May 31, 2016 6:33 pm

Delaware court finds Dell’s $24bn buyout underpaid investors

James Fontanella-Khan and Leslie Hook in New York

Michael Dell and Silver Lake could be forced to pay millions of dollars to former Dell shareholders after a court ruled they significantly underpaid investors in the $24bn buyout of the PC maker in 2013.

A Delaware judge ruled on Tuesday that Dell shareholders should have been paid $17.62 per share instead of the $13.75 paid by Mr Dell, who owned a little under 16 per cent of the company, and the US private equity group.

The ruling, which Mr Dell and Silver Lake can appeal, could cost the buyers about $20m as about 5.2m shares are still eligible for appraisal, according to court documents.

“The sale process functioned imperfectly as a price discovery tool, both during the pre-signing and post-signing phases,” said Travis Laster, vice-chancellor of Delaware’s special corporate court.

The ruling is a black eye for Mr Dell and Silver Lake, which were attacked at the time for underpaying and then changing the voting rules to prevent the offer being blocked.

Magnetar Capital, a hedge fund, could net about $15m as it has legal rights to about 3.8m shares.

Dell’s $24bn sale to its founder came under scrutiny as many investors believed Mr Dell was conflicted: playing seller and buyer at the same time. A spokesperson for Dell declined to comment on Tuesday’s ruling.

In the wake of the financial crisis, Dell’s PC sales had slipped, causing share prices to fall — and presenting Mr Dell with an opportunity.

The efforts by Mr Dell and Silver Lake to take Dell private were contested by shareholders from the beginning. Shareholders who opposed the deal included billionaire activist Carl Icahn as well as T Rowe Price, which believed the market was underpricing Dell.

Opposition from shareholders forced the bidding group to delay the shareholder vote three times, and twice sweeten their offer, before the deal was passed.

When it came time for the final vote, T Rowe Price accidentally voted its shares in favour of the deal, despite being publicly opposed to it, a move that means it is now disqualified from receiving any payout under the court ruling. T Rowe Price could have claimed more than $100m if it had voted against the deal.

The court’s ruling also raises questions about the role played by bankers and lawyers advising Dell’s board on the sale. JPMorgan Chase and Evercore acted as the Dell board’s financial adviser, while Debevoise & Plimpton was its legal counsel.

Several rival proposals, including one from Carl Icahn and another from Blackstone, were made after Mr Dell’s first bid was made but none turned into serious bids.

Gary Lutin, chairman of the Shareholder Forum, said the ruling would have little impact on Dell’s planned $62bn cash and shares acquisition of EMC, the data storage maker. “The financial impact of it will be negligible,” he said. He added the case was a legal milestone for clearing up confusion around appraisals in private equity buyouts, which typically leverage the difference between the market value of a company and its intrinsic, long-term value.