July 26, 2013 Forum Report: Questions about Fairness of Dell Voting Proposal

Forum Home Page see Broadridge note below]

The Shareholder Forum^tm

special project of the public interest program for

For related issues, see programs for

Project Status

Forum participants were encouraged to consider appraisal rights in June 2013 as a means of realizing the same long term intrinsic value that the company's founder and private equity partner sought in an opportunistic market-priced buyout, and legal research of court valuation standards was commissioned to support the required investment decisions.

The buyout transaction became effective on October 28, 2013 at an offer price of $13.75 per share, and the appraisal case was initiated on October 29, 2013, by the Forum's representative petitioner, Cavan Partners, LP. The Delaware Chancery Court issued its decision on May 31, 2016, establishing the intrinsic fair value of Dell shares at the effective date as $17.62 per share, approximately 28.1% more than the offer price, with definitive legal explanations confirming the foundations of Shareholder Forum support for appraisal rights.

Each of the Dell shareholders who chose to rely upon the Forum's support satisfied the procedural requirements to be eligible for payment of the $17.62 fair value, plus interest on that amount compounding since the effective date at 5% above the Federal Reserve discount rate.

Note: On December 14, 2017, the Delaware Supreme Court reversed and remanded the decision above, encouraging reliance upon market pricing of the transaction as a determination of "fair value." The Forum accordingly reported that it would resume support of marketplace processes instead of judicial appraisal for the realization of intrinsic value in opportunistically priced but carefully negotiated buyouts.

For a printable copy of this report, click here.

Forum Report: Fair Investor Access (Dell Valuation Project)

Questions about Fairness of Dell Voting Proposal

Legal analysis of change in practice

Investor policies supporting majority of votes cast

Fairness of minority obstruction

Though voting processes had not been included among the issues defined for attention in the Dell Valuation project, participants in past Forum programs that addressed related issues have encouraged a report clarifying some of the confusion associated with the buyer group proposal of a change in requirements for shareholder approval.[1]

Legal analysis of change in practice

Those of you with questions about the legal foundations of both the old and proposed new variations of “majority of the minority” voting, or about the arguments being presented, are encouraged to read the following commentary that was published a day before Dell submitted his proposal to the special committee:

July 22, 2013, Leonard Chazen of Covington & Burling published in Law360: "Did The Dell Majority-Of-The-Minority Clause Go Too Far?"

Investor policies supporting majority of votes cast

Decisions by a majority of votes cast is strongly advocated by proxy advisors such as ISS[2] and by most institutional investors[3] in elections of directors, for reasons that may be similarly applicable to shareholder decisions about buyout proposals.[4]

Most governance experts and investors also advocate excluding “broker non-votes” – the votes cast by intermediaries for beneficial shareholders who do not actually cast votes – from anything other than routine, uncontested actions such as auditor ratifications.

Both of these policy positions would suggest investor support for eliminating the influence of non-voted shares in a buyout decision. For a determination of support by shareholders who are unaffiliated with the buyout’s proponent, especially in the context of a state law that separately requires approval by a majority of all outstanding shares, it is difficult to think of any rational justification for counting the non-votes.

Fairness of minority obstruction

The Dell situation has raised important questions not only about the fairness of counting non-votes in a “majority of minority” approval, but also about the practicality of allowing a relatively small minority of shareholders to block a transaction. In this case, opposition by less than a third of shares has been able to hold up a transaction that the rest of the company’s shareholders either want or are willing to accept.

♦ ♦ ♦

For those of you concerned with appraisal rights, the proposed change in voting would of course have the advantage of allowing a non-vote that respects the requirements of Delaware law without impairing the rights of shareholders who want to vote for or against the transaction.

Your comments will be welcomed.

GL – July 26, 2013

Gary Lutin

Chairman, The Shareholder Forum

575 Madison Avenue, New York, New York 10022

Tel: 212-605-0335

Email: gl@shareholderforum.com

[1] See July 24, 2013 Wall Street Journal: "Dell Buyout Group Calls for Change in Voting Requirements."

[2] See January 31, 2013, ISS 2013 U.S. Proxy Voting Summary Guidelines, page 20: “Generally vote FOR management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote AGAINST if no carve-out for a plurality vote standard in contested elections is included.”

[3] See, for example, the CalPERS website statement of its policy: “CalPERS believes that in an uncontested director election, a majority of proxies cast should be required to elect a director. In a contested election, a plurality of proxies cast should be required to elect a director.”

[4] For a history of investor advocacy of the “majority of votes cast” standard, with a summary of arguments for and against it, see September 2012, Holly Gregory of Weil Gotshal & Manges in Practical Law, “Trends in Director Elections.”

This project was conducted as part of the Shareholder Forum's public interest program for "Fair Investor Access," which is open free of charge to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants. It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The management of Dell Inc. declined the Forum's invitation to provide leadership of this project, but was encouraged to collaborate in its progress to assure cost-efficient, timely delivery of information relevant to investor decisions. As the project evolved, those information requirements were ultimately satisfied in the context of an appraisal proceeding.

Inquiries about this project and requests to be included in its distribution list may be addressed to dell@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.