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Law360, New York
(July 22, 2013, 6:41 PM ET) -- The proxy contest between
Dell Inc. and Carl Icahn over Michael Dell’s proposal to
take the company private has provided some of the most exciting
moments in recent takeover history. In the hours before the Dell
shareholders meeting was set to begin on Thursday, July 18,
three of Dell’s largest stockholders —
BlackRock Inc.,
State Street Corp. and the Vanguard Group — reportedly
switched from a no to a yes vote, but their support was not
sufficient to give the board a winning margin, and the company
adjourned the meeting for six days to give the board an
opportunity to solicit additional votes.
Press reports blamed the board’s failure on the
majority-of-the-minority voting requirement, which was built
into the transaction by the merger agreement the company signed
with the Michael Dell group. Under this agreement, the merger
would not be approved unless it received a favorable vote from a
majority of the outstanding shares other than shares owned by
the Michael Dell group. The type of majority-of-minority clause
used in the Dell agreement, which requires approval by a
majority of the outstanding unaffiliated shares, instead of a
majority of those voting on the transaction, makes the failure
to cast a vote the equivalent of a vote against the deal.
A widely known company like Dell typically has a significant
number of retail stockholders whose turnout at stockholders
meetings is typically much less than the turn out of
institutional investors and hedge funds. The press reports
indicated that the absence of a large number of retail
stockholders from the meeting (which were treated as the
equivalent of “no votes”) was an important factor in Dell’s
failure to obtain the necessary majority by the time the meeting
convened, and the company vowed to leave no stone unturned in an
effort to get the votes of these stockholders by the time
shareholders reassembled the following Wednesday.
One interesting facet of the drama over the
majority-of-the-minority vote is that this condition, which
prevented approval of the agreement at the July 18 shareholders
meeting, does not seem to have been legally required. Under
current Delaware case law, a transaction between a controlling
shareholder and the corporation is subject to the business
judgment rule rather than being reviewed for entire fairness if
it is approved by a special committee of independent directors
and a majority of the shares not owned by the controlling
stockholder.
However, as Delaware Chancellor Leo E. Strine observed in a
hearing on the Dell transaction, Michael Dell’s stock ownership,
at approximately 15 percent, is far below the level that would
make him a controlling stockholder. Therefore, given the other
procedural protections, the Dell merger should have come under
the business judgment rule, regardless of whether it was
subjected to a majority-of-the minority vote.
This does not mean that the deal would escape meaningful
judicial review. As a sale of control of the corporation, the
Michael Dell transaction was subject to the
Revlon test to determine whether the board had taken
reasonable measures to obtain the highest price attainable for
shareholders. However, in a Revlon case the focus is on whether
the board did enough to negotiate a good deal for stockholders
or to facilitate competing bids, issues that are not impacted by
the presence or absence of a majority-of-the-minority vote.
Given entire fairness was never in the picture, why was a
minority-of-the-minority condition included in the Dell
agreement? One explanation is that, as Steven Davidoff, the
New York Times “Deal Professor” said, the special committee
tried to overcome the reputation that management buyouts have
for bargain basement pricing by putting “every contractual
mechanism ever invented to address this problem” in the
agreement including a majority-of-the minority vote. Beyond any
question of cosmetics, special committee members may have
believed that it would be wrong to sell the company to Michael
Dell if a majority of the unaffiliated shareholders opposed the
transaction and Michael Dell’s votes were needed to get it
approved.
But if some form of majority-of-the-minority vote was
appropriate, why not a majority of the unaffiliated shareholders
voting on the transaction, rather than a majority of the
outstanding condition, which treats a non-vote as a vote against
the deal? A majority-of-the-voting-minority condition would have
prevented Michael Dell from using his voting power to force
through the deal, but would not have embedded the seemingly
unrealistic assumption that every share not voted is a share
opposed to the transaction. Looking at the numbers, there
appears to be a good chance that the deal would have been
approved if a majority-of-the-voting minority condition had
applied.
The New York Times reported a day after the meeting was
adjourned that 23 percent of the shares had not been voted. This
23 percent total presumably includes shares whose owners were
opposed to the transaction and would have voted against the deal
if there had been a majority-of-the-voting minority condition in
which a non-vote does not count as a vote against. But it seems
highly unlikely that the full 23 percent would have been voted
against the deal in these circumstances. Some of these shares
would not have voted regardless of the type of
majority-of-the-minority clause included in the agreement.
