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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.

Note: On December 14, 2017, the Delaware Supreme Court reversed and remanded the decision above, encouraging reliance upon market pricing of the transaction as a determination of "fair value." The Forum accordingly reported that it would resume support of marketplace processes instead of judicial appraisal for the realization of intrinsic value in opportunistically priced but carefully negotiated buyouts.


Forum reference:

Profile of "appraisal arbitrage" investor in Dell case


For a related article, see

For other news reports of the referenced 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: Fortune, June 2, 2016 article


Finance   Hedge Funds

The Biggest Winner in the Dell Settlement Was Hoping to Lose

by Jen Wieczner

June 2, 2016, 6:00 AM EDT




Photograph by Matthew Busch—Bloomberg via Getty Images


Hedge fund also allegedly placed bets that made the financial crisis worse.


Hedge fund also allegedly placed bets that made the financial crisis worse.

Back in 2013 when a buyout took Dell private, hedge fund Magnetar Capital was one of the biggest opponents of the deal. Now, the Chicago-area investment manager, which became famous for making big bucks off the housing bust, is set to become the biggest winner from a case tied to the transaction, scoring an additional $25 million payout, or about 28% more per share than most other shareholders received.

Here’s how it went down: A Delaware court ruled on Tuesday that Dell founder Michael Dell and private equity firm Silver Lake Partners paid too little for Dell when they bought the computer company for $25 billion three years ago, or $13.75 a share. The court ruled that the fair price was actually $17.62 a share for Dell. But the only shareholders who can collect the rest of the money that the court deemed their shares were worth are those who voted against the deal, and Magnetar is the largest of just a few investors who did, according to The Wall Street Journal.

This was likely Magnetar’s strategy all along, and indeed its reason for investing in Dell in the first place—it bought Dell stock after the buyout was already announced, intending to go to court to sue for extra compensation. Of course, Magnetar could only protest the acquisition price in court if the deal was approved despite its objections. In other words, while the hedge fund voted to reject the deal, it was banking on losing that vote—it must have expected other shareholders to approve the deal anyway. Had a majority of shareholders voted with Magnetar and blocked the deal, the hedge fund’s whole strategy would have been moot.

If that game plan seems backwards and counterintuitive, consider that Magnetar, which manages more than $13 billion, has made a killing literally betting against itself in the past. The hedge fund famously profited during the financial crisis by investing in risky mortgage securities known as collateralized debt obligations (CDOs) while also shorting them, a maneuver highlighted in Michael Lewis’s book “The Big Short.” Magnetar was the focus of a Pulitzer Prize-winning investigation by journalism non-profit ProPublica into the deals that caused the housing bust. Magnetar has maintained that it was implementing a “market neutral” strategy that would make money no matter what happened in the housing market; while the Securities and Exchange Commission investigated the hedge fund’s actions, it eventually closed the investigation without pressing charges. The SEC has levied fines on Merrill Lynch and other firms for their roles in the Magnetar deals.

Magnetar’s tactic of filing lawsuits challenging takeover valuations in order to make money, also known as appraisal arbitrage, has become increasing popular with hedge funds in recent years, especially in the merger litigation hotbed of Delaware. In 2015, 54 such cases were filed in Delaware, and so far this year, 29 have been filed through the end of May alone, according to the Delaware Court of Chancery, which handles appraisals in that state (including the Dell case). That’s up from fewer than 10 cases filed in 2010, according to a recent study published in the Washington University Law Review.

In the M&A appraisal game, Magnetar is one of the most active players. A new study by Columbia Business School professor Wei Jiang found that the hedge fund filed appraisal petitions on five M&A transactions between 2010 and 2014. Magnetar has long specialized in merger arbitrage, a strategy that involves trading around deals and occasionally engaging in litigation.

For example, besides the Dell case, Magnetar was one of several hedge funds to share in a $127 million payment from Safeway in June 2015 to settle the investors’ claims that the grocery chain sold itself to Albertson’s for too low a price. The sum amounted to a 26% premium over what the funds originally received for their Safeway stock in the deal.

And in December 2015, Magnetar again split the proceeds, estimated at more than $300 million, of a settlement of its lawsuit claiming that the 2013 buyout of Dole had undervalued the fruit company. More recently, in late January of this year, Magnetar received another settlement of about $11 million, according to regulatory filings, from CEC Entertainment—the operator of Chuck E. Cheese kid-friendly restaurants—which it had sued seeking additional shareholder compensation in CEC’s 2014 buyout by private equity firm Apollo Global Management.

As with Magnetar’s mortgage bet, investing in M&A deals with the primary purpose of challenging them is also controversial. Some critics argue the lawsuits are frivolous and an abuse of the legal system. Others complain that the litigation may benefit a few institutional investors like hedge funds with pockets deep enough to go to court, but it does more harm than good for most shareholders by levying extra expenses on companies and squeezing them for settlements. Delaware itself has recently introduced amendments that could limit such lawsuits.

Magnetar defended the practice. “Decades ago, shareholders in Delaware corporations were granted the right to seek appraisal in mergers where they believe they are not receiving fair value for their shares,” a spokesperson for the firm told Fortune. “The appraisal process—which is exercised multiple times a year by shareholders—allows a court to determine fair value through a judicial process.”

Of course, when takeover appraisal cases do make it all the way to court, there’s no guarantee that the hedge fund will reap a return on its efforts. Sometimes, the court decides that the acquiring company paid the right price—or even too much compared to the target’s fair value. In 2013, for example, Magnetar and several other hedge funds sued over the acquisition by 3M of biometrics company Cogent, seeking about 55% more money for their shares in the target, which they claimed were priced too low. But the judge said the shares had only been undervalued by $0.37 apiece, and that Cogent was worth less than 4% more than what 3M paid.

The Dell deal may have had just the right combination of factors to make it a winning candidate for appraisal litigation, but Magnetar and other investors may not always be so lucky.

This story has been updated with new statistics on appraisal cases from the Delaware Court of Chancery.



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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