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The Shareholder Forumtm

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.


 

Forum reference:

Court's Dell decision provides foundation for professional investment in appraisal rights

 

For the court's careful explanations of the distinction between fairly negotiated pricing and the intrinsic fair value of a company, and of the court's appraisal of that fair value, see

For other news reports of the court's decision in the closely watched appraisal case initiated October 29, 2013, by the Forum's representative petitioner, Cavan Partners, LP. and supported by its attorneys' research of court valuation standards, see the "Appraisal of Fair Value" section of the Dell project's reference page.

 

Source: Reuters, June 1, 2016 article

Reuters

 


Wed Jun 1, 2016 4:50am EDT

U.S. court rules $24.9 billion Dell buyout underpriced by 22 percent

WILMINGTON, DEL. | By Tom Hals

Dell logos are seen at its headquarters in Cyberjaya, outside Kuala Lumpur in this September 4, 2013 file photo.

Reuters/Bazuki Muhammad/Files

Michael Dell and Silver Lake Partners underpriced their 2013 $24.9 billion buyout of Dell Inc by about 22 percent and may have to pay tens of millions to investors who opposed the deal for the computer maker, a Delaware judge ruled on Tuesday.

The ruling, which applies to about 5.5 million Dell shares, is a victory for the specialized hedge funds that have increasingly tried to squeeze more money from mergers using a type of lawsuit known as appraisal.

The lawsuits allow investors who oppose a deal, such as the bitterly contested Dell buyout, to sue and ask a Delaware judge to determine a fair deal price.

Activist investor Carl Icahn urged Dell shareholders to vote down the deal and take their case for fair value to court. Initially appraisal was sought for about 40 million shares, but the bulk was removed for procedural reasons.

In Tuesday's ruling, Vice Chancellor Travis Laster said fair value was $17.62 per share, not the $13.75 per share deal price.

With interest, investors who sought appraisal will collect about $20.84 per share.

The Dell investors presented evidence that fair value was $28.61 per share, which would have cost Michael Dell and Silver Lake hundreds of millions of dollars. The buyers contended that fair value was $12.68.

Dell and a lawyer for the stockholders, Stuart Grant, declined to comment. Tuesday's ruling can be appealed.

Laster said the Dell buyout took advantage of a dip in the company's stock price and its board never determined the intrinsic value before negotiating.

"The original merger consideration was dictated by what a financial sponsor could pay and still generate outsized returns," wrote Laster.

The judge dedicated much of the opinion to explaining why deal price was not a fair value indicator, particularly in a management-led buyout. Delaware judges had used deal price in appraisals involving the closely watched buyouts of Ancestry.com in 2012 and BMC Software Inc in 2013.

The added cost to the buyers from Tuesday's ruling is about $36 million.

About 3.9 million appraised shares were held by affiliates of Magnetar Capital.

A small number of hedge funds have built a strategy of swooping in just before a deal closes, when there is less risk a deal would collapse, and buying stock for the sole purpose of seeking appraisal.

Investors who seek appraisal do not get paid at the deal's closing, but they collect interest of 5 percentage points above the federal discount rate while the case is pending. The U.S. Chamber of Commerce has complained that that encourages hedge funds to bring cases because they can earn a return even when a deal price is found to be fair.

One of the biggest losers from the Dell case may be T Rowe Price, one of the few mutual fund managers to test the appraisal strategy.

Dell was able to knock out T Rowe Price's stock, which comprised the bulk of the shares in the case, because the fund manager mistakenly voted in favor of the buyout.

T Rowe Price stood to collect around $190 million if its Dell stock had been appraised. Laster also ruled on Tuesday the fund manager was not entitled to interest on its shares.

"T Rowe Price runs mutual funds and allocates capital, but they may regret trying to do this themselves," said Minor Myers, a professor at Brooklyn Law School in New York. "This is just one of the pitfalls with appraisal, and it's not for novices."

 

© 2016 Reuters All Rights Reserved
 

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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