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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, click here.

Forum Report: Dell Appraisal Rights and Appraisal Rights Investments

 

Dell Decision Confirms Foundations of Forum Support for Appraisal Rights

Importance of difference between $13.75 fair price and $17.62 fair value

Resuming attention to “AVR” investments

Last week’s valuation decision in the Dell case was notable for both its resolution of a closely watched proceeding and for its careful explanations of the purposes of appraisal rights and of the “fair value” that the court must determine.[1] Thorough but easily understood, the opinion can be expected to eliminate much of the recent confusion about valuation criteria and guide the progress of future appraisal proceedings on which shareholders rely to realize the intrinsic value of their corporate investments.

This decision effectively confirms all of the legal principles of appraisal rights that had been presented to us, including particularly the distinction between fair pricing and intrinsic fair value that is familiar to all value investors.[2] Everyone who helped develop these foundations for Forum support of appraisal rights deserves our congratulations, as well as the gratitude of shareholders who perfected their rights to realize the 28% higher fair value of their Dell stock.[3]

Importance of difference between $13.75 fair price and $17.62 fair value

Importantly, the decision clarifies the rights of investors to realize the intrinsic value of a corporate stock investment, rather than be forced to accept opportunistic offers based on current market pricing, even when in cases such as Dell the offer was responsibly negotiated.

Ø  If you practice “value investing,” the decision supports your ability to realize the difference between market-priced opportunities and intrinsic value.

Ø  If you are concerned about the performance of an indexed portfolio (or about the broader economy), the decision supports the public interest in long term corporate investments for the production of goods and services.

Ø  And if you want a practical way to follow the “smart money,” the decision allows any informed investor to participate in some of the bargains that private equity professionals develop.[4]

It should be noted that the decision does not discourage the use of appraisal rights in trading applications such as the recently evolved practice of “appraisal arbitrage,” or in the old-fashioned negotiations demonstrated in the Dell buyout by Icahn’s dramatic campaign to win a ten-cent “bump” in the buyout price.[5]

Resuming attention to “AVR” investments

While we can of course expect to see continuing efforts on all sides to confuse the principles of appraisal rights,[6] the Dell decision’s clear explanations of the law’s precedents and public purpose, as well as the marketplace logic, justify a renewal of Forum attention to the support that many of you have sought since 2005.[7]

Your suggestions to refine and apply our previously defined support of “Appraised Value Rights (AVR)” investments[8] will be welcomed.

GL – June 6, 2016

Gary Lutin

Chairman, The Shareholder Forum

575 Madison Avenue, New York, New York 10022

Tel: 212-605-0335

Email: gl@shareholderforum.com

 

[3] Special thanks are due especially to John Tully of Cavan Partners, LP, for volunteering to initiate the Dell appraisal proceeding as a representative of Forum participants, and for demonstrating the right way to manage a petition without eligibility issues; see the October 30, 2013 Forum Report: Initiation of Proceedings for Appraisal of Dell Intrinsic Value.

[4] As quoted in 2013, “‘Most investors look at this the same way Michael Dell does, and reach the same conclusion,’ Mr. Lutin added. ‘They want the long term value of the company, not the short term value of the stock price.’” See June 23, 2013 New York Times Fair Game: "For Dell Investors, a Safety Valve."

[5] Carl Icahn initiated public solicitations of shareholder support for appraisal rights after his public bids for Dell failed, and ultimately withdrew the appraisal demands of his own accounts after getting a $.10 per share increase in the buyout price; for reports of the negotiation, see July 10, 2013 Wall Street Journal: "Icahn Calls on Dell Holders to Seek Appraisal of Shares" and September 10, 2013 New York Times DealBook: "Icahn’s Last Chance on Dell", and for disclosure of the withdrawal, see October 4, 2013 Bloomberg: "Carl Icahn Withdraws His Appraisal Request for Dell Stake."

 

 

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.