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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.


 

 

For a printable copy of this report, click here.

Forum Report: Dell Appraisal Rights

 

Court Defines Responsibility for Voting in Appraisal Demands

Court guidance on determining responsibility for voting

Reliability of proxy plumbing to execute and trace voting instructions

Investor’s risk of procedural errors

The recent decision of the Delaware Chancery Court concerning the T. Rowe Price voting error in the Dell appraisal case (“Opinion Enforcing Dissenter Requirement”)[1] has provided important guidance for compliance with the procedural requirements of appraisal rights, as well as valuable observations about the “proxy plumbing” that must be relied upon for a much broader range of purposes.

Some initial views of the Opinion’s relevance, applicable to both long term shareholders and “appraisal arbitrage” investors, are summarized below.[2] Further comments, either for private discussion or for reporting to Forum participants, will of course be welcomed.

Court guidance on determining responsibility for voting

 The Opinion distinguishes the T. Rowe case from the “appraisal arbitrage” cases based on an investor’s control of the vote relating to particular shares for which appraisal is demanded, and on the availability of evidence to determine how those shares were in fact voted.[3]

In the appraisal arbitrage cases, the Opinion explains, the investors purchased their shares after the record date for voting so that it was not possible to determine who had controlled the vote and how the particular shares were voted.  It is therefore reasonable in those cases to allow an appraisal demand based on the investor’s beneficial ownership of shares held in “fungible bulk” by the record holder (the Cede affiliate of Depository Trust Company) that were not voted in favor of a transaction. The new Opinion thus supports the recent decisions allowing appraisal arbitrage investors to rely upon the voting actions or inactions of other, unidentified beneficial owners.

What is different about the T. Rowe case is that the investor was the beneficial owner of shares on the record date, and controlled the voting of those shares. This makes it possible to obtain evidence of how the investor caused those particular shares to be voted. The records of T. Rowe as well as those of the service providers that executed T. Rowe’s instructions could be examined to determine how each of the T. Rowe accounts voted their Dell shares, and the court found that the evidence proved that the shares for which appraisal was sought had been voted in favor of the merger, and as a result do not qualify for appraisal.[4]

Reliability of proxy plumbing to execute and trace voting instructions

The ability to establish facts about T. Rowe’s votes would not have been possible without recent efforts to improve the shareholder proxy process.[5]

The Opinion starts with a remarkably understandable summary of the “Byzantine” system through which T. Rowe and most other professionally managed investors vote their corporate shares. Then, in more than twenty pages that follow, the Opinion describes how the votes of each beneficial owner account were executed and identifies the records by which the votes can be traced. The court concludes not only that the facts of votes can be established, but that the “daisy chain” of service providers are to be respected for making a badly designed regulatory process function reliably.

Investor’s risk of procedural errors

The observation of T. Rowe’s losing a couple of years of its investors’ earnings – according to the Opinion, the shares are entitled to only the October 2013 merger price, without any interest[6] – has naturally focused attention on the risks and potential costs of procedural errors in appraisal rights investments.

The example clearly demonstrates a need to comply with the strict administrative requirements of the legal process for appraisal rights, but the following observations suggest that investors can reasonably expect to satisfy these requirements if they rely upon informed professional guidance and normal levels of care.

■  This is the only known case of an investor voting the wrong way, in this or any other recent appraisal case.

■  As noted in the Opinion, the T. Rowe officials responsible for proxy voting had processed the voting instructions properly and confirmed them three times for repeated adjournments of the shareholder meeting, demonstrating that they understood how to manage the process. However, in the final vote that ultimately counted, nobody from the proxy staff logged into the system.[7]

■  The same fund managers made two other unusual, completely different processing errors in their administration of the Dell shares for which they were responsible: they failed to maintain the required continuous ownership of stock in 5 accounts, losing appraisal rights for an additional 922,975 shares;[8] and for one account, they failed to process any voting instructions at all, which error made that account the only one of the twenty petitioners managed by T. Rowe that is now entitled to appraisal rights.[9]

ttt

Please let me know if you have any questions about these observations.

GL – May 25, 2016

Gary Lutin

Chairman, The Shareholder Forum

575 Madison Avenue, New York, New York 10022

Tel: 212-605-0335

Email: gl@shareholderforum.com

 


[3] For the court’s plainly rational explanation, see pages 27-28 (PDF pp.28-29) of the Opinion.

[4] The decision concerned 31,052,130 Dell shares in 14 mutual fund and pension accounts managed by T. Rowe Price, as listed on page 20 (PDF p.21) of the Opinion.

[6] The final amount of losses has not yet been determined since counsel for T. Rowe has submitted a motion for an “equitable” award of interest based on sympathy for the error, and the response of Dell’s counsel suggests that they may seek compensation for expenses incurred as a result of T. Rowe’s failure to disclose the voting error for months until it was revealed in news reports; see May 19, 2016, In Re: Appraisal of Dell, Inc. (Consol. C. A. No. 9322-VCL): Certain Petitioners' Motion for an Equitable Award of Interest (6 pages, 23 KB, in PDF format) and May 23, 2016, In Re: Appraisal of Dell, Inc. (Consol. C. A. No. 9322-VCL): Respondent Dell Inc.'s Opposition to Certain Petitioners' Motion for an Equitable Award of Interest (12 pages, 58 KB, in PDF format).

[7]  See pages 11-13 (PDF pp.12-14) of the Opinion.

 

 

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.

Inquiries about this project and requests to be included in its distribution list may be addressed to dell@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.