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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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