Dell Special Committee Put In Focus

By Ian Thomas August 5, 2013

The first action taken by Dell’s board of directors upon hearing CEO Michael Dell’s proposal to take the company private last year was to set up a special committee to vet the deal. Now, almost a year later, that committee is in the middle of what continues to be a fierce poker game between Michael Dell, activist investor Carl Icahn and the board itself.

The committee, led by Alex Mandl, announced on August 2 it had reached a revised agreement with Michael Dell and Silver Lake Partners over a buyout of the company. Under the terms of the new deal, the CEO’s consortium would pay $13.75 and a special dividend of 13 cents per share, in exchange for the special committee’s acceptance of a change to the voting rules and adjourning a vote until September.

The committee did not return requests for comment.

Icahn, a fervent opponent of the deal, had sued Dell in Delaware’s Court of Chancery on August 1 to prevent such changes.

While this is just the latest turn in what has become an extremely tumultuous buyout process, the recent actions of the committee have begun to raise questions around some of the committee’s decisions, says Gary Lutin, chairman of the Shareholder Forum, an investor advocacy group.

“The job of the special committee is to run a fair auction, and it can’t do that if the committee becomes part of the bidding process themselves and negotiates openly,” says Lutin. “At times the committee sounds more like Carl Icahn than Icahn does.”

Lutin says that part of the problem may be that the committee has focused on satisfying the ritual requirements for not breaching duty in the process, and has not paid enough attention to its fiduciary duty to shareholders.

One of those requirements has been the recently discussed majority-of-the-minority voting requirement, which Michael Dell had requested be altered in the latest rejected proposal.

Under this rule, 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.

However, Leonard Chazen, senior counsel at Covington & Burling, says this sort of regulation was not legally necessary, and has actually allowed the proxy fight to continue.

“The majority-of-the-minority clause in the Dell merger agreement left Michael Dell fighting Icahn with one hand tied behind his back,” says Chazen. “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.”

Chazen says that Michael Dell’s stock ownership, which sits at about 15%, is far below the level at which he would be considered a controlling stockholder. Under current Delaware law, his level of ownership would only subject his proposal to the business judgment rule rather than being reviewed for its “entire fairness” if it is approved by the committee and a majority of the shares not owned by the controlling stockholder.

“It’s understandable why the committee had considered this sort of rule, especially as a declaration of fairness,” says Chazen. “However, when you have this sort of organized opposition with a willingness to put a competing deal on the table, you begin to question if this type of majority-of-minority vote was right.”

Chancellor Leo Strine of Chancery Court, who declined a request by Icahn and other investors to block the deal in June, had previously granted summary judgment to M&F Worldwide in May 2013, finding that the board did not breach its fiduciary duty when it accepted an offer by the company’s largest shareholder.

In the ruling, Strine wrote that companies that subject going-private deals to the scrutiny of both an independent board committee and a vote of minority shareholders will have an easier time fending off litigation challenges.

In a letter to Dell’s shareholders, Icahn wrote, “Proper protection for stockholders of Dell should not be offered for sale to anyone at any price.” Icahn also called for the annual meeting of stockholders to take place at the same time as the vote on the merger, which would allow investors to vote for his proposed slate of directors.

Lawrence Hamermesh, a professor of corporate and business law at the Widener University School of Law, says that while the M&F Worldwide case does provide precedence for Dell to continue to proceed with minority stockholder vote conditions, directors should take a much closer look at how they work when constructing and looking at strategic alternatives.

“If initial reports would show that 40% of the publicly held shares would want a deal, 35% of shareholders wouldn’t want it, and another 25% of shareholders are just not interested enough either way, what should the director be trying to do? It almost answers itself,” says Hamermesh.

Hamermesh says he doubts the court would take a negative view toward Dell’s special committee if it were to accept a change to the vote structure at some point. In that scenario, Michael Dell still wouldn’t hold enough of a controlling stake and the change wouldn’t be any less protective of the minority vote.

Chazen says that with activist investing on the rise it is important for directors whose companies are being targeted for a buyout to try to anticipate any opposition that could occur down the road.

“Boards or special committees should always look to rules that don’t [give] the purchaser the ability to use their voting power to force through a buyout or a transaction,” says Chazen. “But they also have to be cognizant of giving the opponent of a transaction an unfair advantage.”