June 8, 2016
'Dell' Ruling Raises Questions Over Fair Value of Buyouts
Corporate Law & Accountability Report
June 3 — A recent
Delaware Chancery Court
finding that Dell Inc. stock was undervalued in a 2013 management-led
buyout clarified that deal price isn't always the best indicator of a
company's “fair value” in appraisal proceedings.
In In re Appraisal
of Dell Inc., the court—instead of looking to the negotiated
merger price—relied on a valuation method known as “discounted cash
flow” to determine that some shareholders should have received almost
$4 more per share than what company founder Michael Dell and buyout
firm Silver Lakes paid (105 CARE, 6/1/16).
The decision raises a
really interesting question about how “you value a company,” Ann
Lipton, a professor at Tulane University Law School, told Bloomberg
BNA. Is a company valued by performing a cash-flow analysis or is it
valued by what people are willing to pay for it? she asked.
Not Fair Value
Under Delaware law,
investors that choose not to participate in a merger can petition the
chancery court for an appraisal of how much their shares are worth.
the chancery court issued several opinions finding that the parties'
negotiated price was the best estimate of a company's value under
Delaware's appraisal statute (53 CARE 53, 10/23/15). Those decisions
did not involve management-led buyouts.
In one such decision
involving the appraisal of Ancestry.com Inc. stock, Vice Chancellor
Sam Glasscock in January 2015 made several comments about the
difficulties “a law-trained judge” faces in resolving appraisal
decisions (13 CARE 255, 2/6/15).
Chancellor J. Travis Laster identified several factors in the Dell
case that he said showed the negotiated price wasn't fair value.
Laster found that the
parties' use of a leveraged buyout (LBO) model to determine the deal
price had the effect of undervaluing the company. An LBO is where one
company buys another using a significant amount of borrowed funds,
such as bonds, to finance the deal.
LBO Model Disfavored
Attorneys said in
several law firm memoranda that Dell will have a significant
impact on future transactions led by management.
“Facts really matter”
in appraisal proceedings, Morris James LLP attorneys said in a May 31
adding that companies pursuing management-led buyouts “will have a
hard time doing almost any deal that will be adequate to establish an
A June 1 memo
authored by attorneys at Debevoise & Plimpton LLP
that in particular, Laster “appeared to call into question whether a
financial sponsor requiring a 20% minimum IRR [internal rate of
return] could ever be paying ‘fair value,' at least in circumstances
where leverage is constrained.”
It is interesting
that Laster distrusted LBO figures based on the amount of return
sought by Silver Lakes, Lipton said. She observed that the court was
concerned that company value based on what people are willing to pay
may be unduly impacted by external constraints, such as the buyers'
need for financing and the risks associated with the deal.
however, that such constraints are normally what the parties take into
account in pricing a transaction.
Lipton suggested that
the Dell decision wouldn't have much of an impact on appraisal
cases involving arm's-length transactions.
“Right off the bat,”
this decision was different from others where the merger price was the
best indicator of fair value because Dell involved a management
buyout, Lipton said. Companies involved in arm's-length deals will be
able to distinguish their cases from Dell, she said.
To contact the
reporter on this story: Michael Greene in Washington at
To contact the editor
responsible for this story: Yin Wilczek at
For More Information
The decision is available at
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