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The Shareholder Forumtm

special project of the public interest program for

Fair Investor Access

Supporting investor interests in

appraisal rights for intrinsic value realization

in the buyout of

Dell Inc.

For related issues, see programs for

Appraisal Rights Investments

Fair Investor Access

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.

 

Forum distribution:

Professional spin confusing valuation standards for appraisal rights

 

The commentary below reflects interpretations of a recent Delaware court decision that have been presented by professionals with interests in discouraging investor use of rights to appraisal of intrinsic value as an alternative to market-priced buyout offers. The judge actually states in the opinion that he resorted to market bid prices because it was the only available reference to value, and not as a preferred reference. In a 38 page opinion reviewing the inadequacies and irrelevance of the expert analyses presented by both sides, the judge summarized his conclusion as follows (page 29 of Huff Fund Investment Partnership v. CKx, Inc. (Del, Ch. November 1, 2013):

In the absence of comparable companies or transactions to guide a comparable companies analysis or a comparable transactions analysis, and without reliable projections to discount in a DCF analysis, I rely on the merger price as the best and most reliable indication of CKx's value.

For an authoritative report of Delaware court standards for valuations in appraisal rights proceedings, see

 

Source: Financial Times Lex, December 2, 2013 commentary

FINANCIAL TIMES

ft.com/lex

  

December 2, 2013 7:12 pm

Dell: fair appraisal

Despite the protests, deal price may be the right price

Those hoping that Dell would slouch into private company obscurity are going to have to wait a little longer. Carl Icahn backed off from his threat to seek appraisal (a judicial review of the deal price) in the Delaware courts but that has not stopped another set of investors, owning about 3 per cent of the shares, from asking a judge to grant them more than the $13.75 per share that a majority of shareholders approved. But the aggrieved should beware. In a recent appraisal ruling involving the company that produces American Idol, the judge said a well-negotiated deal price is as acceptable as one that fancy analysis churns out.

Valuation, like vocal talent, is in the ear of the judge (one hopefully less cruel than that of Simon Cowell). CKx, the producer of American Idol, was taken private in 2011 at $5.50 a share. One shareholder claimed, based on discounted cash flow analysis, that fair value exceeded $9. But since it was unclear how much Fox would pay to keep airing Idol, reliable forecasts did not exist. That, along with the dearth of peer companies, led the judge to sanction the deal price blessed by the board and a majority of shareholders as the best indication of CKx’s fair value.

Dell’s projections were scattered. Its bankers showed scenarios developed by Wall Street, management and consultants all with varying views of personal computer erosion and cost cuts. Assessing how much desktop computer demand would slip and how much Dell’s new businesses would take off makes selecting the right projections difficult. However, peer analysis might be a better tack for the dissenters – Hewlett-Packard shares are up 80 per cent this year.

Even if the judge finds Dell’s $13.75 buyout price to be correct, appraisal is still not a bad gambit. The rules dictate that 5.75 per cent per year be tacked on to the judge’s price.

© The Financial Times Ltd 2013
 

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.