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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.


 

 

The article and analysis below provide legal explanations of the Delaware court's decision that had been reported in the August 16, 2013 Forum Report: Resumption of Attention to Dell Appraisal Rights.

 

Sources: Law360, August 16, 2013 article and August 17, 2013 analysis


Strine Denies Icahn Challenge, Paving Way For Dell Buyout


By Liz Hoffman


 

Law360, New York (August 16, 2013, 1:19 PM ET) -- A Delaware judge on Friday rejected Carl Icahn's efforts to force Dell Inc.'s board to reschedule its annual meeting, dealing what is likely a fatal blow to his crusade against the company's $25 billion buyout.

Chancellor Leo E. Strine Jr. rejected Icahn’s claims that Dell’s board had run a tainted process, emphatically dismissing Icahn’s fiduciary duty claims. And he said that, while Dell’s decision to hold its annual director elections in mid-October technically violates state law, it’s unlikely that even a court-ordered meeting would happen any sooner.

The ruling paves the way for a Sept. 12 merger vote that is likely to pass, thanks to a tweak that sets aside abstentions and gives votes to shareholders who bought their stock more recently. It would end a yearlong effort by CEO Michael Dell and private equity firm Silver Lake Partners to buy the struggling technology company, which has played out against a harsh backdrop of shareholder dissent and public scrutiny.

Icahn had sought an order forcing Dell to hold its annual meeting on the same day as the merger vote. Currently, the meetings are more than a month apart, and if the merger vote succeeds, the annual meeting — where Icahn had hoped to install his own directors and pursue an alternative transaction — likely won't be held.

“I find no reason to believe the special committee is acting from any reason other than that the meeting set is in the best interests of Dell’s stockholders,” Chancellor Strine said. Icahn’s argument is “essentially an adjectival assault that doesn't have nouns and verbs that add up to a colorable claim.”

Icahn, who accumulated a 13 percent block of shares after the deal was announced, opposed the transaction and has instead pushed a $15 billion leveraged share buyback. He brought two main claims: first, that the board violated its fiduciary duties by changing the voting rules and staggering the meetings, and second, that Dell was refusing to hold a timely annual meeting in order to push through an unpopular deal.

Delaware law allows boards broad discretion in handling merger votes. Once directors have decided a deal is in the best interests of stockholders, they can delay a meeting, change the terms and reset a record date to get it passed, powers laid out clearly by the chancellor himself in 2006 litigation over the takeover of Inter-Tel Inc.

The annual meeting claim, then, was Icahn's best shot to disrupt the deal. State law requires companies to hold shareholder meetings at least every 13 months to elect directors and handle other company business. Dell's last meeting was July 13, 2012. On Aug. 13, the first day the claim was ripe, Icahn amended his suit to add it.

Section 211 of Delaware's corporate code allows, but does not require, Delaware judges to order a meeting that is overdue — a fact the chancellor emphasized. Sometimes they have held companies' feet to the fire, as then-Vice Chancellor Strine did to Equidyne Corp. in a 2003 lawsuit. Other times, they have been less strict.

Generally, the court has been tougher on boards appearing to use the delay to keep their jobs, and more lenient on those that show a compelling reason. For example, a few companies successfully argued in the mid-2000s that issues related to back-dated stock options meant they couldn't file an accurate proxy statement without violating federal securities law. No proxy statement, no annual meeting.

Dell's board argued that it wasn't trying to entrench itself. Rather, its directors were supporting a transaction that would result in most of them losing their jobs. Scheduling the shareholder meeting for Oct. 17 — more than 15 months after its last meeting — was an effort to help the buyout succeed, and nothing more, the company argued.

The chancellor agreed.

“They are not trying to stick around in office, and there’s no plausible basis for arguing that they are,” he said.

He also said that Icahn's circumstances were largely his own doing. The billionaire had declined to made a firm topping bid for Dell, despite being offered due diligence and expense reimbursement by the company's board, preferring instead to propose a self-tender.

"I think the special committee would dance in the streets if the Icahn group would make a topping bid that was firmly financed and would buy out everybody's shares at a greater price," he said. 