In one of his
Airgas opinions, Chancellor William Chandler observed that
12 percent of the Airgas shares had not voted in the hotly
contested election of directors at the 2010 Airgas annual
meeting at which nonvoted shares did not affect the outcome of
the race and said that this is fairly typical even in contested
elections. Assuming that this is the approximate number that
would not have voted one way or the other on the Dell merger
agreement, if it had included a majority-of-the-voting-minority
clause, the Michael Dell transaction would then have needed
favorable votes from unaffiliated stockholders owning 36.5
percent of the outstanding shares (50 percent of the voting
shares not owned by Michael Dell), which according to press
reports is slightly less than the number of these shares that
had submitted yes votes at the time the July 18 meeting was
convened.
One reason the Dell special committee may have opted for the
onerous majority-of-the outstanding minority condition is that
Delaware courts have not shown a high regard for
majority-of-the-voting-minority conditions. In his 2009 Hammons
Hotels opinion, Chancellor Chandler found that a
majority-of-the-voting-minority was not adequate to take a
transaction out of entire fairness, saying that “requiring
approval of a majority of all minority stockholders assures that
a majority of the minority stockholders truly support the
transaction, and there is not actually ‘passive dissent’ of a
majority of the minority stockholders.”
The phrase “passive dissent” comes from a Chancellor Strine
opinion in a case in which the majority-of-the-minority vote was
not a condition of the transaction. When there is such a
condition, it is hard to see why dissenting shareholders who
believed their vote could have an impact would not vote against
the deal.
The reality may be that in a hotly contested election like Dell
the nonvoters are largely small retail stockholders who do not
vote in proxy contests for the same reason that many people do
not vote in political elections: either they have no preference
or they believe it is not worth the bother to send in a proxy
because there is only an infinitesimal chance that their vote
will influence the outcome of the election. These small retail
stockholders probably form the core of the irreducible 10
percent to 15 percent of the shareholder population who do not
vote in proxy contests regardless of the situation. Absent a
scientific study of the mentality of these stockholders, there
is no reason to believe that they are consistently on one side
or the other of merger votes.
Given the views that have been expressed by the Delaware courts,
there is little chance that majority-of-the-voting-minority
clauses will become an acceptable way to bring transactions with
controlling stockholders under the business judgment rule, but
they may be a useful tool in situations like the Dell buyout,
where there is no entire fairness requirement, but the board or
special committee wants to deny the purchaser the ability to use
his voting power to force through the transaction, without
giving the opponents of the transaction an unfair advantage.
The majority-of-the-minority clause in the Dell merger agreement
left Michael Dell fighting Carl Icahn with one hand tied behind
his back. Besides treating shares that weren’t voted as votes
against the transaction, the agreement created an asymmetrical
relationship between the two contestants. Dell had his shares
neutralized, while Icahn, who had proposed a competing
transaction, was free to vote against the Dell offer. Icahn made
the most of his tactical advantages.
For example, he dangled before Dell stockholders the possibility
that if the deal was approved, Dell would offer a premium to
shareholders who didn’t vote for the transaction and exercised
appraisal rights, saying in an open letter to stockholders:
“Even if you want the Michael Dell/Silver Lake offer to be
accepted, unless you believe your shares will tip the balance,
why vote for it? Why not seek appraisal and have the benefit of
the ‘free 60 day period [during which shareholders can back out
of their exercise of appraisal rights]? Dell may well pay a
premium over $13.65 to settle with those seeking appraisal.”
Presumably, some of the nonvoting shares were held by
stockholders who supported the transaction, but wanted the Icahn
free look at appraisal rights.
A majority-of-the-voting-minority version of the
majority-of-the-minority clause would help remedy the asymmetry
that exists when a large stockholder like Icahn opposes a deal
with an insider in order to open the door to a competing
transaction in which the stockholder has an interest. This type
of majority-of-the-minority clause would still prevent insiders
from using their voting power to tip the balance on their own
proposal, but it would help reduce the tactical advantage of the
large shareholder opponents.
—By Leonard Chazen,
Covington & Burling LLP
Leonard Chazen is senior counsel in Covington & Burling's
New York office.
The opinions expressed are those of the author(s) and do not
necessarily reflect the views of the firm, its clients, or
Portfolio Media Inc., or any of its or their respective
affiliates. This article is for general information purposes and
is not intended to be and should not be taken as legal advice.