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Strine Denies Icahn
Challenge, Paving Way For Dell Buyout
By Liz Hoffman
Law360, New York (August
16, 2013, 1:19 PM ET) -- A Delaware judge on Friday rejected Carl
Icahn's efforts to force
Dell Inc.'s board to reschedule its annual meeting, dealing what
is likely a fatal blow to his crusade against the company's $25
billion buyout.
Chancellor Leo E. Strine Jr. rejected Icahn’s claims that Dell’s board
had run a tainted process, emphatically dismissing Icahn’s fiduciary
duty claims. And he said that, while Dell’s decision to hold its
annual director elections in mid-October technically violates state
law, it’s unlikely that even a court-ordered meeting would happen any
sooner.
The ruling paves the way for a Sept. 12 merger vote that is likely to
pass, thanks to a
tweak that sets aside abstentions and gives votes
to shareholders who bought their stock more recently. It would end a
yearlong effort by CEO Michael Dell and private equity firm Silver
Lake Partners to buy the struggling technology company, which has
played out against a harsh backdrop of shareholder dissent and public
scrutiny.
Icahn had sought an order forcing Dell to hold its annual meeting on
the same day as the merger vote. Currently, the meetings are more than
a month apart, and if the merger vote succeeds, the annual meeting —
where Icahn had hoped to install his own directors and pursue an
alternative transaction — likely won't be held.
“I find no reason to believe the special committee is acting from any
reason other than that the meeting set is in the best interests of
Dell’s stockholders,” Chancellor Strine said. Icahn’s argument is
“essentially an adjectival assault that doesn't have nouns and verbs
that add up to a colorable claim.”
Icahn, who accumulated a 13 percent block of shares after the deal was
announced, opposed the transaction and has instead pushed a $15
billion leveraged share buyback. He brought two main claims: first,
that the board violated its fiduciary duties by changing the voting
rules and staggering the meetings, and second, that Dell was refusing
to hold a timely annual meeting in order to push through an unpopular
deal.
Delaware law allows boards broad discretion in handling merger votes.
Once directors have decided a deal is in the best interests of
stockholders, they can delay a meeting, change the terms and reset a
record date to get it passed, powers
laid out clearly by the chancellor himself in
2006 litigation over the takeover of Inter-Tel Inc.
The annual meeting claim, then, was Icahn's best shot to disrupt the
deal. State law requires companies to hold shareholder meetings at
least every 13 months to elect directors and handle other company
business. Dell's last meeting was July 13, 2012. On Aug. 13, the first
day the claim was ripe, Icahn amended his suit to add it.
Section 211 of Delaware's corporate code allows, but does not require,
Delaware judges to order a meeting that is overdue — a fact the
chancellor emphasized. Sometimes they have held companies' feet to the
fire, as then-Vice Chancellor Strine did to Equidyne Corp. in a 2003
lawsuit. Other times, they have been less strict.
Generally, the court has been tougher on boards appearing to use the
delay to keep their jobs, and more lenient on those that show a
compelling reason. For example, a few companies successfully argued in
the mid-2000s that issues related to back-dated stock options meant
they couldn't file an accurate proxy statement without violating
federal securities law. No proxy statement, no annual meeting.
Dell's board argued that it wasn't trying to entrench itself. Rather,
its directors were supporting a transaction that would result in most
of them losing their jobs. Scheduling the shareholder meeting for Oct.
17 — more than 15 months after its last meeting — was an effort to
help the buyout succeed, and nothing more, the company argued.
The chancellor agreed.
“They are not trying to stick around in office, and there’s no
plausible basis for arguing that they are,” he said.
He also said that Icahn's circumstances were largely his own doing.
The billionaire had declined to made a firm topping bid for Dell,
despite being offered due diligence and expense reimbursement by the
company's board, preferring instead to propose a self-tender.
"I think the special committee would dance in the streets if the Icahn
group would make a topping bid that was firmly financed and would buy
out everybody's shares at a greater price," he said.
