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Informed Investing in Appraisal Rights
Example of easily exploited confusion
Icahn speculation and simple arithmetic
Investing in appraisal rights, like any other investing, is
competitive. You don’t have to be the smartest investor on Wall Street
to win, but you do have to be smarter than the average.
And being smarter means being better informed.
Example of easily exploited confusion
Observing what has been reported about supposed expert views of
appraisal rights during the past few weeks, being better informed than
average should be easy.
An important example is the confused application of court opinions in
breach of duty litigation to theories of how judges will determine
value in appraisal cases. While some elements of valuation are
obviously relevant to both, the standards are essentially different.
First, valuation becomes relevant in a breach of duty case only if a
plaintiff establishes that a board has failed to perform its duties,
justifying court intervention to determine what would have been a fair
price. The kind of pricing that is relevant in those circumstances is
typically current market bidding. For appraisal cases, it does not
matter whether the board has done a good or bad job, since the
appraisal remedy is intended for the very different purpose of
protecting the rights of a stockholder to realize the long term value
of a business when a majority of other shareholders want to sell.
Delaware law provides for a judge to make a completely independent
appraisal of the “fair value” of the standalone “going concern,”
without regard to market bidding. This distinction between auction
price and fair value was explicitly established in a 2010 decision of
the Delaware Supreme Court that has been referenced repeatedly in
Forum reports.
This should help you understand why there have been no cases in the
past twenty years in which the Delaware Chancery court has appraised
value below a buyout price other than in purchases by third parties
and in buyouts of dissident managers.
That does not mean the next court decision will follow the pattern,
but you can assume that it would be difficult for management insiders
backed by professional equity investors to convince a judge that they
knowingly offered to pay more than the standalone value of a going
concern.
Obviously, from all the media and analyst reports of expected court
views of Dell’s auction process, most people do not know the rules for
value determination in appraisal cases. If you know them, it will give
you a legitimate and well deserved information advantage.
These and other elements of appraisal rights, both Dell-specific and
general, will be addressed by members of the “Review Panel” being
organized as part of the Dell Valuation Trust to support your
information requirements.
Icahn speculation and simple arithmetic
Responding to reports that Icahn representatives have said we are
talking, I cannot disclose any information about private
communications in the absence of specific permission. I can, however,
suggest consideration of the following assumptions based on logic and
arithmetic:
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Icahn, like any other investor, should make more money, more
predictably, from appraisal rights than from winning a series of two
proxy fights to reorganize Dell.
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Icahn’s investment style, including stated negotiating objectives,
would benefit more than most from establishing effective
marketability of interests in appraisal rights.
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Icahn should also benefit along with other owners of Dell appraisal
rights from the effective management and consistent definition of
these rights, providing essential support for informed
decision-making and eliminating the confusion that results from
variations in ownership and decision-making rights, differences in
cost and benefit allocations, and discriminatory information access.
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Since Icahn has reported perfecting appraisal rights for over 150
million Dell shares, more than all the other announced dissenters
combined, everyone should encourage their leadership support of this
shared opportunity to realize the fair value of Dell.
I will of course let you know if there are any further developments
before Mr. Icahn presents his views at the conclusion of tomorrow’s
CNBC “Delivering Alpha” conference,
and before Dell votes are counted the following morning.
GL – July 16, 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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