Forum participants were encouraged to consider appraisal rights in
June 2013 as a means of realizing the same long term intrinsic
value that the company's founder and private equity partner sought
in an opportunistic market-priced buyout, and
legal research of court
valuation standards was commissioned to support the required
investment
decisions.
Each of the Dell shareholders who chose to rely upon the Forum's
support satisfied the procedural requirements to be eligible for payment
of the $17.62 fair value, plus interest on that amount compounding since
the effective date at 5% above the Federal Reserve discount rate.
Note: On December 14, 2017, the
Delaware Supreme Court
reversed and remanded the
decision above, encouraging reliance upon market pricing of the
transaction as a determination of "fair value." The Forum
accordingly
reported that it would resume
support of marketplace processes instead of
judicial appraisal for the realization of intrinsic value in
opportunistically priced but carefully negotiated buyouts.
For the memorandum on which the article's
report of appraisal rights research was based, a variation of which is
reportedly to be published in a legal journal, see
Carl C. Icahn may have given up his campaign to block Dell Inc. from
going private in a vote on Thursday. But the activist investor still has a
good shot at another goal: getting more for his shares than the company’s
founder,
Michael S. Dell, wants to pay.
Mr. Icahn says he will
seek appraisal rights in the Delaware courts, a legal maneuver that lets a
judge decide how much Dell shares are really worth. And growing evidence
indicates that he stands a good chance of coming out ahead by doing so.
In theory, seeking
appraisal rights is a risky move – the judge could decide that Dell shares
are, fundamentally, worth less than the the $13.75 each that Mr. Dell and
the investment firm Silver Lake Partners are offering. Then Mr. Icahn would
be stuck with that lower price.
But
a new analysis from
lawyers at Fish & Richardson suggests that it’s unlikely. In the last 20
years, Delaware courts have rarely settled on a value lower than the
transaction price – and never in a deal like the one Dell is contemplating.
The findings echo those of
at least two other analyses of appraisal rights cases, cited by
Steven
M. Davidoff, the Deal Professor, and by
Gretchen Morgenson
in The New York Times.
The latest analysis, which
is planned for publication in
Law360 on
Wednesday, was carried out at the request of the Dell Valuation Trust, a
fledgling effort to coordinate investors seeking appraisal rights in the
Dell transaction. The trust is being organized by
the
Shareholder Forum, an organization run by a former investment banker,
Gary Lutin, that seeks to inform investors.
The Fish & Richardson
analysis found that, in 45 appraisal-rights cases in the last two decades,
the courts have set a “fair value” below the corresponding transaction price
for just eight deals, or about 18 percent of the time.
None of those eight
outliers were “standalone” buyouts, where the company was being bought for
its own sake, rather than, say, in order to fold it into another, similar
company. Among standalone buyouts, the courts set share values at anywhere
from 3.5 percent over the deal price to more than double the deal price.
In other words, if Mr.
Icahn’s bid for appraisal rights follows the traditional pattern, it’s
unlikely that he’ll receive less than $13.75 a share – and he may well
receive more. The same holds for other investors who seek appraisal rights.
Mr. Lutin called appraisal
rights “a value investor’s dream come true,” with pricing based not on the
vagaries of the market, but on a company’s intrinsic value, as calculated by
Delaware judges, who have considerable experience evaluating business
arguments.
Nothing is guaranteed, of
course. If Dell’s buyout vote fails on Thursday, the transaction falls
through and appraisal rights are irrelevant — there’s no deal price to
dispute. Some of the companies included in the Fish & Richardson analysis
were small, and few deals anywhere match Dell’s in size or scope, leaving it
an open question how predictive any retrospective analysis can be.
As for other investors,
only those who have jumped through the right hoops ahead of the Thursday
vote stand to benefit; other shareholders are stuck with what Mr. Dell and
his partners are offering. Given the bureaucratic hurdles involved, it is
likely to be too late for most investors to seek appraisal rights now if
they haven’t started the process already.
In some ways, of course,
it shouldn’t be surprising that investors often win when they seek appraisal
rights.
Delaware courts are
supposed to take multiple factors into consideration, including market
value, asset value, dividends, earnings prospects and intellectual property
values. The approach approximates how many investors would calculate a
company’s “intrinsic” value.
In other words, to
conclude that investors seeking appraisal rights should get less than the
deal price implies that the buyers are overpaying on a fundamental level.
That’s unlikely, the Fish & Richardson lawyers concluded.
“Management buyers, after
all,” they write, “can be expected to know their company’s intrinsic value
best and are not likely to convince the court that they knowingly offered to
pay more than the company was worth.”
This project was conducted as part of
the Shareholder Forum's public interest program for "Fair
Investor Access," which is open free of charge to anyone
concerned with investor interests in the development of
marketplace standards for expanded access to information for
securities valuation and shareholder voting decisions.
As stated in the
posted
Conditions of Participation, the
Forum's purpose is to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's
Forum Summary. Each
participant is expected to make independent use of
information obtained through the Forum, subject to the
privacy rights of other participants. It is a Forum
rule that participants will not be identified or quoted
without their explicit permission.
The management of Dell Inc. declined the
Forum's invitation to provide leadership of this project,
but was encouraged to collaborate in its progress to assure
cost-efficient, timely delivery of information relevant to
investor decisions. As the project evolved, those
information requirements were ultimately satisfied in the
context of an appraisal proceeding.
Inquiries about this project
and requests to be included in its distribution list may be
addressed to
dell@shareholderforum.com.
The information
provided to Forum participants is intended for
their private reference, and permission has not
been granted for the republishing of any
copyrighted material. The material presented on
this web site is the responsibility of
Gary Lutin, as chairman of the Shareholder
Forum.
Shareholder
Forum™
is a trademark owned by The Shareholder Forum,
Inc., for the programs conducted since 1999 to
support investor access to decision-making
information. It should be noted that we have no
responsibility for the services that Broadridge
Financial Solutions, Inc., introduced for review
in the Forum's
2010 "E-Meetings" program and has since been
offering with the “Shareholder Forum” name, and
we have asked Broadridge to use a different name
that does not suggest our support or
endorsement.
