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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:

Court considers "fair value" defined by market pricing, eliminating appraisal as protection from opportunistic buyouts

 

For the full decision reported below, see

Note: An earlier version of the article below, which was updated to add commentary and eliminate reference to the court decision's controversial endorsement of "efficient market hypothesis" as a basis for valuing companies, was distributed to Forum participants shortly after its initial publication on December 14, 2017.

 

Source: Reuters, December 14, 2017 article (updated)

#Business News    December 14, 2017 / 12:10 PM /  updated 05:46pm EST

Court reverses Dell buyout ruling that alarmed dealmakers

Tom Hals

WILMINGTON, Del. (Reuters) - Delaware’s Supreme Court ruled on Thursday that a lower court erred in finding that the 2013 buyout of computer maker Dell Inc was vastly underpriced, in an opinion that will likely restrict a hedge fund strategy aimed at wringing cash from mergers.

A Dell logo is seen in this illustration picture taken in Sarajevo, Bosnia and Herzegovina, October 12, 2015. REUTERS/Dado Ruvic

Thursday’s ruling stems from an “appraisal” lawsuit, which allowed Dell shareholders who opposed the $24.9 billion buyout to ask a judge to determine the fair value of their stock.

Last year, a Delaware Court of Chancery judge ordered Dell to pay Magnetar Capital and other Dell investors $17.62 for each of their 5.5 million shares, well above the $13.75 per share deal price paid by Michael Dell and Silver Lake Partners.

The Supreme Court said Vice Chancellor Travis Laster abused his discretion by rejecting the deal price as a way to measure the fair value of Dell stock.

Dell declined to comment. Stuart Grant, the lawyer who represented the investors seeking appraisal, did not immediately respond to a request for comment.

The Supreme Court opinion will likely be welcomed by corporate dealmakers who have warned that Laster’s ruling would encourage hedge funds to seek a quick profit by scooping up shares just before a deal closes, then pursuing appraisal.

As corporate lawyers express it, Dell was properly shopped to potential buyers such as Blackstone and the price was driven up during the process.

However, there was plenty of criticism of the sale. It was approved by a slim majority of shareholders. Billionaire investor Carl Icahn encouraged dissatisfied Dell shareholders to seek appraisal.

Laster said he rejected the use of deal price to determine fair value because private equity buyers and management-led buyouts inherently undervalue a company.

The Supreme Court said Laster should have given “heavy weight” to the deal price, given the evidence of fair play and market efficiency in the sale.

The Supreme Court remanded the case to Laster and said he should follow the ruling’s guidance to determine fair value, which the court suggested should be the deal price.

“We give the vice chancellor the discretion on remand to enter judgment at the deal price if he so chooses, with no further proceedings,” said the 82-page unanimous opinion written by Justice Karen Valihura.

In an August appraisal ruling, the Supreme Court said Chancellor Andre Bouchard erred in finding payday lender DFC Global Corp was sold too cheaply and criticized his finding that private equity buyers do not necessarily pay fair value.

Larry Hamermesh, a professor at the Delaware Law School, said the two rulings taken together will reduce appraisal cases, continuing a recent trend of weeding out what the court sees as weaker shareholder lawsuits.

“The whole program here since Leo Strine became chief justice is about getting rid of the crappy lawsuits,” Hamermesh said.

Strine took over the court in 2014.

Reporting by Tom Hals in Wilmington, Del.; Editing by Chizu Nomiyama and Matthew Lewis

 

© 2017 Reuters All Rights Reserved

 

 

 

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.

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