Creative suggestions for buyer defense positions
based on court's valuation standards
The Harvard Law School Forum on Corporate Governance and Financial
Regulation, June 21, 2016 posting
Implications of the
Recent Dell Appraisal Decision
Posted by Lewis R. Clayton & Stephen P.
Lamb, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Tuesday, June
On May 31, Vice
Chancellor Laster of the Delaware Court of Chancery held that, for
purposes of Delaware’s appraisal statute, the fair value of the common
stock of Dell Inc. at the time of its sale to a group including the
Company’s founder Michael Dell was $17.62 per share, almost a third
higher than the $13.75 deal price. The
decision has received a good deal of attention from the press and
commentators, largely because the Court rejected the use of the
transaction price as compelling evidence of fair value, despite
several recent Delaware appraisal decisions that have relied heavily
or exclusively on the transaction price. While the ruling may
encourage some stockholders of Delaware companies to seek
appraisal—particularly in management buyouts—there are powerful
reasons why the decision should be limited to its particular facts.
In October 2013, Dell
was taken private by a group led by Michael Dell and the investment
firm Silver Lake. The transaction followed years of disappointing
performance attributable, in part, to competition from low-margin
producers and shifts in consumer preferences towards smartphones and
tablets. Although management expressed confidence in the Company’s
prospects, the stock price declined significantly. A special committee
of the Dell Board negotiated and approved the transaction, and the
Company’s disclosures to stockholders emphasized that the deal price
represented a large premium over the common stock’s trading price. A
consolidated class action challenging the transaction and asserting
breach of fiduciary duty claims was voluntarily dismissed by the lead
plaintiffs without any consideration or concession from the
In the appraisal action, Dell argued that the transaction price
was the best evidence of the fair value of the shares. The Court acknowledged
that, “[i]n at least five” recent decisions, the Court of Chancery “has found
the deal price to be the most reliable indicator of the company’s fair value,
particularly when other evidence of fair value was weak.” And the Court noted
that the Company’s sale process “easily would sail through if reviewed under
Nevertheless, the Court found the deal price was not a reliable
proxy for fair value, for a number of reasons. Among the most significant:
The transaction was a management buyout. “Because of management’s additional
and conflicting role as buyer, MBOs present different concerns than true arms’
Where the only active bidders were financial, rather than strategic buyers,
the price reflected the constraints of an “LBO pricing model.” In the Court’s
view, financial bidders focus on short term internal rates of return, rather
than on the fair value of the shares. Fair value under the appraisal statute
normally requires consideration of a range of factors, including market value,
asset value and likely prospective earnings.
There was “extensive and compelling” evidence of a “valuation gap between the
market’s perception and the Company’s operative reality.” The Court found an
“anti-bubble”—due to “[m]arket myopia,” investors and analysts focused on
Dell’s “short-term, quarter-by-quarter results” although the Company had made
$14 billion in investments that had yet to generate anticipated results.
There was limited pre-signing competition for the Company, and the
effectiveness of the post-signing go-shop period was limited by the size and
complexity of the Company.
The special committee that negotiated the deal did not consider fair
value—instead, it focused on the market price of the Company’s common stock,
and “negotiated without determining the value of its best alternative to a
Even considering all these factors, the Court found the outcome
of the sale process sufficiently probative to rule out a large undervaluation,
such as the former stockholders’ claim that Dell shares were worth $28.61, over
twice the transaction price. What is the likely impact of the Dell ruling?
Acquirers may find it more difficult to argue that the transaction price is
compelling evidence of fair value, but that effect may be limited to cases
where the factors listed above are present. Significantly, the Dell Court
distinguished Chancery decisions relying on the transaction price because
those cases did not involve MBOs, and “either involved a more active
pre-signing market check or the process was kicked off by an unsolicited
third-party bid.” In such cases, or where the target company can show that the
pre-transaction market price of its stock reflected legitimate doubts about
the target’s prospects, as opposed to “myopia,” the transaction price might
well be regarded as compelling evidence of fair value.
To reduce the risk of a large appraisal award, target boards may wish to make
a record of their focus on the company’s intrinsic value, as opposed to the
premium to market represented by the transaction price.
Many transaction agreements allow the buyer to abandon the deal if a specified
percentage of shares seeks appraisal. Acquirers concerned about the risk of a
significant appraisal award might consider negotiating for a lower threshold.
The Dell Court’s view that financial buyers focus on their own rate of return
rather than fair value may aid those acquirers in resisting or limiting
discovery of their internal communications in appraisal litigation. If those
buyers are not basing their bids on fair value, then their own analyses and
estimates may well be irrelevant.
In re Appraisal of Dell Inc., C.A.
No. 9322-VCL (Del. Ch. May 31, 2016)
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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