The chancellor made the Oct. 17 meeting a court-ordered one, forbidding Dell from pushing it any farther back. He said he will set a hearing on the Section 211 claims for late August or early September, but urged the parties to work out their differences outside court, and stressed that he was unlikely to order a meeting before then anyway.

The ruling is in line with his comments in related shareholder litigation, in which he has complimented Dell's board on a well-run process.

The $25 billion buyout, which will see Dell take its IBM-like transformation behind closed doors, is now likely to succeed. Earlier this month, the parties changed the deal terms to set aside shares that aren't voted, which had been counted as "no" votes, and only require more than half of votes actually cast. Separately, they reset the record day from June 3 to Aug. 12 to allow current shareholders, many of whom bought in well below the offer price in a July trading boom, to vote.

Icahn is represented by Stephen Jenkins, Marie Degnan, Phillip Sumpter and Philip Trainer Jr. of Ashby & Geddes PA.

Dell is represented by David Ross, Eric Selden and Anthony Rickey of Seitz Ross Aronstam & Moritz LLP. Its special committee is represented by Gary Kubek, Elliot Greenfield and Maeve O'Connor of Debevoise & Plimpton LLP and by S. Mark Hurd, D. McKinley Measley and Brendan Sullivan of Morris Nichols Arsht & Tunnell LLP.

The independent directors are represented by John Hendershot, Gregory Williams, Thomas Beck, Scott Perkins and Susan Hannigan of Richards Layton & Finger PA.

Michael Dell is represented by Bill Savitt of Wachtell Lipton Rosen & Katz and Matthew Stachel, Donald Wolfe Jr. and Matthew Fischer of Potter Anderson & Corroon LLP.

Silver Lake, which is not named in the lawsuit, is represented by Simpson Thacher & Bartlett LLP and Young Conaway Stargatt & Taylor LLP.

The case is High River LP et al. v. Dell Inc. et al., case number 8762, in the Delaware Court of Chancery.

--Editing by Sarah Golin and Jeremy Barker

 


 

Dell's Win, Point By Point


By Liz Hoffman


 

Law360Law360, New York (August 17, 2013, 12:24 AM ET) -- A Delaware judge on Friday rejected Carl Icahn’s effort to block Dell’s $25 billion leveraged buyout. The ruling likely spells an end to the billionaire's campaign against the deal, and paves the way for a shareholder vote in September. 

Icahn was seeking an order moving up the company's annual meeting to coincide with the merger vote, arguing that would give shareholders a more evenhanded choice between a $13.88-per-share offer from CEO Michael Dell and private equity firm Silver Lake Partners on the one hand, and a $14-per-share leveraged buyback from a new board Icahn hoped to install at the annual meeting.

Legal experts say Icahn faced an uphill road to persuade Chancellor Leo E. Strine Jr., who has so far been complimentary of the board's decision making, that it had run a bad process. His best bet instead resting on spinning a technical violation of a Delaware law that requires companies to hold annual meetings every 13 months into a broad-reaching injunction.

That effort failed. Here's why, point by point:

Argument: Dell Can’t Change the Voting Rules

Icahn claimed the merger agreement prevented Dell's board from changing the voting rules. The document says that an “unaffiliated stockholder approval” — defined elsewhere in the 100-page document as a majority of all outstanding shares not held by Michael Dell — “shall not be waivable.”

Dell countered that its board had not only the right to make the change, but also a duty to do so if it believed the deal was in stockholders' best interests. It was drawing from a rich source: the chancellor’s own decision in a 2006 case involving Inter-Tel Inc., which supported boards using broad measures to avoid failed merger votes.

The chancellor hasn’t changed his mind since then.

“There is no reason to believe the special committee is acting from any reason other than that the meeting set is in best interests of Dell's stockholders,” he said.

Argument: Staggered Votes Dooms Icahn’s Proposal

First, Icahn argued that holding the merger vote before the annual directors meeting required a herculean commitment from shareholders to first vote down the deal, swallow the likely drop in Dell’s stock price, then a month later vote for Icahn’s slate. He said most stockholders, even if they preferred his recapitalization plan, would balk at the risk.