The chancellor made the Oct. 17 meeting a court-ordered one,
forbidding Dell from pushing it any farther back. He said he will set
a hearing on the Section 211 claims for late August or early
September, but urged the parties to work out their differences outside
court, and stressed that he was unlikely to order a meeting before
then anyway.
The ruling is in line with his comments in related shareholder
litigation, in which he has
complimented Dell's board on a well-run process.
The $25 billion buyout, which will see Dell take its
IBM-like transformation behind closed doors, is now likely to
succeed. Earlier this month, the parties changed the deal terms to set
aside shares that aren't voted, which had been counted as "no" votes,
and only require more than half of votes actually cast. Separately,
they reset the record day from June 3 to Aug. 12 to allow current
shareholders, many of whom bought in well below the offer price in a
July trading boom, to vote.
Icahn is represented by Stephen Jenkins, Marie Degnan, Phillip Sumpter
and Philip Trainer Jr. of
Ashby & Geddes PA.
Dell is represented by David Ross, Eric Selden and Anthony Rickey of
Seitz Ross Aronstam & Moritz LLP. Its special committee is
represented by Gary Kubek, Elliot Greenfield and Maeve O'Connor of
Debevoise & Plimpton LLP and by S. Mark Hurd, D. McKinley Measley
and Brendan Sullivan of
Morris Nichols Arsht & Tunnell LLP.
The independent directors are represented by John Hendershot, Gregory
Williams, Thomas Beck, Scott Perkins and Susan Hannigan of
Richards Layton & Finger PA.
Michael Dell is represented by Bill Savitt of
Wachtell Lipton Rosen & Katz and Matthew Stachel, Donald Wolfe Jr.
and Matthew Fischer of
Potter Anderson & Corroon LLP.
Silver Lake, which is not named in the lawsuit, is represented by
Simpson Thacher & Bartlett LLP and
Young Conaway Stargatt & Taylor LLP.
The case is High River LP et al. v. Dell Inc. et al., case number
8762, in the Delaware Court of Chancery.
--Editing by Sarah Golin and Jeremy Barker
Dell's Win,
Point By Point
By Liz Hoffman
Law360Law360, New York
(August 17, 2013, 12:24 AM ET) -- A Delaware judge on Friday rejected
Carl Icahn’s effort to block Dell’s $25 billion leveraged buyout. The
ruling likely spells an end to the billionaire's campaign against the
deal, and paves the way for a shareholder vote in September.
Icahn was seeking an order moving up the company's annual meeting to
coincide with the merger vote, arguing that would give shareholders a
more evenhanded choice between a $13.88-per-share offer from CEO
Michael Dell and private equity firm Silver Lake Partners on the one
hand, and a $14-per-share leveraged buyback from a new board Icahn
hoped to install at the annual meeting.
Legal experts say Icahn faced an uphill road to persuade Chancellor
Leo E. Strine Jr., who has so far been complimentary of the board's
decision making, that it had run a bad process. His best bet instead
resting on spinning a technical violation of a Delaware law that
requires companies to hold annual meetings every 13 months into a
broad-reaching injunction.
That effort failed. Here's why, point by point:
Argument: Dell Can’t Change the Voting Rules
Icahn claimed the merger agreement prevented Dell's board from
changing the voting rules. The document says that an “unaffiliated
stockholder approval” — defined elsewhere in the 100-page document as
a majority of all outstanding shares not held by Michael Dell — “shall
not be waivable.”
Dell countered that its board had not only the right to make the
change, but also a duty to do so if it believed the deal was in
stockholders' best interests. It was drawing from a rich source: the
chancellor’s own decision in a 2006 case involving Inter-Tel Inc.,
which supported boards using broad measures to avoid failed merger
votes.
The chancellor hasn’t changed his mind since then.
“There is no reason to believe the special committee is acting from
any reason other than that the meeting set is in best interests of
Dell's stockholders,” he said.
Argument: Staggered Votes Dooms Icahn’s Proposal
First, Icahn argued that holding the merger vote before the annual
directors meeting required a herculean commitment from shareholders to
first vote down the deal, swallow the likely drop in Dell’s stock
price, then a month later vote for Icahn’s slate. He said most
stockholders, even if they preferred his recapitalization plan, would
balk at the risk.
