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The Shareholder Forumtm

special project of the public interest program for

Fair Investor Access

Supporting investor interests in

appraisal rights for intrinsic value realization

in the buyout of

Dell Inc.

For related issues, see programs for

Appraisal Rights Investments

Fair Investor Access

Project Status

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.

The buyout transaction became effective on October 28, 2013 at an offer price of $13.75 per share, and the appraisal case was initiated on October 29, 2013, by the Forum's representative petitioner, Cavan Partners, LP. The Delaware Chancery Court issued its decision on May 31, 2016, establishing the intrinsic fair value of Dell shares at the effective date as $17.62 per share, approximately 28.1% more than the offer price, with definitive legal explanations confirming the foundations of Shareholder Forum support for appraisal rights.

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: The "one penny per share" referred to in the article below is an administrative charge for the Dell Valuation Trust's processing of the formal demand required to secure appraisal rights, according to rules cited in footnote 2 of a June 21, 2013 Forum Report. Those appraisal rights would then be eligible for assignment to the Trust at the investor’s option, according to conditions that are currently being defined and are expected to be presented for consideration in compliance with applicable securities laws.

 

Source: New York Times Fair Game, June 23, 2013 column

Fair Game

For Dell Investors, a Safety Valve

Kimihiro Hoshino/Agence France-Presse — Getty Images

If shareholders think Michael Dell’s buyout offer for Dell Inc. looks too low, they can ask a Delaware court to appraise the company’s long-term value.

AFTER months of sometimes fractious debate on the merits or demerits of the proposed Dell Inc. buyout, decision time nears for the company’s shareholders. Investors have until July 18 to tender their stock to Michael Dell in his proposed $13.65-a-share deal that the special committee of Dell’s board has overseen.


Fair Game

Gretchen Morgenson writes the Fair Game column for the Sunday Business section.

Author Bio »

Fair Game Columns »


 

Investors who think that the price is inadequate have surely been disappointed that a higher bid never emerged. One big Dell investor, Southeastern Asset Management, has estimated that the company is worth almost $24 a share.

But many shareholders may not realize that they have an intriguing alternative that could generate more money than Mr. Dell is offering: requesting that a court appraise the company’s long-term value.

Because Dell is incorporated in Delaware, such an appraisal process would go through that state’s Court of Chancery. Upon the case’s conclusion, Delaware law would require Mr. Dell to pay the shareholders bringing the litigation whatever value the court determined was fair.

Going the appraisal route has its risks. One big one is that the court could award shareholders less than the $13.65 a share that Mr. Dell is offering. The cases also take time, during which investors’ stock is tied up.

But in the Dell case, an innovative trust has been set up by an outside group allowing Dell shareholders to pursue appraisal-rights litigation while also allowing them to sell their shares. More on that later.

Shareholders making legal challenges to buyouts typically base them on a supposed breach of duty by company directors overseeing the process. No such breach is required in appraisal litigation. Investors simply agree to disagree on the proposed purchase price and ask a court to assess the company’s value. Nevertheless, because of procedural complexities, appraisal litigation in takeovers is not that common.

Often purchasers limit shareholder participation in appraisals to minimize their financial exposure should a judge rule that a higher price is in order. But Mr. Dell’s offer did not limit how many shareholders could mount an appraisal case.

In the Dell transaction, said Lawrence A. Hamermesh, a professor of corporate and business law at Widener Law School in Wilmington, Del., appraisal litigation could be “a safety valve on doubts about whether a valuation process worked appropriately.”

“No matter how effective you think special committees are, some people genuinely believe the result isn’t fair,” he said. “So this is a way of giving people access to a court to make that determination.”

For appraisal litigation to proceed in the Dell case, a majority of the company’s shareholders — not counting Mr. Dell — must first approve his offer. Only then can investors who chose not to tender their shares bring an appraisal case.

“What makes this an interesting case for appraisal is you rarely see going-private deals of this size,” said Jeffrey Gordon, a professor at Columbia Law School. “If you’re a 3 percent or 5 percent owner, the litigation cost of an appraisal case for Dell is a tiny fraction of the potential upside.”

The outcomes in past appraisal cases suggest that such litigation can pay off handsomely. Some 40 appraisal cases from 1984 through 2004 that culminated in court decisions were cited in an unpublished paper by Charles Korsmo, assistant professor at the Case Western Reserve School of Law, and Minor Myers, associate professor at Brooklyn Law School.

The professors found that in the 40 cases where both the merger premium and the court’s finding were disclosed, appraisal litigation generated a median award of 50.2 percent over the buyout price. Mr. Myers noted in an interview, however, that some of the cases involved small, private companies where a large premium did not amount to all that much in dollars.

Eric M. Andersen, a lawyer specializing in appraisal litigation at the law firm of Mark Andersen in Wilmington, Del., has also studied cases that went to trial. His analysis identified 46 since 1985; among those, the court assigned a lower price in only seven of them. The median premium paid in cases analyzed by Mr. Andersen was approximately 72 percent.

Another benefit to joining an appraisal case, lawyers say, is that Delaware law gives participating shareholders 60 days after a shareholder vote to change their minds and tender their shares. So why haven’t there been more appraisal cases in recent years? Operational hurdles and costs have made it hard for both institutional and individual investors to participate in such litigation.

But some of the main hurdles are being eliminated in the Dell case by the Shareholder Forum, an independent creator of programs devised to provide the kind of information investors need to make astute decisions.

The forum, overseen by Gary Lutin, a former investment banker at Lutin & Company, has created a trust registered in Delaware to which shareholders seeking to exercise their appraisal rights can assign their stock and pursue the case as a group. The Dell Valuation Trust, as it is known, will oversee the process, hiring lawyers to represent the shareholders in Chancery Court. This will allow individual investors, who would find it too onerous to hire their own lawyers, to demand appraisal rights as well.

The trust will also provide another benefit to investors: freedom to trade their rights. Ordinarily, shares of investors seeking appraisal rights in a deal are frozen until the court comes to a decision, which can take as long as two years. But the securities held in the Dell trust will continue to trade as the case proceeds.

Shares deposited by investors into the Dell Valuation Trust will be exchanged, one to one, for a security representing the appraisal rights. Investors will be able to buy and sell these instruments throughout the legal process with their price reflecting the market’s view of a potential outcome. As such, investors, like mutual funds, who can’t or don’t want to hold illiquid securities will be able to participate in the appraisal litigation. The Shareholder Forum charges one penny per share represented.

“Most investors had viewed appraisal rights as a perfect theoretical solution for underpriced buyouts, but impractical because of administrative burdens and lack of marketability,” Mr. Lutin said. “The analytical view of professional investors is fairly consistent — assuming appraisal rights are marketable, processing a demand essentially reserves a no-risk option.”

“Most investors look at this the same way Michael Dell does, and reach the same conclusion,” Mr. Lutin added. “They want the long term value of the company, not the short term value of the stock price."

Mr. Dell’s deal might be approved, or it might not. But providing a low-cost tool for investors to exercise appraisal rights means that they may occur more often. And that’s a good thing.


© 2013 The New York Times Company

 

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.