THE WALL STREET JOURNAL.
LAW | August 9, 2013, 5:20 p.m.
Icahn, Dell Head to Court
Over Shareholder-Voting Changes
By PEG BRICKLEY
Delaware corporate-law tribunal is expected on Monday to fast-track
Carl Icahn's legal challenge to Michael
Dell's buyout deal for Dell Inc., setting up a potential showdown
between the two billionaires over their competing visions for the
Mr. Icahn has asked
Chancellor Leo Strine of Delaware's Court of Chancery to force Dell to
hold simultaneous votes on the almost $24.8 billion buyout offer from
Mr. Dell and Silver Lake Capital and on Mr. Icahn's attempt to set the
stage for a competing offer. The activist investor says Dell rigged
the voting against his bid to replace Dell's board with directors
sympathetic to his proposal for a leveraged recapitalization of the
Mr. Icahn is arguing that
recent changes to voting rules have robbed the company's shareholders
of the right to choose between the dueling deals. Dell, meanwhile,
says Mr. Icahn's lawsuit is "just another soapbox" to publicize his
fight with the special committee of the company's board that is
putting the offer from Mr. Dell and Silver Lake to a shareholder vote.
The issue up for decision
Monday is how fast the case will move. With a shareholder vote set
Sept. 12 on the buyout bid from Mr. Dell and Silver Lake, the
financing for Mr. Icahn's rival offer set to expire Sept. 30, and
Dell's board vote set for Oct. 17, Mr. Icahn argues that failure to
get a speedy hearing on his challenge could be fatal his legal case.
Chancellor Strine could
move the case along quickly or let the deal action play out and leave
Mr. Icahn to pursue his remedies after the fact. Delaware courts are
reluctant to interfere in shareholder votes, but the question of
whether the shareholder-voting changes are fair is one the judge may
want to tackle in advance, observers say. They also expect the market
is right in betting that Mr. Dell's deal for the computer company he
founded will survive the legal attack, unless new facts turn up.
"When dealing with voting
rights like this, I'd be stunned if [Chancellor Strine] didn't just
say, 'Let's cut to the chase and get this scheduled,'" said Lawrence
A. Hamermesh, professor of corporate and business law at Widener
University's Institute of Delaware Corporate Law.
Don't expect earthshaking
pronouncements Monday, Mr. Hamermesh said, but do look for an
important decision soon on a "troublesome area" of corporate law: how
much power do boards have to change the rules on a shareholder vote?
The Dell special committee
recently moved the record date—the date which determines which
shareholders are entitled to vote—to Aug. 13 from June 3. The special
committee also removed a requirement that Mr. Dell's buyout offer be
approved by holders of a majority of the shares outstanding. Instead,
a deal advances if it gains approval of a majority of the votes
actually cast. So Mr. Dell's offer could be approved without winning a
majority of shares outstanding—if large numbers of shares aren't
The company says the voting
changes, allowing shareholders to consider a recent $350 million
improvement in the buyout offer, were appropriate.
Delaware, the legal
homeland of thousands of major corporations, holds shareholder voting
rights sacred and has invalidated board decisions that interfere with
them unfairly, requiring a "compelling justification," such as the
need to weigh material new information.
Mr. Icahn says the special
committee, in essence, delivered Dell into the hands of deal
arbitrageurs, short-term investors who jump into a stock as it heads
toward a deal and jump out just as fast. The new voting record date
gives voting rights to so-called arbs and other late buyers of the
stock, while the tally rule change amplifies the effect of the arb
votes in that it will take only a majority of shares voted for the
buyout to pass. According to Mr. Icahn, that unfairly dilutes the
votes of long-term investors who care about Dell's future—too high a
price to pay for a small improvement in the buyout price.
In Dell, it will come down
to whether the board's special committee had the right advice and the
right motives for changing the record date, Mr. Hamermesh said. "Are
they biased or genuinely trying to pursue a course of action that
places the voting rights in the right hands? It's all about whether
the board is promoting voting rights appropriately or impairing them."
If Dell's decision to
change the voting rules passes muster, deal makers get clarity in a
murky area and an important tool to push shareholders toward a deal
the board endorses, said Hunton & Williams LLP's Steven Haas, a
mergers-and-acquisitions practitioner who has written on the issue of
"Within the M&A bar you
usually have one high-profile deal every two or three years that is so
significant everyone is watching," Mr. Haas said. The fight over Dell,
he said, is one of those cases.
In a 2007 ruling,
Chancellor Strine suggested the "compelling justification" standard
for changing voting rules should be eased to allow boards to abide by
their duties to screen deals and let shareholders know what they
think. That decision wasn't appealed to the Delaware Supreme Court,
but the ruling in Dell, whatever it is, may well be, Mr. Haas said.
That is another reason for
thinking Mr. Icahn's lawsuit will get onto the fast track: if
Chancellor Strine clears the voting changes and Mr. Dell and Silver
Lake win the vote and complete the buyout, it could be tough to undo
the deal if the state's high court ultimately reverses the ruling.
What of the arbs, the
fast-buck artists of the investing world? Will their presence convince
Chancellor Strine that the effect of the changed voting schedule, as
Mr. Icahn contends, will be to allow short-term profiteers to decide
Probably not, said Mr.
Haas. Chancellor Strine "is going to be reluctant to craft any kind of
a holding around the assumption that certain investors are always
going to behave a certain way," Mr. Haas said.
Mr. Hamermesh agrees.
"Arbs are stockholders.
People buy shares for long-term and short-term reasons, and we don't
distinguish between the voting rights of someone who bought recently
and someone who bought a long time ago," he said.
Peg Brickley at
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