Founder 'Nowhere Close' To Controlling Dell, Strine Says

By Liz Hoffman

Law360, New York (June 26, 2013, 7:30 PM ET) -- Dell Inc. founder Michael Dell is “not anywhere close” to controlling the computer maker he is now trying to take private, a Delaware judge has said, hinting at a lower standard of review in litigation over the $24.4 billion buyout.

The founder owns about 16 percent of Dell, which he and private equity firm Silver Lake Partners are seeking to acquire for $13.65 per share. The deal, set for a shareholder vote next month, has spawned 19 class actions in Delaware Chancery Court that have been consolidated in front of Chancellor Leo E. Strine Jr.

One of the key issues in the trial will be Michael Dell's role on both sides of the deal, and whether he exerted enough influence over the process to discourage bidders who might have been willing to pay more.

Control has always been something of a fuzzy concept in the legal world. When it comes to stock ownership, the line appears to be somewhere between 30 and 40 percent, moving with the facts specific to each case. In 2003, for example, then-Vice Chancellor Strine held that a CEO with a 35 percent stake and family ties to management effectively controlled software maker Cysive Inc.

Personal and financial ties, debt ownership, governance rights and “star power” — the ability of an insider to impede a better deal simply by showing up — have all factored into judicial perceptions of insider influence.

Michael Dell is closely linked to the company that bears his name, having served as its CEO for 26 of the past 29 years. He owns a pile of shares worth $3.4 billion of the offer price, and as part of the buyout had agreed to put in another $750 million of his own money.

But “he's not anywhere close to the level of stock ownership that's ever been considered a controlling stockholder,” Chancellor Strine said at a court conference on Wednesday.

Even factoring in his personal influence, the CEO's stake is “at a percentage level well below even the edgiest” judge's determination, the chancellor said.

Michael Dell may actually be a less controlling force than Carl Icahn and Southeastern Asset Management Inc., the investor team seeking to thwart the buyout and pushing their own recapitalization plan, the chancellor said. The CEO has agreed to vote his 250 million shares in favor of a higher bidder, should one emerge. Icahn and Southeastern are under no such obligation with their combined 223 million shares.

What's more, Michael Dell's votes won't count toward approving the deal, which requires a majority of other shareholders to support it. These clauses, known as “majority of the minority” — or, in this case, “majority of the majority” — are meant to neutralize an insider's power.

“Controlling stockholder cases, where people say they're only a buyer and not a seller, is exactly the opposite of” what Michael Dell has offered to do, which is “contractually binding himself to give his vote to the disinterested electorate and to let them decide.”

The question of whether Michael Dell controls his company isn't an academic one. Rather, it will determine which judicial standard the transaction must meet, a key factor companies consider in deciding whether to settle.

Deals with a significant insider on both sides are normally subject to the “entire fairness” standard of review, where boards and buyers must pass a two-pronged test, showing both that the price and the process used to reach it are fair. It's a high legal bar, and many defendants settle rather than try to clear it.

But Michael Dell's comparatively small stake in his company, and the absence of any other controlling factors, may earn him the benefit of a less stringent review and embolden the company and its board to defend their deal at trial.

A source close to the litigation said there are still arguments the plaintiffs can make, but that “entire fairness was always going to be a tough sell.”

Lawyers for the plaintiffs declined to comment on legal strategy. But some court watchers have said the Dell litigation may end up focusing on appraisal rights, where a judge sets a fair price, rather than on breach of fiduciary duty claims in a class action, especially after the chilly reception those arguments got from Chancellor Strine.

Other potential bidders were contacted before any deal protections were put in place, the chancellor noted. After the deal was signed up, 71 possible buyers were invited to bid. Michael Dell and Silver Lake agreed to a low breakup fee of just 1 percent if Dell terminates for a higher offer, and will have a single chance to match a higher offer.

And the special committee wrung several concessions out of the buyers. Among them: Michael Dell's promise to vote his shares in favor of a higher bidder, a go-shop period that let Blackstone Group LP and Icahn conduct due diligence and an offer by Dell to reimburse their expenses.

Moreover, the special committee brought in a second investment bank, Evercore Partners Inc., specifically to look for a higher offer, then tied the bank's compensation to its ability to find one.

“There was not only presigning competition among private equity sponsors, there was an active post-signing go-shop with insubstantial deal protections,” Chancellor Strine said. “It's hard for me to imagine what more Mr. Dell could do in this circumstance.”

The plaintiffs are represented by co-lead counsel at Grant & Eisenhofer PA, Bouchard Margules & Friedlander PA, Bernstein Litowitz Berger & Grossmann LLP, Kessler Topaz Meltzer & Check LLP and Robbins Geller Rudman & Dowd LLP. Barrack Rodos & Bacine and Motley Rice LLC are serving as the executive committee for the plaintiffs.

Dell is represented by Hogan Lovells, with Seitz Ross Aronstam & Moritz LLP and Alston & Bird LLP serving as litigation counsel. Its special committee is represented by Debevoise & Plimpton LLP and Morris Nichols Arsht & Tunnell PA. Its other independent directors are represented by Richards Layton & Finger PA.

Michael Dell is represented by Wachtell Lipton Rosen & Katz and Potter Anderson & Corroon LLP. Silver Lake is represented by Simpson Thacher & Bartlett LLP and Young Conaway Stargatt & Taylor LLP.

The case is In re: Dell Shareholder Litigation, case number 8329-CS, in Delaware Court of Chancery.

--Editing by Andrew Park.

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