Don't Count On Appraisal, Dell Warns Shareholders

By Liz Hoffman

Law360, New York (July 12, 2013, 2:46 PM ET) -- Dell Inc.'s board on Friday warned shareholders not to be fooled by Carl Icahn's plan to exercise appraisal rights, warning that the process is long, expensive and not guaranteed to beat the $13.65 being offered by Michael Dell and Silver Lake.

Icahn this week said he would seek to have a Delaware judge value his 152 million Dell shares, and urged other investors to do the same. If enough shareholders opt for appraisal, the billionaire said it could force the buyout group to raise its price for everyone, rather than risk a large award.

Shareholders can secure their appraisal rights but have 60 days after the merger to change their minds and take the offer price. Icahn called it a “no-brainer,” especially for smaller shareholders whose votes are unlikely to move the needle much.

But Dell's special committee warned that appraisals are risky. They can drag on for years — the record, set by Technicolor's 1982 buyout, is 22 years — and, unlike shareholder class actions, are not paid for upfront by plaintiffs' lawyers.

“The special committee urges stockholders not to be misled by Mr. Icahn’s characterization of the appraisal option and to consider their options with great care,” the special committee said in a statement. “Mr. Icahn is asking Dell stockholders to vote against the certainty of $13.65 per share in cash to pursue a highly speculative appraisal remedy.”

And there's always the risk that the judge decides Dell's shares are actually worth less than the merger price, Dell's board noted.

It's happened before — at least seven times since the early 1990s. In 2007, for example, hedge fund Highfields Capital turned down a $31-per-share offer for its stock in MONY Group Inc., only to have a judge decide the shares were only worth $24.97.

In the most recent appraisal ruling, dissenting shareholders of Cogent Inc. last week received a 3.5 percent bump over the price paid in 2010 by 3M Co., far less than the 54 percent increase they sought.

Appraisals have tended to fare best in deals with a controlling shareholder and a viable competing bidder, neither of which appears to be the case with Dell. Despite Icahn's attempts to label the deal a freeze-out transaction, a Delaware judge has said Michael Dell's 16 percent stake is “not anywhere close” to effective control.

And the company's board, backed up by ISS Inc. and other proxy advisers, has argued that Icahn's proposal isn't a true alternative because it requires shareholders to first vote down the current offer and then elect new directors in what is likely to be a tough proxy fight. Michael Dell can't vote his shares in favor of the merger, but he can use them to keep his friendly board in control.

Icahn pushed back Friday, arguing that his deal would likely return cash to shareholders faster than would the buyout, which is awaiting antitrust approvals from China.

Either way, the battle over Dell looks increasingly likely to focus on an appraisal, a rarely used but potentially powerful shareholder tool.

In addition to Icahn and Southeastern's efforts, another investor group is rounding up support for a first-of-its-kind traded investment vehicle for pooled appraisal rights. That effort is targeting holders of up to 10 percent of Dell's outstanding shares.

Icahn suggested that such a critical mass of shares could trigger a material adverse change under Silver Lake's merger agreement by stoking fears of a large future payout.  Private equity buyouts such as Dell's are particularly vulnerable because they are using borrowed money, doled out by lenders who don't like long-term uncertainty.

Legal experts discounted the theory, but Icahn and Southeastern continue to push appraisal as a fallback plan to defeating the merger.

Icahn and Southeastern are pushing their own recapitalization, which would see Dell buy back 1.1 billion shares at $14 apiece. The two investors will not tender their stock, guaranteeing that 71 percent of Dell's remaining shareholders could cash out, on a proportionate basis, above the merger price.

On Friday, Icahn and Southeastern sweetened their proposal, adding a fraction of warrant that would be exercisable at $20. Dell's stock hasn't traded that high since September 2008, but Southeastern has said the upside from the company's recent software acquisitions could push the stock as high as $24.

Their efforts to thwart the buyout took a hit this week, however, when ISS Inc. and two other proxy advisers recommended that shareholders take the cash from Michael Dell and Silver Lake. If shareholders vote for the deal July 18, Icahn's alternative proposal for a share buyback is dead.

Michael Dell is represented by Martin Lipton and Steven A. Rosenblum of Wachtell Lipton Rosen & Katz. Silver Lake is represented by Rich Capelouto and Chad Skinner of Simpson Thacher & Bartlett LLP, along with Bank of America Merrill Lynch, Barclays PLC, Credit Suisse AG and RBC Capital Markets.

Dell's special committee is represented by Jeffrey Rosen, William Regner and Michael Diz of Debevoise & Plimpton LLP, as well as attorneys from Morris Nichols Arsht & Tunnell LLP. JPMorgan Chase & Co. and Evercore Partners Inc. are serving as financial advisers.

Icahn is represented by in-house counsel. Southeastern is represented by Dennis J. Block of Greenberg Traurig LLP.

--Editing by Stephen Berg.

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