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Choosing Fair Value over Auction Price for Dell
Unconfused valuation standards for appraisal rights
Practical value realization and “no brainer” options
Process for reserving appraisal rights eligibility
Refinements of investor support requirements
Now that the Dell buyout
proposal appears to be on its path to an expected voting approval in
three weeks, we have been updating and refining the Forum’s support of
investor interests in appraisal rights.
Issues raised by Forum participants who are planning to reserve their
rights to “fair value,” or are considering it, are summarized below.
Unconfused valuation standards for appraisal
rights
There has been continuing
confusion in public reports of supposed experts about the standards of
valuation that a Delaware court will apply in an appraisal case. It
does not depend on the integrity or effectiveness of the
board’s conduct of a sale process, and is not based on
marketplace bidding. Delaware’s Supreme Court has very clearly defined
the law’s requirement for a judge’s independent valuation of a “going
concern” based on a company’s long-term value as a business enterprise
– essentially the same as what securities analysts call “intrinsic
value” – without considering the price set by an auction. This has
been addressed in past Forum reports
and has more recently been explained in the following authoritative
legal review (presented with linked references to the cited cases):
●
August 7, 2013, Lawrence M. Rolnick and Steven M. Hecht of Lowenstein
Sandler LLP in Law360: "Del. Weighs In On Fair Value In
Appraisal Rights Cases"
You will of course have to
do your own thinking about how a judge may apply this standard to
Dell. You will also have to make your own estimates of how long the
appraisal process may take, adjusting for the interest that compounds
quarterly at a statutory rate of 5% over the Federal Reserve discount
rate.
Anyone who understands basic investment analysis should be able to do
this, but you need to know the rules.
Practical value realization and “no brainer” options
Moving beyond recent public speculation about the tactical use of
appraisal rights to negotiate a higher offering price for the proposed
buyout, the more significant value enhancement opportunity is to use
appraisal rights for their intended purpose: securing the “fair value”
for your own account. This can generate much more than a little price
bump, and whatever it generates will be allocated selectively to
appraisal rights investors rather than dispersed to all your
competitors. These will be your practical alternatives for value
realization:
(a)
60-day option to take merger price
– The widely promoted “60 day free option” does in fact allow
investors up to 60 days after the effective date of the merger to
decide whether to withdraw appraisal rights (assuming they’ve been
established) and take the offered merger price.
For the Dell buyout, this means that you should be able to consider
all of the alternatives below until December, and possible longer, to
determine whether you can realize more value from appraisal rights
than the price offered in the buyout.
(b)
Hold your appraisal rights
– If your risk-adjusted estimate of a court valuation exceeds both the
merger price and any offers to buy your appraisal rights at the end of
the option period, you can hold your rights as long as you want, until
the appraisal proceeding is concluded and you receive the fair value
plus accrued interest (net of costs). You would of course remain able
to consider offers to sell at any time after the option period, as
indicated below, and other holders would not be able to force a
settlement to terminate your rights.
(c)
Sell your appraisal rights
– If someone offers to pay more for your appraisal rights than you
think they are worth – whether during the 60 day option period or
later – you will be able to sell all or any portion of the rights. The
buyer could be another investor, or possibly Dell as a means of
settling your portion of the appraisal rights.
It should be noted that the marketability of your interests and your
ability to make selling, settlement or other decisions independently
of other holders assumes administrative management of your appraisal
rights by the Dell Valuation Trust. If you are considering traditional
arrangements or other alternatives for management of appraisal rights,
you should determine the provisions for your control as well as for
access to information needed by investors.
Process for reserving appraisal rights eligibility
The new September 12 voting
date with a new August 13 record date for stock ownership raised some
questions that were not addressed in Dell’s revised proxy statement
about requirements for the written demand that must be delivered to
secure appraisal rights.
Since Dell’s legal officer declined to clarify the requirements, Fish
& Richardson has informed the company as counsel to the Dell Valuation
Trust that they will take the position that a stockholder who had
already presented a demand for appraisal will not need to repeat the
demand.
This means that the Trust will certify eligibility of appraisal rights
based on demands for appraisal delivered in relation to the original
merger proposal and meeting, and that it will not charge the rights
holder for legal costs of responding to any Dell challenge of
eligibility on that basis.
If you own Dell stock that was acquired after the old June 3, 2013
record date, you will need to process another written demand for
appraisal to reserve your rights for those new shares.
A previous demand for appraisal rights would apply only to stock owned
at that time.
Whether for new demands or updates for added shares, it is important
to understand that the administrative processing through
custodians and Depository Trust Company normally takes about ten days,
and you should not expect things to go more smoothly than usual around
Labor Day. For those of you who want the Trust to assume
administrative responsibility for processing the demand for appraisal,
its deadline for accepting requests is August 30, 2013.
Refinements of investor support requirements
The adjournments of the Dell vote, while wearing, have actually proved
to be valuable in providing an opportunity to consider a broader range
of investor interests as well as a broader range of buyout situations
for our support of investor interests in appraisal rights.
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Dell Valuation Trust
– Plans for the Trust’s administration of Dell appraisal rights as
standardized units of investment are being refined to increase the
flexibility of holders to make independent decisions about buying,
selling, borrowing or settling, including participation in any public
registration of investment interests. Each holder of rights, including
future buyers, will be able to act separately.
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Review Panel
– The panel of investor-selected legal and valuation experts that had
been planned for oversight of the Trust is being reorganized to
address broader investor interests in appraisal rights. This
continuing panel will then establish committees responsible for Dell
and other Forum-supported appraisal cases to confer with the attorneys
responsible for each of those proceedings and to publicly report on
their progress.
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Program for Appraisal Rights Investments
– We are in the process of organizing a program for investors who
anticipate regular attention to opportunities for value enhancement
relating to buyouts, developing the broadened Review Panel and other
projects to support their leadership in the use of appraisal rights.
I will welcome your interest in the progress of these efforts, as well
as your questions about securing appraisal rights to realize the fair
value of a long-term investment in Dell.
GL – August 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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