But the chancellor wasn’t buying it, saying large holders with “the
courage of their convictions” should be able to stand firm. The task
of convincing them now belongs to Icahn, he said.
“If they don't like the increased value [of the buyout offer], they
can vote no,” he said. “The idea that our institutional investor
committee can't for a five-week period stand firm and vote its view is
not one that's apparent to me.”
Second, Icahn said the staggered votes made it impossible for him to
recruit a CEO to run the company once, presumably, his slate won and
fired Michael Dell. The billionaire said he was talking with several
“world-class” chiefs, but they were reluctant to spend two months
under the spotlight for a job that might not even exist.
This argument, however, was backward, the chancellor
responded. Stockholders being asked to vote to keep Dell public should
know who would be running it.
“The failure of the Icahn group to identify [a CEO] makes it less,
rather than more, equitable for the court to grant its relief,” the
chancellor said.
Third, Icahn argued Dell had purposely scheduled the annual elections
after the Sept. 30 expiration date for commitments on the $5 billion
in debt he had lined up to support his buyback plan.
But Chancellor Strine noted that even if the board were voted in Sept.
12, the new members would have to determine whether, from the vantage
point of the boardroom, Icahn’s plan even still made sense. After all,
Dell’s board has already rejected the idea of a highly leveraged
buyback.
Those directors “would actually have to sit in the fiduciary chair,
spin around in it, and make a fiduciary judgment,” a process likely to
go past Sept. 30 anyway, the chancellor said. “They’re not going to be
able to get elected and seconds later go into the boardroom and sign
papers.”
Moreover, the chancellor said, the lower termination fee, reduced from
$450 million to $180 million in the revised agreement, should make it
easier for Icahn to reassure his lenders.
“That's pretty good math,” he said. “It should be easier to finance
the company on a going-forward basis.”
Argument: Delaware Law Requires a Prompt Vote
Icahn’s best shot at success was his claim under Section 211 of the
Delaware corporate code, which requires companies to hold annual
meetings at least every 13 months. Dell was clearly in violation of
the statute; its last meeting was July 13, 2012. Icahn said
stockholders were entitled to a “prompt” meeting, citing the Delaware
Supreme Court, which has called the right to an annual meeting
“virtually absolute.”
Half-right, the chancellor said. Section 211 of Delaware's corporate
code allows, but does not require, Delaware judges to order a meeting
that is overdue, he stressed. Sometimes the court has held companies'
feet to the fire, as then-Vice Chancellor Strine did to Equidyne Corp.
in a 2003 lawsuit. Other times, they have been less strict.
Generally, the court has been tougher on boards appearing to use the
delay to keep their jobs, and more lenient on those that show a
compelling reason. For example, a few companies successfully argued in
the mid-2000s that issues related to backdated stock options meant
they couldn't file an accurate proxy statement without violating
federal securities law.
Dell's board argued that it wasn't trying to entrench itself. Rather,
its directors were supporting a transaction that would result in most
of them losing their jobs. Scheduling the shareholder meeting for Oct.
17 — more than 15 months after its last meeting — was an effort to
help the buyout succeed, and nothing more, the company argued.
The chancellor agreed.
“They are not trying to stick around in office, and there’s no
plausible basis for arguing that they are,” he said.
Even if the chancellor had wanted to come down hard on Dell and order
an earlier meeting, he would have been hamstrung by federal securities
law and other logistical concerns. The court has regularly ordered
meeting dates 60 (Opportunity Partners v. Transtech), 70 (Shay v.
Moreline) or even 90 days (Newcastle vs. Vesta Insurance) later. Such
a timeline would put a Dell meeting well past the already scheduled
date, the chancellor said.
“It does not seem at all possible to have a compliant meeting in the
time frame the Icahn group suggests,” the chancellor said. "The
reality is that a Dell annual meeting held on Oct. 17 would occur
closer to the statutory period than was ordered by court in other
cases."
--Editing by Kat Laskowski.
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