But the chancellor wasn’t buying it, saying large holders with “the courage of their convictions” should be able to stand firm. The task of convincing them now belongs to Icahn, he said.

“If they don't like the increased value [of the buyout offer], they can vote no,” he said. “The idea that our institutional investor committee can't for a five-week period stand firm and vote its view is not one that's apparent to me.”

Second, Icahn said the staggered votes made it impossible for him to recruit a CEO to run the company once, presumably, his slate won and fired Michael Dell. The billionaire said he was talking with several “world-class” chiefs, but they were reluctant to spend two months under the spotlight for a job that might not even exist.

This argument, however, was backward, the chancellor responded. Stockholders being asked to vote to keep Dell public should know who would be running it.

“The failure of the Icahn group to identify [a CEO] makes it less, rather than more, equitable for the court to grant its relief,” the chancellor said.

Third, Icahn argued Dell had purposely scheduled the annual elections after the Sept. 30 expiration date for commitments on the $5 billion in debt he had lined up to support his buyback plan.

But Chancellor Strine noted that even if the board were voted in Sept. 12, the new members would have to determine whether, from the vantage point of the boardroom, Icahn’s plan even still made sense. After all, Dell’s board has already rejected the idea of a highly leveraged buyback.

Those directors “would actually have to sit in the fiduciary chair, spin around in it, and make a fiduciary judgment,” a process likely to go past Sept. 30 anyway, the chancellor said. “They’re not going to be able to get elected and seconds later go into the boardroom and sign papers.”

Moreover, the chancellor said, the lower termination fee, reduced from $450 million to $180 million in the revised agreement, should make it easier for Icahn to reassure his lenders.

“That's pretty good math,” he said. “It should be easier to finance the company on a going-forward basis.”

Argument: Delaware Law Requires a Prompt Vote

Icahn’s best shot at success was his claim under Section 211 of the Delaware corporate code, which requires companies to hold annual meetings at least every 13 months. Dell was clearly in violation of the statute; its last meeting was July 13, 2012. Icahn said stockholders were entitled to a “prompt” meeting, citing the Delaware Supreme Court, which has called the right to an annual meeting “virtually absolute.”

Half-right, the chancellor said. Section 211 of Delaware's corporate code allows, but does not require, Delaware judges to order a meeting that is overdue, he stressed. Sometimes the court has held companies' feet to the fire, as then-Vice Chancellor Strine did to Equidyne Corp. in a 2003 lawsuit. Other times, they have been less strict.

Generally, the court has been tougher on boards appearing to use the delay to keep their jobs, and more lenient on those that show a compelling reason. For example, a few companies successfully argued in the mid-2000s that issues related to backdated stock options meant they couldn't file an accurate proxy statement without violating federal securities law.

Dell's board argued that it wasn't trying to entrench itself. Rather, its directors were supporting a transaction that would result in most of them losing their jobs. Scheduling the shareholder meeting for Oct. 17 — more than 15 months after its last meeting — was an effort to help the buyout succeed, and nothing more, the company argued.

The chancellor agreed.

“They are not trying to stick around in office, and there’s no plausible basis for arguing that they are,” he said.

Even if the chancellor had wanted to come down hard on Dell and order an earlier meeting, he would have been hamstrung by federal securities law and other logistical concerns. The court has regularly ordered meeting dates 60 (Opportunity Partners v. Transtech), 70 (Shay v. Moreline) or even 90 days (Newcastle vs. Vesta Insurance) later. Such a timeline would put a Dell meeting well past the already scheduled date, the chancellor said. 

“It does not seem at all possible to have a compliant meeting in the time frame the Icahn group suggests,” the chancellor said. "The reality is that a Dell annual meeting held on Oct. 17 would occur closer to the statutory period than was ordered by court in other cases."

--Editing by Kat Laskowski.

 


© Copyright 2013, Portfolio Media, Inc.

 

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.

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