Deals  |  Mon May 11, 2015 7:12am EDT

T Rowe's challenge to Dell deal may fuel critics of 'appraisal'

WILMINGTON, Del  |  By Tom Hals

An increasingly popular tactic used by hedge funds and others to extract more money from buyouts could face a major courtroom test as soon as Monday, when a big investor in Dell Inc may argue that it should be paid a higher price for the 2013 acquisition of the PC maker.
 

The strategy, known as "appraisal," usually involves an investor who opposes a buyout price asking a judge to determine the fair value for the stock. The tactic is also known as "dissenter's rights" and is meant to protect investors from underpriced buyouts, but some Wall Street dealmakers say hedge funds use it as a hold-up strategy to squeeze extra money from mergers.
 

The question in the Delaware litigation is whether an investor can come back to seek an appraisal once it emerges that the investor voted for, not against, the deal. The investor, T Rowe Price, is seeking an higher price for its Dell stock than the $13.75 per share offered in the $26 billion buyout led by Michael Dell and Silver Lake Partners.
 

Some holdout Dell investors have said fair value of Dell's stock was up to $25 per share. That could mean hundreds of millions of dollars are on the line for T Rowe Price and Michael Dell.
 

T Rowe Price's case began in February 2014 when the company asked Delaware judge Travis Laster to appraise its roughly 27 million Dell shares, according to court records. It said it had notified Dell and had not voted its stock for the deal, satisfying the legal requirements for appraisal.
 

However, in an apparent about-face, the money manager reported to securities regulators in August that it voted for the deal across its funds. That vote came to light earlier this month, based on a review of filings by USA Today.
 

Asked if it had voted for the Dell deal, T Rowe Price did not directly respond.
 

"We are aware of a discrepancy in the communication of our voting instruction on the Dell buyout," the company said in a statement.
 

One Delaware law specialist said, if regulatory filings are correct, T Rowe Price's gamble on appraisal may be over.
 

"I think there is a pretty serious question of their continued ability to pursue appraisal rights," said Larry Hamermesh, a professor at the Widener University School of Law in Wilmington, Delaware.
 

T Rowe Price is one of scores of Dell holders to seek appraisal claims, covering more than 38 million shares in total, according to court records.
 

Laster is expected to hear arguments Monday on whether many of these claims should be tossed.
 

T Rowe Price's appraisal claims were not originally among those challenged by Dell. But a letter Dell sent to Laster on Friday regarding "recent factual developments” in connection with T Rowe Price's appraisals claims suggests that might no longer be the case. The letter was filed under seal.
 

One corporate law professor said T Rowe Price will be able to continue seeking appraisal even if it voted for the deal.
 

This is because the law governing appraisal looks not to the vote of the beneficial holder of the stock, which is T Rowe Price, but to the record-holder of the stock. For the vast majority of investors, including T Rowe Price, the record holder was Cede & Co, which aggregates stock certificates.
 

Delaware judges have found that so long as an investor's appraisal claim is covered by an outstanding number of Cede-held shares that abstained or voted no on deal, the appraisal case can proceed.
 

Brian Quinn, a professor at Boston College Law School, acknowledged T Rowe Price's situation looks bad from a public relations standpoint. "But when you look at the law, I don't think it will matter," he said.
 

That law has fueled Wall Street criticism of appraisal, which has been used by a growing number of hedge funds to wring a bit more money from a merger.
 

The funds often seek appraisal using stock they bought after the record date for determining who casts a ballot on the deal. As companies see it, the hedge funds are pursuing dissenter's rights without voting on the deal.
 

Quinn said that T Rowe Price is distinct from the hedge funds, even if it is using the law in the same way.
 

Hedge funds buy their stock at the last minute and often seek a quick settlement.
 

T Rowe Price was a long-term holder of Dell stock and a vocal critic of the price of the Dell deal. Its large appraisal claim is the kind of action that Delaware judges have said can act as a necessary deterrent against underpriced deals.
 

Dell and T Rowe Price's attorney, Stuart Grant of Grant & Eisenhofer, did not immediately respond to a request for comment.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Nick Zieminski)