Business Day

Your Rights, Buried in Paperwork

JULY 19, 2014

When shareholders receive takeover bids for their companies, they may feel like celebrating. But what if the buyout price doesn’t fully reflect a fair value for the company?

That was the question asked by a group of more than 100 Dell shareholders last year as that computer giant was being taken private by its founder, Michael S. Dell, for nearly $25 billion. To get an answer, they sought an independent appraisal of the company, a process now being overseen by J. Travis Laster, a vice chancellor in the Delaware Chancery Court.

Now, however, a court filing by Mr. Dell has raised still another question among these shareholders: Is the founder trying to hobble the appraisal process by making it more costly and prolonged than it needs to be?

Seeking an appraisal of a takeover bid is the right of all shareholders of companies incorporated in Delaware. This process, once obscure, has become more popular in recent years as the ranks of activist investors have grown.

In such cases, a judge hears from valuation experts on both sides of a deal and then decides whether a buyout price was fair.

In the Dell matter, if the court rules that the $13.75 per share that Mr. Dell and his co-buyer, Silver Lake Partners, paid for the company was too low, the buyers will have to pay up. If the court determines that the price was too generous, the shareholders seeking appraisal rights will end up receiving less than the investors who have already tendered their shares in the deal.

Studies have shown that appraisal-rights cases very often result in higher valuations for the shareholders pursuing them. One downside, however, is that the appraisal process eats up a lot of time. Typically, these cases take 18 months to two years to adjudicate; the company shares held by the investors seeking an appraisal are tied up during that period.

The Dell case may take even longer than usual, though, thanks to a recent legal move by Mr. Dell’s representatives. The maneuver also may discourage shareholders in future appraisal cases from exercising their rights.

In a court filing on July 9, Mr. Dell’s lawyers demanded extensive records from January 2011 through May of this year from the shareholders seeking the independent appraisal of the company.

The lawyers began by requesting “all documents and communications concerning any analysis, valuation, financial modeling, estimate or appraisal, conducted by any person, of Dell, Dell’s market, or any assets, liabilities or securities of Dell.”

This was followed by 13 more paragraphs of demands. They included “all documents and communications relating to your investment strategies for trading in Dell securities”; “all documents and communications from you to actual or potential partners, investors, owners, members, equity holders, lenders, banks, investment banks, accountants or other third parties concerning the value of Dell or your investment in Dell at any time”; and “all documents and communications concerning or reflecting your decision to seek an appraisal of your Dell shares.”

Document demands like these are common in shareholder litigation, but not an everyday occurrence in appraisal cases, according to experts in the field.

Darsh Khusial, a patent holder in computer software and Internet technologies, is a Dell shareholder seeking an appraisal. “I decided to become a shareholder when I observed Dell was selling far below its intrinsic value,” he said. “Like Mr. Dell, I didn’t believe that the PC was dead.”

Since the deal was approved, Mr. Khusial added, the personal computer market has turned upward. “I suspect if Dell was to I.P.O. today, it would be valued significantly above the buyout price.”

John Tully, a Dell shareholder who heads Cavan Partners, an investment partnership, is also pursuing appraisal rights. Mr. Tully volunteered to be an investor representative in the process.

“To demand all this documentation is quite onerous,” he said in an interview last week. “If this kind of thing became commonplace, it would pretty much discourage people from demanding appraisals.”

I asked the company why it would make such lengthy demands of the shareholders who were just exercising one of their rights. A spokesman said it had served document requests only on the 28 shareholders who volunteered to represent all the investors seeking appraisal rights. “Discovery of this nature is usual in appraisal cases such as this one,” he said, declining to comment further. 

If it will be onerous for Mr. Tully, who is not a large shareholder, to answer Mr. Dell’s demands, imagine how burdensome it would be for a big mutual fund company to respond. The company would have to produce documents relating to Dell from an array of portfolio managers whose funds hold the stock, as well as myriad research analysts and other employees. That’s the problem facing T. Rowe Price, one of the investors seeking an appraisal.

Stuart M. Grant, a partner at Grant & Eisenhofer, a law firm that represents the shareholders who want an appraisal, said he would most likely ask the court to rule that the information requested by Mr. Dell should not be discoverable.

Gary Lutin, a former investment banker, oversees the Shareholder Forum, an independent creator of programs devised to provide information investors need to make astute decisions. The Dell appraisal-rights case is a current program of the forum, and last week, he asked Mr. Dell’s lawyers to withdraw the demand.

“Long-term investors need a secure right to realize the long-term value of a company,” Mr. Lutin told me. “Without it, you can’t justify funding an enterprise, and our capital markets won’t work. Every investor depends on that right, and it’s our responsibility to protect it.”

Perhaps the judge overseeing the appraisal process will take an interest in the chilling effect that the Dell filing might have on future shareholders’ efforts to seek independent appraisals.

“If Dell is successful in demanding petitioners produce documents over the period they outlined, it would be a blow to all minority shareholders demanding appraisal rights,” Mr. Khusial said. “One of the few options minority investors have in a buyout would become inefficient and impractical.”

A version of this article appears in print on July 20, 2014, on page BU1 of the New York edition with the headline: Your Rights, Buried in Paperwork.

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