September 10, 2013 Forum Report: Court Rules for Appraisal: Fair Value = Intrinsic Value

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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 the referenced memorandum, click here.

Forum Report: Fair Investor Access (Dell Valuation Project)

Court Rules for Appraisal: Fair Value = Intrinsic Value

The law firm representing Dell Valuation Trust has prepared a report of Delaware legal standards for determining “fair value” in appraisal cases,[1] based on their review of each of the court decisions during the past 20 years. Focusing on what is likely to be most relevant to investors, the report analyzes the rules and results for “standalone buyouts” such as the Dell transaction in which the buyer is not paying for any value beyond that of the going concern.

● September 9, 2013, Jeremy D. Anderson, Erin C. E. Battersby and José P. Sierra of Fish & Richardson P.C., memorandum to Dell Valuation Trust: Delaware Appraisal of Fair Value for Standalone Buyouts

These points should interest investors, and especially value investors:

► Appraisal law defines “fair value” the same way value investors do, as the “intrinsic value” of a going concern.

► Delaware’s supreme court in 2010 determined that appraisal of “fair value” must be made independently of market bids, echoing the similar advice of Benjamin Graham to focus on intrinsic value and ignore “Mr. Market.”[2]

► It is unlikely that any standalone buyer, especially a management insider partnering with professional investors, could present a credible argument that the buyer had knowingly offered to pay more for a company than it was worth.

► Court records show there has not been even one case during the past two decades of a standalone buyout in which “fair value” was appraised at less than the offer price.

The Delaware standard for “fair value” makes appraisal rights essentially a professionalized version of value investing, with two significant improvements:

1. Variables and risk are reduced by valuing the going concern as of the effective date of the transaction, eliminating the need to guess about future developments.

2. Ultimate pricing of the value realization is based on a court’s review of expert analyses, and it is reasonable to assume that a Delaware Chancery judge will be better informed and less fickle than Graham’s “Mr. Market.”

Your comments will be welcomed.

GL – September 10, 2013

Gary Lutin

Chairman, The Shareholder Forum

575 Madison Avenue, New York, New York 10022

Tel: 212-605-0335

Email: gl@shareholderforum.com

[1] See Delaware General Corporation Law (“DGCL”) § 262. Appraisal Rights.

[2] The term “Mr. Market” was used by Benjamin Graham in his 1949 book, The Intelligent Investor, to explain the fluctuating irrationality of market pricing of stocks, quoting a different price every day based on whims rather than on the intrinsic value that concerns a “businesslike” value investor.

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.