EMC Ins. Grp., Inc. v. Shepard

960 N.W.2d 661

EMC INSURANCE GROUP, INC., Appellee,

v.Gregory M. SHEPARD, Appellant.

No. 20-0698

Supreme Court of Iowa.

Submitted April 14, 2021

Filed June 11, 2021

Thomas K. Cauley, Jr. (argued), Sidley Austin LLP, Chicago, Illinois, and Steve Eckley of Eckley Law PLLC, Des Moines, for appellant.

Beth I.Z. Boland (argued), Eric G. Pearson, and Joseph S. Harper of Foley & Lardner, LLP, Boston, Massachusetts, and Michael W. Thrall, Mark C. Dickinson, and Lynn C. Herndon of Nyemaster Goode, P.C., Des Moines, and for appellee.

Stephen E. Doohen of Whitfield & Eddy, P.L.C., Des Moines, and Gregg M. Mashberg, Margaret A. Dale, and Brian A. Hooven of Proskauer Rose LLP, New York, New York, for amicus curiae The Depository Trust Company.

Waterman, J., delivered the opinion of the court, in which all justices joined.

WATERMAN, Justice.

In this appeal, we must decide whether the district court correctly entered summary judgment against an investor on grounds he failed to exercise his appraisal rights in a merger. The controlling statute, Iowa Code section 490.1303(2)(a ) (2019), requires a beneficial shareholder to submit the written consent of "the record shareholder" to demand appraisal. The investor, the beneficial owner of 1.1 million shares, received $36 per share ($39.6 million) when the merger transaction closed. He objected to the merger and, through his attorney and broker, sought to exercise his appraisal rights but never obtained the written consent of Cede & Co. (Cede), shown on the corporation's records as the record shareholder. Another dissenting investor successfully exercised his appraisal rights by obtaining the timely consent of Cede. The corporation filed this declaratory judgment action and moved for summary judgment, which the district court granted. The investor appealed and we retained the case.

On our review, we determine that Cede was the sole record shareholder as a matter of law for the disputed shares. The investor, lacking Cede's consent, failed to validly exercise his appraisal rights that have been extinguished. His waiver and estoppel arguments fail. For the reasons explained below, we affirm the district court's summary judgment against the investor.

I. Background Facts and Proceedings.

The material facts in this case are undisputed. Employers Mutual Casualty Company (EMCC) was the majority owner of EMC Insurance Group, Inc. (EMCI). Gregory Shepard was the beneficial owner of 1.1 million shares of EMCI stock. Shepard held these shares in two brokerage accounts at Morgan Stanley Smith Barney LLC (Morgan Stanley), a Depository Trust Company (DTC) participant.¹ As the DTC explained in its amicus curiae brief in this appeal, participants

deposit securities into their DTC accounts for "book-entry" services; i.e., transfer of beneficial ownership interests by means of automated credits and debits to securities accounts, rather than actual transfer of record ownership. Securities deposited at DTC for book-entry services are registered on the books and records of the issuer in the name of DTC's nominee, Cede & Co., which becomes the record (legal) owner of the shares.

This case arises from the merger of EMCC and EMCI. Before the special meeting for this proposed merger, EMCI's transfer agent, AST, sent EMCI a list of record shareholders as of August 8, 2019 (the record date), eligible to vote at the special meeting (the Record Shareholder Voting List). AST was in charge of maintaining EMCI's records of its registered shareholders. This list indicated that Cede held 9,432,555 shares as of the record date for the special meeting. AST also sent EMCI a spreadsheet on the day of the special meeting and included the registered shareholders of the company (the Record Shareholder Payment List). Neither Morgan Stanley nor Shepard appeared as registered shareholders on either of these lists.

On August 8, EMCI mailed to the company's shareholders and filed with the Securities and Exchange Commission the "EMC Insurance Group Inc. Definitive Proxy Statement on Schedule 14A," (Proxy Statement), which provided:

Beneficial owners of shares of common stock held of record in the name of another person, such as a bank, broker or other nominee, may assert appraisal rights only if the shareholder submits to the Company the record holder's written consent to the assertion of such rights ....

The Proxy Statement told shareholders that all shares of common stock would "automatically be cancelled and cease to exist, except for the right to receive the merger consideration" at the time of the merger. In order to avoid this outcome, shareholders were required to "demand[ ] and perfect[ ] their right to appraisal of their shares in accordance with Division XIII of the Iowa Business Corporation Act. " (Emphasis added.) The statement included the following admonition:

The Company urges you to read the entire proxy statement, including the annexes and the documents referred to or incorporated by reference in the proxy statement, carefully, as it sets forth the details of the merger agreement and other important information related to the merger.

