Committee Put In Focus
Thomas August 5, 2013
The first action taken by
Dell’s board of directors upon hearing CEO Michael Dell’s
proposal to take the company private last year was to set up a special
committee to vet the deal. Now, almost a year later, that committee is
in the middle of what continues to be a fierce poker game between
Michael Dell, activist investor Carl Icahn and the board
The committee, led by
Alex Mandl, announced on August 2 it had reached a revised
agreement with Michael Dell and Silver Lake Partners over a
buyout of the company. Under the terms of the new deal, the CEO’s
consortium would pay $13.75 and a special dividend of 13 cents per
share, in exchange for the special committee’s acceptance of a change
to the voting rules and adjourning a vote until September.
The committee did not
return requests for comment.
Icahn, a fervent opponent
of the deal, had sued Dell in Delaware’s Court of Chancery on August 1
to prevent such changes.
While this is just the
latest turn in what has become an extremely tumultuous buyout process,
the recent actions of the committee have begun to raise questions
around some of the committee’s decisions, says Gary
Lutin, chairman of the
Shareholder Forum, an investor advocacy group.
“The job of the special
committee is to run a fair auction, and it can’t do that if the
committee becomes part of the bidding process themselves and
negotiates openly,” says Lutin. “At
times the committee sounds more like Carl Icahn than Icahn does.”
Lutin says that part of the problem may be that the committee
has focused on satisfying the ritual requirements for not breaching
duty in the process, and has not paid enough attention to its
fiduciary duty to shareholders.
One of those requirements
has been the recently discussed majority-of-the-minority voting
requirement, which Michael Dell had requested be altered in the latest
Under this rule, the merger
would not be approved unless it received a favorable vote from a
majority of the outstanding shares other than shares owned by the
Michael Dell group.
However, Leonard Chazen,
senior counsel at Covington & Burling, says this sort of
regulation was not legally necessary, and has actually allowed the
proxy fight to continue.
majority-of-the-minority clause in the Dell merger agreement left
Michael Dell fighting Icahn with one hand tied behind his back,” says
Chazen. “Dell had his shares neutralized, while Icahn, who had
proposed a competing transaction, was free to vote against the Dell
offer. Icahn made the most of his tactical advantages.”
Chazen says that Michael
Dell’s stock ownership, which sits at about 15%, is far below the
level at which he would be considered a controlling stockholder. Under
current Delaware law, his level of ownership would only subject his
proposal to the business judgment rule rather than being reviewed for
its “entire fairness” if it is approved by the committee and a
majority of the shares not owned by the controlling stockholder.
“It’s understandable why
the committee had considered this sort of rule, especially as a
declaration of fairness,” says Chazen. “However, when you have this
sort of organized opposition with a willingness to put a competing
deal on the table, you begin to question if this type of
majority-of-minority vote was right.”
Chancellor Leo Strine
of Chancery Court, who declined a request by Icahn and other investors
to block the deal in June, had previously granted summary judgment to
M&F Worldwide in May 2013, finding that the board did not
breach its fiduciary duty when it accepted an offer by the company’s
In the ruling, Strine wrote
that companies that subject going-private deals to the scrutiny of
both an independent board committee and a vote of minority
shareholders will have an easier time fending off litigation
In a letter to Dell’s
shareholders, Icahn wrote, “Proper protection for stockholders of Dell
should not be offered for sale to anyone at any price.” Icahn also
called for the annual meeting of stockholders to take place at the
same time as the vote on the merger, which would allow investors to
vote for his proposed slate of directors.
a professor of corporate and business law at the Widener University
School of Law, says that while the M&F Worldwide case does provide
precedence for Dell to continue to proceed with minority stockholder
vote conditions, directors should take a much closer look at how they
work when constructing and looking at strategic alternatives.
“If initial reports would
show that 40% of the publicly held shares would want a deal, 35% of
shareholders wouldn’t want it, and another 25% of shareholders are
just not interested enough either way, what should the director be
trying to do? It almost answers itself,” says Hamermesh.
Hamermesh says he doubts
the court would take a negative view toward Dell’s special committee
if it were to accept a change to the vote structure at some point. In
that scenario, Michael Dell still wouldn’t hold enough of a
controlling stake and the change wouldn’t be any less protective of
the minority vote.
Chazen says that with
activist investing on the rise it is important for directors whose
companies are being targeted for a buyout to try to anticipate any
opposition that could occur down the road.
“Boards or special
committees should always look to rules that don’t [give] the purchaser
the ability to use their voting power to force through a buyout or a
transaction,” says Chazen. “But they also have to be cognizant of
giving the opponent of a transaction an unfair advantage.”
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