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
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
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.
The "Deal Professor" author
has been encouraged to investigate the assumptions he reported in his blog
below. Although it is probably obvious that some of
his statements are unsupported by fact or logic, it seems necessary to
offer this response for the record:
Neither the Forum nor its chairman is considering any change in their
consistent support of the letter and spirit of securities regulation.
has neither the ability nor the inclination to usurp investor rights to
decide whether they proceed with an appraisal.
The article below is of
course presented with the understanding that Forum participants will
independently investigate its statements and reach their own conclusions.
What is going on with
Dell? It’s not what you think as the options for Dell’s shareholders, other
than a takeover by Michael S. Dell and Silver Lake, look increasingly
The battle for Dell is now
really all about what Carl Icahn is up to. Mr. Icahn and Southeastern Asset
Management have been working hard to come up with an alternative to the
Michael Dell/Silver Lake bid. Despite the hard work, nothing has panned out.
It truly appears that it is all a maneuver to extract more money for
shareholders from the current buyers.
In other words, it has
become a giant game of chicken.
But the game is tilted
against Dell’s shareholders. And to understand why, you need to examine how
the endgame for the July 18 vote is shaping up.
Last week was proxy
advisory week. Institutional Shareholder Services and Glass, Lewis are
considering whether to recommend the deal to their clients. And so the
parties were making presentations to I.S.S. to try to influence it.
The proxy advisory service
recommendations are always important, but here even more so because only a
few big shareholders may sway the deal. That is because the deal must be
approved by shareholders who are not part of the buyout group, the so-called
Right now, Mr. Icahn’s
funds have 10.28 percent of the public float and Southeastern has 4.83
percent. Perhaps in their camp is T. Rowe Price, Yacktman Asset Management
and Pzena Investment Management. All three funds have also expressed their
displeasure with the buyout. If all these parties vote no, then according to
the public information the Icahn camp has 21.83 percent of the public float.
Mr. Icahn and Southeastern will then need nearly 30 percent more to put them
into a position to block the transaction.
The key here is whether
these and other institutional shareholders are on Mr. Icahn’s side. But they
may not even own these shares anymore.
These funds are
institutional shareholders that are not in the business of taking big risks,
and they all own less than 5 percent of Dell, meaning they publicly report
their Dell holdings only in each quarter. T. Rowe Price, for example, was
selling Dell shares last quarter and may be selling right now. We just don’t
know what the institutional investors own at the moment. It may be that they
decided this was all too risky and sold.
Even Southeastern is
becoming skittish. Despite its protests that Dell is worth $24 a share,
Southeastern just sold 71.7 million Dell shares to Mr. Icahn at $13.52 each,
below the $13.65 that Mr. Dell and Silver Lake are offering.
It’s a bit puzzling why
Southeastern would do this in the middle of this contest and not wait until
at least the proxy advisory service recommendations, but the bottom line is
that Southeastern is not really a hedge fund in the business of taking risk.
Southeastern most likely just preferred to lock in part of its losses and
reduce its exposure. And by reducing its stake, Southeastern no longer owns
more than 5 percent of Dell and it, too, can sell without having to disclose
the information until the end of the quarter.
With the institutional
shareholders uncertain, this leaves Mr. Icahn and perhaps other hedge funds.
After all, Mr. Icahn was happy to buy Southeastern’s shares because the
price was below Dell’s offer and he is, to put it politely,
But again there is a
puzzler here. If Mr. Icahn had simply bought shares in the market instead of
spending a billion dollars or so to buy more of Southeastern’s shares, he
would be much closer to his theoretical blocking position.
Perhaps Mr. Icahn firmly
believes in his value case and is hoping the deal is rejected. In this case
he just wants more shares from any source. But I am puzzled again because
Dell’s stock will almost certainly decline if shareholders reject the deal.
Why not buy then? And so, maybe the simple fact is that Mr. Icahn is
preparing for the endgame by pocketing some extra cash in case the deal goes
The cash is not certain,
though, because the conventional wisdom is that the endgame will be a close
vote. But again, the dynamics work against shareholders opposed to the
According to Capital IQ
and based on public information from last quarter, institutional holders
like mutual funds hold 57 percent of Dell while hedge funds hold only 6
percent. The figures may have changed, but this does not appear to be a
situation similar to Clearwire’s, where the hedge funds came in full force
and were willing to fight for more money. Here, the game is devolving to Mr.
Icahn as the lone holdout, and even he may be setting himself up to take the
money at the end if the game of chicken doesn’t work.
Which leads us to what
happens if the vote goes through. There is a lot of talk that this will be
the mother of all appraisal actions, in which a court determines what the
fair value is. The Dell case may become an example of how appraisal can be
used as a remedy in these types of deals, but more likely it won’t.
Appraisal is a difficult
course of action. In an appraisal proceeding in Delaware, a dissenting
shareholder can get more or less than the value of its shares depending on
the court’s determination. Shareholders also can’t bring appraisal as a
class action, which means they have to pay out-of-pocket attorneys’ and
related fees. It also takes years to pursue the action and collect any money
awarded. Because of these barriers, appraisal rights are not often
exercised, and when they are, it is usually only by the biggest
we have another clever idea in the Dell deal. Gary Lutin of the
Shareholder Forum is organizing the Dell Valuation Trust to overcome the
hurdles to appraisal. Shareholders will join together to hire lawyers,
coordinate the process and share attorneys’ fees and other expenses.
Unfortunately, there are
problems. First, the trust might be found to be selling a security that
requires both registration with the Securities and Exchange Commission and
the filing of a registration statement before shareholders can participate
in the trust. The Dell Trust may even be found by the S.E.C. to be an
investment adviser requiring its own S.E.C. registration.
Even assuming the trust
can get past these issues, or that they do not apply to it, there is the
problem that the trust is
charging only a penny a share in administrative costs (with a minimum of
$100 charged for shareholder). Lawyers are expensive and it is hard to see
how they can pursue an appraisal action with this small sum. And Mr. Lutin
reserves the right not to seek appraisal for the trust, something he may do
once he realizes the costs involved.
The authors examined 141
appraisal proceedings over six years. They found that on average 1 percent
to 6 percent of public transactions each year have appraisal rights. On the
whole, they found that 92 out of 141 of these proceedings settled and in
those that went to trial the parties seeking appraisal were remarkably
successful in obtaining additional money.
The professors’ findings
reflect the conventional wisdom that appraisal is a struggle and an
expensive one, but because it is uncommon, Delaware judges tend to reward
However, let’s face it, if
appraisal became common, the Delaware judges may not look so kindly on it
and instead would view it as just another form of shareholder litigation to
be treated summarily. So I am skeptical that appraisal is likely to be the
new trend anytime soon. It was designed to be difficult for a reason and to
channel shareholders toward litigation.
In the Dell case in
particular, the board went out of its way to adopt procedures to appeal to
the Delaware courts. As
I’ve noted this may have been a hollow exercise because they focused on
only two bidders, but the Delaware courts are likely to give them great
credit in any appraisal proceeding for this. It may be that there is a big
appraisal case looming, but it doesn’t seem like it would be Dell’s.
Given the costs and
uncertainty, this just means that the likelihood of an appraisal proceeding,
even with Mr. Icahn, may be lower than people think.
All this is contingent on
the transaction going through. If it doesn’t, then we are left with the fear
of an uncertain price and future for Dell, again something institutional
investors abhor. It means that there are serious forces pushing this
transaction forward. If those forces hold, this may not be quite the
cliffhanger the conventional wisdom expects.
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
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.
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in the Forum's
2010 "E-Meetings" program and has since been
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