Your Rights, Buried in Paperwork
shareholders receive takeover bids for their companies, they may feel
like celebrating. But what if the buyout price doesn’t fully reflect a
fair value for the company?
was the question asked by a group of more than 100
Dell shareholders last year as
that computer giant was being taken private by its founder,
Michael S. Dell, for nearly $25
billion. To get an answer, they sought an independent appraisal of the
company, a process now being overseen by
J. Travis Laster, a vice
chancellor in the Delaware Chancery Court.
however, a court filing by Mr. Dell has raised still another question
among these shareholders: Is the founder trying to hobble the
appraisal process by making it more costly and prolonged than it needs
Seeking an appraisal of a takeover bid is the right of all
shareholders of companies incorporated in Delaware. This process, once
has become more popular in recent
years as the ranks of activist investors have grown.
such cases, a judge hears from valuation experts on both sides of a
deal and then decides whether a buyout price was fair.
Michael S. Dell, who took his
Plunkett/Associated Press Images for Dell
Dell matter, if the court rules that the $13.75 per share that Mr.
Dell and his co-buyer,
Silver Lake Partners, paid for the
company was too low, the buyers will have to pay up. If the court
determines that the price was too generous, the shareholders seeking
appraisal rights will end up receiving less than the investors who
have already tendered their shares in the deal.
Studies have shown that appraisal-rights cases very often result in
higher valuations for the shareholders pursuing them. One downside,
however, is that the appraisal process eats up a lot of time.
Typically, these cases take 18 months to two years to adjudicate; the
company shares held by the investors seeking an appraisal are tied up
during that period.
Dell case may take even longer than usual, though, thanks to a recent
legal move by Mr. Dell’s representatives. The maneuver also may
discourage shareholders in future appraisal cases from exercising
court filing on July 9, Mr. Dell’s lawyers demanded extensive records
from January 2011 through May of this year from the shareholders
seeking the independent appraisal of the company.
lawyers began by requesting “all documents and communications
concerning any analysis, valuation, financial modeling, estimate or
appraisal, conducted by any person, of Dell, Dell’s market, or any
assets, liabilities or securities of Dell.”
was followed by 13 more paragraphs of demands. They included “all
documents and communications relating to your investment strategies
for trading in Dell securities”; “all documents and communications
from you to actual or potential partners, investors, owners, members,
equity holders, lenders, banks, investment banks, accountants or other
third parties concerning the value of Dell or your investment in Dell
at any time”; and “all documents and communications concerning or
reflecting your decision to seek an appraisal of your Dell shares.”
Document demands like these are common in shareholder litigation, but
not an everyday occurrence in appraisal cases, according to experts in
Khusial, a patent holder in computer software and Internet
technologies, is a Dell shareholder seeking an appraisal. “I
decided to become a shareholder when I observed Dell was selling far
below its intrinsic value,” he said. “Like Mr. Dell, I didn’t believe
that the PC was dead.”
the deal was approved, Mr. Khusial added, the
personal computer market has
turned upward. “I suspect if Dell was to I.P.O. today, it would be
valued significantly above the buyout price.”
Tully, a Dell shareholder who heads Cavan Partners, an investment
partnership, is also pursuing appraisal rights. Mr. Tully volunteered
to be an investor representative in the process.
demand all this documentation is quite onerous,” he said in an
interview last week. “If this kind of thing became commonplace, it
would pretty much discourage people from demanding appraisals.”
asked the company why it would make such lengthy demands of the
shareholders who were just exercising one of their rights. A
spokesman said it had served document requests only on the 28
shareholders who volunteered to represent all the investors seeking
appraisal rights. “Discovery of this nature is usual in appraisal
cases such as this one,” he said, declining to comment further.
will be onerous for Mr. Tully, who is not a large shareholder, to
answer Mr. Dell’s demands, imagine how burdensome it would be for a
big mutual fund company to respond. The company would have to produce
documents relating to Dell from an array of portfolio managers whose
funds hold the stock, as well as myriad research analysts and other
employees. That’s the problem facing T. Rowe Price, one of the
investors seeking an appraisal.
M. Grant, a partner at
Grant & Eisenhofer, a law firm
that represents the shareholders who want an appraisal, said he would
most likely ask the court to rule that the information requested by
Mr. Dell should not be discoverable.
Lutin, a former investment banker, oversees the
Shareholder Forum, an independent
creator of programs devised to provide information investors need to
make astute decisions. The Dell appraisal-rights case is a current
program of the forum, and last week,
he asked Mr. Dell’s lawyers to
withdraw the demand.
“Long-term investors need a secure right to realize the long-term
value of a company,” Mr. Lutin told me. “Without it, you can’t justify
funding an enterprise, and our capital markets won’t work. Every
investor depends on that right, and it’s our responsibility to protect
Perhaps the judge overseeing the appraisal process will take an
interest in the chilling effect that the Dell filing might have on
future shareholders’ efforts to seek independent appraisals.
Dell is successful in demanding petitioners produce documents over the
period they outlined, it would be a blow to all minority shareholders
demanding appraisal rights,” Mr. Khusial said. “One of the few options
minority investors have in a buyout would become inefficient and
version of this article appears in print on July 20, 2014, on page BU1
of the New York edition with the headline: Your Rights, Buried in
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