‘Fair Value?’ In Dell’s Case, a Judge
Buyouts like the one Michael Dell
pursued for his company are often rife with self-dealing. But
Mr. Dell and the directors were not found to have done anything
Winter/The New York Times
Last week, the
Delaware Court of Chancery handed down a startling decision with broad
implications for the future of corporate takeovers: It determined that the
board of Dell Inc. sold the company for $6 billion too little when the
formerly public company was taken private by a buyout group led by
Michael Dell in 2013.
What was so
surprising about the decision was that the judge in the case, Vice
Chancellor J. Travis Laster, highlighted that there had been no higher offer
for the company and said that the board “and its advisors did many
praiseworthy things.” Nevertheless, he ordered Dell to pay the shareholders
who brought the lawsuit their portion of the difference.
The decision is
sending shudders all over Wall Street and the boardrooms of corporate
America, because the court, in effect, overruled “the market.” The decision
means that companies don’t simply have a fiduciary duty to find a buyer
willing to pay the highest price, but that a judge may ultimately deem what
the price should be.
This outcome was
applauded by shareholder advocates. And it is likely to lead to a spate of
lawsuits and second-guessing over the price of the next big mergers and
buyouts like the one that Mr. Dell pursued are often filled with conflicts
and self-dealing, dynamics that have produced steady fodder for this column.
But in this instance, what is particularly startling and noteworthy is that
Mr. Dell and the directors were not found to have done anything underhanded.
The judge himself went out of his way to say: “It bears emphasizing that
unlike other situations that this court has confronted, there is no evidence
that Mr. Dell or his management team sought to create the valuation
disconnect so that they could take advantage of it.”
Chancellor Laster still decided that based on Dell’s “fair price,” the
company, which is incorporated in Delaware, was sold for too little. “The
concept of fair value under Delaware law is not equivalent to the economic
concept of fair market value,” he wrote. “Rather, the concept of fair value
for purposes of Delaware’s appraisal statute is a largely judge-made
creation, freighted with policy considerations.”
The case is part
of a growing trend in which hedge funds and other investors jump into a
company’s stock after a takeover bid has been announced with the explicit
plan of suing the companies to claim the price was too low. The practice —
one that is likely to be catapulted even further by this decision — is known
as appraisal arbitrage.
appraisal arbitrage will tout the Dell result to encourage the flow of even
greater funds into the practice,” Martin Lipton, the famed takeover lawyer,
wrote in a memo to clients after the decision.
are clear: “Private
equity firms should be expected to ask whether they face routine
appraisal exposure in Delaware, no matter how robust the auction, and
therefore seek out alternative transaction structures to cap and price their
risk (or exit the market entirely),” wrote Mr. Lipton, a founding partner of
Wachtell, Lipton, Rosen & Katz.
one of the firms suing Dell, T. Rowe Price, was deemed to be ineligible to
receive a payment because — through a series of technical mistakes — it
voted in favor of the transaction. (A shareholder has to vote against the
deal to be eligible for a payout.) On Monday, T. Rowe Price said it would
make its investors who held Dell shares whole, paying out a total of $194
The rules around
Delaware’s appraisal rights of “fair value” are aimed at helping long-term
shareholders protect themselves in instances of self-dealing or other
chicanery. In recent years, however, using the courts to negotiate “fair
value” has become a full-time industry for investment funds and lawyers
looking for a quick score.
Wei Jiang, a
professor at Columbia Business School, recently noted in a study that Vice
Chancellor Sam Glasscock III in Delaware had commented in one case that the
shareholders bringing the lawsuit were “arbitrageurs who bought, not into an
ongoing concern, but instead into this lawsuit.” Ms. Jiang wrote that “the
number of appraisal petitions has increased from a trickle of cases in the
early 2000s to over 20 a year in recent years, or close to one-quarter of
all transactions where appraisal is possible.”
peculiar about the Dell decision is that the judge found no chicanery and
still didn’t think the price was fair, explaining that it was possible a
board’s actions “might pass muster for purposes of a breach of fiduciary
claim and yet still generate a sub-optimal process for purposes of an
That’s not to
say that Dell’s buyout was a model of perfection; no buyout in which the
founder is trying to buy shares from the public will ever be conflict-free.
Management always has the distinct advantage, and its decision to pursue a
deal often makes it harder to attract competing offers. In its ruling, the
a column I wrote about this very issue
in the Dell case.
At the same
time, Mr. Dell appears to have genuinely tried to make the playing field
even for bidders: He spent more time with the Blackstone Group, which
ultimately dropped its bid, than with the winning group he led. And the
judge said as much in his decision.
All of this
raises serious questions for dealmakers and public shareholders: What’s the
appropriate way to determine a takeover price? And if the highest bid is not
deemed “fair” — assuming the auction is run competently — what is?
Mr. Lipton said
he imagined that a “private equity buyer might insist on a provision in the
merger agreement allowing it to walk away if a small fraction of the shares
— 1 or 2 percent — perfect appraisal rights.
This approach is
likely to be unpalatable to selling boards, however, and creates substantial
risk that the buyer will exit the transaction when the appraisal cap is
ruling is likely to make it harder for companies to complete buyouts. That
may be a good thing, given that so many shareholders of public companies
lose out when the companies they invested in go private and find ways to do
But if the
decision has the chilling effect that some critics fear — making a judge,
not the market, the decider of takeover premiums — it could ultimately make
the situation for shareholders even worse.
A version of
this article appears in print on June 7, 2016, on page B1 of the New
York edition with the headline: A Judge Decides Fair Value for Dell.
The New York Times Company