Chancery's Dell Ruling Gives New Life To
Wilmington (May 31, 2016, 11:40 PM ET) -- The Delaware Chancery Court’s
ruling that valued
Dell stock at nearly $4 above the
transaction price in its roughly $25 billion take-private deal throws cold
water on any notion that the court would continue to look no further than
market price in appraisal actions, a move that experts say encourages
shareholders’ attorneys to keep bringing such challenges.
On Tuesday, Vice Chancellor J. Travis Laster
ruled that the fair value of
Dell’s stock at the time its take-private deal led by founder and CEO
Michael Dell closed in 2013 was actually $17.62 — 28 percent higher than
the $13.75 transaction price.
In fact, the vice chancellor didn’t consider the deal price at all when
trying to determine the fair value of Dell, in part because the
transaction, rather than being a so-called arm’s length deal, was a
management-led buyout and the intrinsic worth of a company required a more
thorough examination, according the opinion.
The decision breaks a recent chain of Chancery appraisal opinions,
including Vice Chancellor Sam Glasscock III’s rulings in
BMC Software Inc. and CKx Inc., holding deal price to be the
fair value, and experts say Vice Chancellor Laster’s findings reiterate
the Delaware law position that market price does not have to be the
ultimate factor in appraisal actions.
“Outside shareholders should be gratified and extremely encouraged by the
court’s decision to perform traditional valuation techniques to protect
them and, when necessary, use its judgment to price a deal higher than the
various corporate insiders,” said David Graff, co-chair of
Anderson Kill PC's corporate and
commercial litigation practice group. “The Chancery Court is not going to
let itself be constrained by an artificial ceiling set by market
participants when it believes there’s compelling data.”
While there have been appraisal cases in recent years that have been
settled for a share value that beats what the deal price was, it was rare
to see one that went all the way to trial and didn’t hang the valuation on
what the market supposedly had spoken for.
Longtime Delaware attorney David J. Margules of
Ballard Spahr LLP said that the recent
spate of appraisal decisions cutting toward deal price had “put starch in
defendants' collars” on the issue, but that anyone who thinks the law has
changed regarding what the court should be weighing in these matters
should think again.
“The law has always been that deal price is just a data point,” Margules
said, adding that Vice Chancellor Laster’s decision analyzes the
limitation of the concept that deal price is always reflective of fair
That notion was beginning to take the gas out of the tank for shareholders
looking to have their stock appraised, but the decision in Dell, even
though it was very specific to the facts in the case, stopped the idea
that the Chancery Court was necessarily going to default to merger price
from gaining traction, experts said.
“No one should have read the previous opinions as creating a flat rule
that the deal price is the maximum,” said Lawrence Hamermesh, professor of
corporate and business law at Widener University Delaware Law School.
“[Deal price is] a powerful piece, but it’s not a presumptive one, let
alone a conclusive one.”
The key difference between the Dell case and other recent appraisal
actions is that the computer giant’s take-private transaction was a
management-led buyout instead of one completely driven by market forces.
Jed I. Bergman, a partner at
Kasowitz Benson Torres &
Friedman LLP, trained in on that
factor, noting that it could be an indicator that the Chancery Court could
be headed toward giving such transactions a second look in appraisal
actions, opening a door for shareholders.
“The management-led buyout structure was a key factor behind the
decision’s departure from recent Chancery cases finding that the deal
price was the best indicator of fair value,” Bergman said. “The court’s
analysis, and its decision to give zero weight to the final merger price,
suggests that management-led buyout transactions may well face increased
scrutiny in appraisal proceedings.”
In third-party transactions, deal price can be a good indication of value,
but it can become problematic in a scenario like Dell’s, said University
of Pennsylvania corporate law professor Jill E. Fisch.
“If you’ve got a robust sale process and an independent buyer, then the
deal price that was negotiated in this robust market is a good indication
of value,” Fisch said. “With something like a management-led buyout,
there’s a risk of controlling the timing and self-interest. There’s a risk
the deal is going to be priced opportunistically.”
In the Dell instance, Vice Chancellor Laster was careful to note that
there appeared to be no breaches of fiduciary duty by Michael Dell or
other Dell management, going as far as writing that the deal would “sail
through” the Chancery Court if evaluated under that standard.
But he also noted that even though the deal makers did “praiseworthy”
things, fiduciary duty claims and appraisal are two separate analyses.
Part of the vice chancellor’s opinion focused on a disconnect between the
market’s perception of what the company was worth and what he called its
Dell had shown through the trial that it was in the midst of a
transformation, pivoting from a company seen as stuck in the shrinking
market for personal computers to one arming itself to respond to
disruptions caused by the exploding smartphone and tablet space, the vice
Those considerations need to be factored in when determining a company’s
value, and a fair-value determination can’t simply rely on “market
fundamentalism,” especially when it’s driven by a management-led buyout,
the opinion states.
Eduard Korsinsky, founding partner of
Levi & Korsinsky LLP, said that the
vice chancellor was correct to specifically parse out the difference
between a fiduciary duty breach analysis and an appraisal in his opinion,
quelling fears on the petitioners’ side that an adjustment to price could
only be achieved if “the specter” of some sort of corporate wrongdoing
“Vice Chancellor Laster is a very practical individual and understood what
was happening, that there was a plan in place that was transformative,”
Korsinsky said. “He wasn’t taking a narrow view. Judges should take these
Dell is represented by Gregory P. Williams, John D. Hendershot, Susan M.
Hannigan and Andrew J. Peach of
Richards Layton & Finger PA and John
L. Latham, Susan E. Hurd, Gidon M. Caine and Charles W. Cox of
Alston & Bird LLP.
The petitioners are represented by Stuart M. Grant, Michael J. Barry,
Christine M. Mackintosh, Jennifer A. Williams and Rebecca A. Musarra of
Grant & Eisenhofer PA.
The case is In re: Appraisal of Dell Inc., case number 9322, in the Court
of Chancery of the State of Delaware.
--Editing by Mark Lebetkin and Philip Shea.
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