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Analysis of “Appraisal Rights” in a Dell Buyout
Shareholder rights to appraised “fair value” of “going concern”
Decisions to reserve rights and choose alternatives
Support of shareholder interests
A project is being organized for Forum participants interested in
considering “appraisal rights” as an alternative to the offered price
in a proposed Dell buyout.
Shareholder rights to appraised “fair value” of “going concern”
As stated in the preliminary drafts of Dell’s proxy statement,
shareholders will be “entitled to have the ‘fair value’ (as defined
pursuant to
Section 262 of the DGCL) of your shares of Common Stock determined
by the Court of Chancery of the State of Delaware and to receive
payment based on that valuation instead of receiving the merger
consideration.”
An analysis of this choice requires both
(a) an
understanding of Delaware legal standards for an appraisal based on a
long-term investor interest in the business enterprise as a “going
concern,” rather than on current market or bidding prices;
and
(b)
access to information needed for analyzing the “going concern” to
determine whether its value can be reasonably expected to exceed the
proposed transaction payment.
While offer prices resulting from competitively bid sales to companies
seeking benefits of a business combination may often exceed the values
that would be appraised for an independent going concern, it is less
common for management buyouts or “going private” restructurings to be
priced at more than what professional investors and bankers consider
to be the intrinsic value of a company. Situations such as the Dell
buyout proposal therefore justify careful analysis.
Decisions to reserve rights and choose alternatives
The process for reserving and securing appraisal rights combines very
sensible decision-making steps and, unfortunately, some challenging
administrative requirements that were defined before the development
of modern securities regulations and financial services. These are the
basic phases and deadlines:
1.
Reserve rights before the vote
– To reserve rights to appraisal, formal demand for appraisal must be
presented prior to the date of the shareholder meeting held for voting
on the proposed transaction, and the shareholder also cannot vote for
approval of the proposed transaction. This step does not commit the
shareholder to proceeding with appraisal rights, since the process
allows shareholders a period to consider alternatives as indicated
below, but the shareholder will not have the option to select
appraisal if the rights are not properly secured at this stage.
2.
Choose between offer price and appraisal within 60 days of “effective
date”
– A shareholder who has reserved rights to appraisal can withdraw the
demand and accept the approved proposal’s offered payment at any time
until 60 days after the date on which the buyout transaction becomes
effective. (The effective date can be a few days after an approving
vote, or in some cases months later.) This option will not be
available, though, if the shareholder has already taken the action
below to become an active petitioner or party in the appraisal action.
3.
Decide whether to be an active or passive participant within 120 days
of the “effective date”
– Shareholders who have secured appraisal rights have until 120 days
after the effective date to decide whether to take an active part in
the court process for appraisal, including the selection of legal and
valuation advisors, or to simply wait as passive participants for a
determination of appraised value and cost allocations.
4.
Settlement opportunities
– Settlement offers can be presented at any time. Typically negotiated
by legal counsel for shareholders who are active parties in the court
appraisal process, settlements are most commonly established several
months after the process starts when both sides have been able to
consider the testimony of valuation experts.
As indicated, this very practical series of choices involves some
fairly burdensome administrative processes. Starting with the first
step’s notice of demand, for example, the formal paper needs to come
from the registered owner of the stock. For most investors who are
beneficial owners rather than directly registered owners, this will
require instructing the shareholder’s broker or custodian to direct
the registered owner, usually Depository Trust, to present the formal
notice. This is a common practice and the requirements should be
readily understood by the lawyers and administrative managers
involved, but it is important to assure correct and timely execution.
The Delaware court requires strict compliance with Section 262’s
provisions to qualify for appraisal rights.
Support of shareholder interests
The purpose of this new Forum project is to identify and support the
needs of Dell shareholders who want to consider appraisal rights.
Requirements of investor information access that are being addressed
generally in the main Dell Valuation project will be more specifically
focused in relation to the nature and timing of appraisal rights
decisions. To support administrative requirements as well as the
appraisal process, we plan to invite the advice of respected experts
and explore possible cooperative arrangements for more effective
management of shareholder interests.
Inquiries about participation in this project will be welcomed, and I
will of course appreciate your suggestions of issues to be addressed.
GL – May 23, 2013
Gary Lutin
Chairman, The Shareholder Forum
575 Madison Avenue, New York, New York 10022
Tel: 212-605-0335
Email:
gl@shareholderforum.com
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