| Mon May 11, 2015 1:09pm EDT
T Rowe's challenge to Dell deal may fuel critics of 'appraisal'
| By Tom Hals
Michael Dell, chief
executive of Dell Inc, delivers his keynote speech at the All
Things Oracle OpenWorld Summit in San Francisco, California
September 25, 2013.
An increasingly popular tactic used by hedge funds and
others to extract more money from buyouts could soon face a major
courtroom test when a big investor in Dell Inc may argue that it should be
paid a higher price for the 2013 acquisition of the PC maker.
The strategy, known as "appraisal," usually
involves an investor who opposes a buyout price asking a judge to
determine the fair value for the stock. The tactic is also known as
"dissenter's rights" and is meant to protect investors from underpriced
buyouts, but some Wall Street dealmakers say hedge funds use it as a
hold-up strategy to squeeze extra money from mergers.
The question in the Delaware litigation is whether
an investor can come back to seek an appraisal once it emerges that the
investor voted for, not against, the deal. The investor, T Rowe Price, is
seeking a higher price for its Dell stock than the $13.75 per share
offered in the $26 billion buyout led by Michael Dell and Silver Lake
Some holdout Dell investors have said fair value of
Dell's stock was up to $25 per share. That could mean hundreds of millions
of dollars are on the line for T Rowe Price and Michael Dell.
T Rowe Price's case began in February 2014 when the
company asked Delaware judge Travis Laster to appraise its roughly 27
million Dell shares, according to court records. It said it had notified
Dell and had not voted its stock for the deal, satisfying the legal
requirements for appraisal.
However, in an apparent about-face, the money
manager reported to securities regulators in August that it voted for the
deal across its funds. That vote came to light earlier this month, based
on a review of filings by USA Today.
Asked if it had voted for the Dell deal, T Rowe
Price did not directly respond.
"We are aware of a discrepancy in the communication
of our voting instruction on the Dell buyout," the company said in a
At a court hearing on Monday, Gregory Williams, a
lawyer for Dell, briefly addressed T Rowe Price's appraisal and told
Laster the computer maker would soon begin "aggressive, limited discovery"
into the fund manager's vote. Williams said Dell might ask Laster to toss
T Rowe Price's appraisal claim.
One Delaware law specialist said that if regulatory
filings are correct, T Rowe Price's gamble on appraisal may be over.
"I think there is a pretty serious question of
their continued ability to pursue appraisal rights," said Larry Hamermesh,
a professor at the Widener University School of Law in Wilmington,
T Rowe Price is one of scores of Dell holders to
seek appraisal claims, covering more than 38 million shares in total,
according to court records.
Laster heard arguments on Monday that many of those
claims should be tossed for technical reasons. He did not say when he
WALL STREET CRITICISM
T Rowe Price's appraisal claims were not among those
challenged by Dell on Monday and the fund manager's attorney, Stuart
Grant, did not discuss his client's appraisal claim at the hearing.
One corporate law professor said T Rowe Price will
be able to continue seeking appraisal even if it voted for the deal.
This is because the law governing appraisal looks
not to the vote of the beneficial holder of the stock, which is T Rowe
Price, but to the record-holder of the stock. For the vast majority of
investors, including T Rowe Price, the record holder was Cede & Co, which
aggregates stock certificates.
Delaware judges have found that so long as an
investor's appraisal claim is covered by an outstanding number of
Cede-held shares that abstained or voted no on the deal, the appraisal
case can proceed.
Brian Quinn, a professor at Boston College Law
School, acknowledged T Rowe Price's situation looks bad from a public
relations standpoint. "But when you look at the law, I don't think it will
matter," he said.
That law has fueled Wall Street criticism of
appraisal, which has been used by a growing number of hedge funds to wring
a bit more money from a merger.
The funds often seek appraisal using stock they
bought after the record date for determining who casts a ballot on the
deal. As companies see it, the hedge funds are pursuing dissenter's rights
without voting on the deal.
Quinn said that T Rowe Price is distinct from the
hedge funds, even if it is using the law in the same way.
Hedge funds buy their stock at the last minute and
often seek a quick settlement.
T Rowe Price was a long-term holder of Dell stock
and a vocal critic of the price of the Dell deal. Its large appraisal
claim is the kind of action that Delaware judges have said can act as a
necessary deterrent against underpriced deals.
(Reporting by Tom Hals in Wilmington, Delaware;
Editing by Nick Zieminski, Noeleen Walder and Ted Botha)