Under "Dissenters’ Rights to Appraisal," the company repeated:

You are encouraged to read Division XIII of the Iowa Business Corporation Act carefully and in its entirety. Moreover, due to the complexity of the procedures for exercising the right to seek appraisal, shareholders who are considering exercising such rights are encouraged to seek the advice of legal counsel. Failure to comply with these provisions may result in loss of the right of appraisal. Any holder of common stock who loses his, her or its appraisal rights will be entitled to receive the merger consideration of $36.00 per share in cash if such person is a shareholder of the Company as of the effective time of the merger.²

On September 10, EMCI received a letter from Cede submitted on behalf of one of EMCI's beneficial shareholders (the other dissenter), who had also obtained certificates for its shares and deposited them with EMCI. That letter stated that Cede was the nominee of DTC, "a holder of record of shares [of EMCI]," and that, "[i]n accordance with instructions received from Participant on behalf of Beneficial Owner, we hereby assert appraisal (or dissenters’) rights with respect to the Shares." The Record Shareholder Payment List had the shares of the other dissenter recorded with the notation "CEDE & CO FBO DISSENTER."

On September 12, EMCI obtained an Omnibus Proxy and Security Position Report (SPR or Cede Breakdown) from DTC. The Omnibus Proxy is the means by which DTC, "the holder of record for depository-eligible securities, transfers the right to vote with respect to those securities to the DTC participants that hold record date positions." Proxy Services , DTCC, (emphasis added) https://www.dtcc.com/settlement-and-asset-services/issuer-services/proxy-services [https://perma.cc/D32H-JMZS]. The Cede Breakdown includes detailed share and contact information for each participant. Id. The September 12 Omnibus Proxy provided that Cede appointed the person or entity named in the attached Cede Breakdown to vote the shares opposite its name. The September 12 Cede Breakdown identified Morgan Stanley as a participant with respect to 1,123,502 shares of DTC's total position in EMCI. Shepard's name was not on the Cede Breakdown.

On September 16, Thomas Cauley, Shepard's attorney, sent EMCI notice of Shepard's "intent to demand payment pursuant to Iowa law" and attached Shepard's vote against the merger. The next day, Cauley sent another letter to EMCI that enclosed a September 17 letter from Shepard's broker, Morgan Stanley (the Morgan Stanley Letter). Cauley indicated the enclosed letter confirmed Shepard was authorized to exercise appraisal rights with respect to the 1.1 million shares of EMCI common stock that he owned. The Morgan Stanley Letter stated that Shepard maintained two brokerage accounts at Morgan Stanley. It stated his shares held in these accounts were "held in street name and Morgan Stanley's records reflect that the Client is the owner of record of the shares held in each account." The letter also stated that

[t]he control agreement between Morgan Stanley, [Heartland Bank and Trust Company (HBTC)] and the Client does not restrict the Client's ability to exercise his voting and appraisal rights with respect to the shares of EMCI, however, Morgan Stanley makes no representation regarding any other agreements that may exist between HBTC and the Client.

After receiving these letters, Todd Strother—the Senior Vice President, Chief Legal Officer, and Secretary of EMCI—spoke by phone with a representative of AST, who confirmed EMCC, through AST, was to pay Cede for the 9,270,528 shares beneficially owned through it, including Shepard's shares (the DTC Payment). Cede would then distribute the DTC Payment to its participants, who in turn would distribute the funds to the ultimate beneficial holders of EMCI's common stock. AST confirmed Shepard had not requested his shares be removed from Cede's record ownership and that Cede would not make the distribution payment to any of the beneficial shareholders unless and until it received $36 per share for all of its shares reflected on the Record Shareholder Payment List.

On September 18, EMCI shareholders met and voted to approve the merger. Effective September 19, EMCC purchased the remaining outstanding shares of EMCI for $36 a share. The Agreement and Plan of Merger (Merger Agreement) controlled the terms of the merger and required that all shares of EMCI be converted into the right to receive $36 in cash, without interest (the Merger Consideration). The only shares exempted from this payout were those held by shareholders who demanded and perfected their appraisal rights and those held by EMCC and certain EMCI-affiliated entities. Section 1.6 of the Merger Agreement stated:

[A]ll Company Dissenting Shares held by shareholders who shall have failed to perfect or ... lost

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