Last week’s ruling on the Dell Inc. appraisal proceeding shows how Delaware corporate law can favor institutional shareholders over individuals. The court found that Dell Inc.’s buyers – founder Michael Dell and Silver Lake Partners — had underpaid by almost 30% back in the 2013 buyout. Now Dell will have to pay the small group of shareholders who preserved their appraisal rights what the court concluded was the real fair value plus interest from the closing of the transaction — which likely adds up to about another 20% of the purchase price.


But only a handful of shareholders will benefit and over 70% of the money will go to a single hedge fund.

Appraisal is not a process designed for the small investor. To participate in such a proceeding, shareholders need to wait until the end to get their money, accept the risk of collecting less than the deal price and navigate the procedural complexities. The Dell case put a spotlight on the complexity when T. Rowe Price Group, one of the largest U.S. mutual fund companies, blew the simplest part of perfecting its appraisal rights by accidentally voting to accept the deal even though it had publicly announced it was voting “no.” That mistake ended up costing it $194 million.

Unlike appraisal actions, claims alleging directors breached their fiduciary duties generally benefit all shareholders. The irony in Dell is that the deal got what was essentially a clean bill of health in an earlier lawsuit seeking to stop the deal and claiming breach of duty. In that case, Leo E. Strine Jr., then chancellor of Delaware’s special corporate court who later became chief justice of the state Supreme Court, complimented Dell’s directors: “I do not see any plausible, conceivable basis in which to conclude that it is a colorable possibility that you could deem the choices made by this board to be unreasonable with all the different safeguards.”

Fiduciary duty claims in deals like the Dell buyout tend to be resolved through an examination of the process the directors followed, but that’s not the case in appraisal proceedings. “The court does not judge the directors‘ motives or the reasonableness of their actions, but rather the outcome they achieved. The price is all that matters because the court‘s inquiry focuses exclusively on the value of the company. How and why the directors achieved fair value or fell short is not part of the case,” Vice Chancellor J. Travis Laster wrote in last week’s ruling in the Dell appraisal case

Individual investors (and even an experienced corporate lawyer) could be forgiven for wondering how directors could miss the mark by almost 30% of the purchase price and be viewed as having complied with their fiduciary duties. But that was the case here. Mr. Laster seemed to agree with the Mr. Strine’s assessment in 2013, concluding that there could not be “any basis for liability” in a fiduciary duty case against Dell directors. Something seems wrong here. After all, isn’t the focus on good process based on expecting it to lead to a fair price? The Dell decision seems to disprove that.

Before this case, Delaware judges issued a string of decisions that accepted the deal price as the best indication of fair value in appraisal cases. The Dell case says a different approach should be taken in some cases, particularly management buyouts.

The end result is that retail shareholders are generally left high and dry unless there’s an obvious procedural error, while hedge funds and other sophisticated investors can afford to navigate the complex appraisal process. And the small shareholder arguably gets hit twice: Some have suggested that buyers in such deals deals may pay less to cover a potential recovery in an appraisal.

It all seems backwards. If the Delaware courts are going to conduct an independent financial analysis of the fairness of the price, the results should benefit all shareholders.

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