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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.

 

 

For a printable copy of this report with its referenced letters, click here.

Forum Report: Fair Investor Access (Dell Valuation Project)

 

Supporting Practical Choices for Dell, and for Shareholders

Safe appraisal rights without risking deal defeat

Choosing between auction value and fair market value

Defining support to optimize value of appraisal rights

Last week Dell was offered an alternative that it can implement if needed to win support of its proposed buyout, and that allows shareholders to safely choose appraised fair value over the auction-based bid price. The related investor decisions for this week are addressed below.

Safe appraisal rights without risking deal defeat

Responding to investor concerns that negative votes required to secure appraisal rights might contribute to a defeat of the proposed transaction and result in a value-destroying control contest, I have offered Dell or any of the buyout affiliates support of what was termed a “yes-voting” appraisal rights option. This is essentially a more practical alternative to increasing the bid price, that the buyer can present if it decides something is needed to win more support for the transaction. In simplified form, the buyer would give shareholders a choice between the fixed bid price and a right to receive the same “fair value” payment (or an allocated portion) that a court establishes for dissident investors, but make it available to investors who vote in favor of the proposed buyout. Shareholders would therefore be able to secure the appraised fair value alternative without having to vote against the transaction.

The “yes-voting” appraisal rights option is summarized, with explanations of its use to accommodate different levels of investor participation and an analysis of costs compared with bid increases, in this letter to Mr. Dell with an attached copy of the earlier letter to the company’s special committee:

With this option available to the buyout’s proponents, a shareholder can safely assume that its demand for appraisal rights will not actually threaten the transaction. Dell will know the exact number of shares that are subject to written demands they’ve received for appraisal rights. If the numbers they are counting justify the increased cost, they will be able to initiate the “yes-voting” appraisal rights alternative – or a traditional bid price increase – either before the scheduled meeting or for an adjourned or postponed date.

Choosing between auction value and fair market value

While media attention has been focused on debates about the effectiveness of the bidding contest and speculation about whether the bidders might offer a higher price, investors need to focus on the decision that is theirs: the choice between whatever bid the auction produces and an independent court appraisal of Dell’s fair value.

What is familiar to most people as the distinction between an “auction” or “liquidation” value and a “fair market value” for equipment or real estate is similarly recognized in the Delaware provisions for appraisal rights relating to companies. The court is required to make an appraisal of “fair value” based on a long-term investor interest in the business enterprise as a “going concern,” independently of current auction market bidding.[*] And Delaware law allows a company’s investors to choose between the bid price and the long-term fair value.

Now that appraisal rights are a practical alternative, the real money for investors is in an analysis of the difference between auction and fair market values.

Defining support to optimize value of appraisal rights

During the next few days we will be seeking the views of investors who are reserving appraisal rights, as well as those of you who have expressed interest in acquiring or trading the rights, to develop final definitions of the support arrangements to be provided by the Dell Valuation Trust. Forum participants who can justify the attention will be welcomed to review a confidential draft of the Trust’s organization plan and offer suggestions for its refinement. Any brief suggestions or observations will also be appreciated, of course, to help us understand how your interests can be most effectively supported.

We expect to have the Trust’s plan in final form by the end of this week, so that it can start offering whatever support services you need to realize the full value of eligible appraisal rights.

GL – July 8, 2013

Gary Lutin

Chairman, The Shareholder Forum

575 Madison Avenue, New York, New York 10022

Tel: 212-605-0335

Email: gl@shareholderforum.com

 

 

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.