merion Capital II LP (collectively, "Merion") are self-described "event-driven investment" funds, [5] or, in the words of the Respondent, "hedge fund[s] that specialize[] in appraisal arbitrage."[6]"Appraisal arbitrage" is a phrase commonly used to denote an investment strategy whereby an investor acquires an equity position in a cash-out merger target with the specific intention of exercising the statutory stockholder appraisal right found in 8 Del. C. § 262; in the subsequent appraisal action the court awards the appraisal petitioners what the court determines to be the fair value of the target, which, if the target was undervalued in the transaction, represents a positive return on the arbitrage investor's initial investment. Pursuant to this investment strategy, Merion determined that the "consideration offered in the [BMC/Boxer] merger . . . [was] considerably below the value of BMC" and began purchasing shares of BMC stock on the public market, through a series of brokers, in July 2013.[7] By July 17, 2013, Merion had acquired 7, 629, 100 shares of BMC common stock and, as the beneficial owner of those shares, moved to perfect its right under the appraisal statute.[8]

Because only the record holder of shares can make the statutorily required demand for appraisal on the corporation under Section 262, [9] a beneficial owner seeking appraisal must direct the record holder of its shares to make a demand for appraisal on the beneficial owner's behalf.[10] Typically, according to Merion, a beneficial owner would accomplish this by directing an intermediary broker to direct the record holder to issue the demand; in this instance, however, when Merion attempted to direct its broker to pass along its demand request to the record owner of its BMC shares, Cede & Co. ("Cede"), the nominee of the Depository Trust Company ("DTC"), the broker refused, citing a policy change within the broker company.[11] Merion claims that, as a result, the "unexpected news left [it] with only one path for ensuring that its appraisal demand would be timely submitted-i.e., take the steps necessary to have its holdings in BMC stock withdrawn from the fungible mass at DTC/Cede and registered directly with BMC's transfer agent, Computershare."[12] In other words, Merion sought to become not only the beneficial owner of its shares but also the record holder, so that Merion itself could make the statutorily required appraisal demand on BMC.[13]Over the next few days Merion carried out that task, and on July 19, 2013, Computershare confirmed that it had transferred 7, 629, 100 shares of BMC common stock from the fungible bulk at DTC/Cede to Merion, which now held the shares in record name on its books.[14] On July 22, 2013, Merion delivered its formal demand for appraisal of those shares to BMC.[15]

On the heels of Merion's appraisal demand, on July 24, 2013, BMC held a special meeting of stockholders to vote on the proposed merger of BMC with and into Boxer.[16] Holders of BMC common stock as of the June 24, 2013 record date, representing 141, 454, 283 shares, approved the merger by over a two-thirds vote: 95, 033, 127 shares were voted for adopting the Merger Agreement while 46, 421, 156 shares were not voted for adopting the Merger Agreement.[17]Subsequently, the take-private merger between Boxer and BMC closed on September 10, 2013 with each share of BMC being converted into a right to receive $46.25 in cash.[18]

B. Procedural History

On September 13, 2013, Merion commenced this action by filing its Verified Petition for Appraisal of Stock. In that Petition, Merion represented that it "did not vote [its 7, 629, 100 shares of BMC] in favor of the Merger, [has] not sought to exchange [those shares] for payment from BMC Software in connection with the Merger, and [has] not withdrawn [its] demand for appraisal of [those shares]."[19]Following stipulated discovery between the parties, BMC ...


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