Delaware Court of Chancery rejects
transaction price as best measure of fair value
Ropes & Gray LLP
USA
| September 28 2016
Introduction
On May 31 2016 the Delaware Court of Chancery released its post-trial
opinion on the closely watched appraisal action that arose from the
buy-out of Dell Inc(1)
by Michael Dell, its founder, along with a private equity backer.
Despite finding that the transaction had resulted from a
disinterested, fair and robust process that would have "sailed
through" a traditional fiduciary duty review, Vice Chancellor Laster
nonetheless held, after a four-day trial featuring 1,200 exhibits and
extensive witness testimony, including from five experts, that the
$13.75 per share transaction price did not provide Dell stockholders
with fair value for their shares.
Decision
The Dell opinion is notable in that, contrary to the recent
trend in Delaware, the court did not accept the transaction's market
price as presumptively representative of fair value. The vice
chancellor refused to view the market price as determinative for a
number of reasons, including:
-
the fact that the transaction was a management buy-out;
-
evidence showing a gap between Dell's intrinsic value and its share
price; and
-
certain limitations in the transaction process, including the lack
of meaningful pre-signing price competition and the limitations of
the go-shop provision.
The court instead employed a discounted cash flow (DCF) analysis to
render an independent conclusion. Interestingly, the court rejected
the company's internal projections as overly optimistic and instead
focused on projections prepared by the special committee's financial
adviser, the Boston Consulting Group Inc, in connection with the
transaction, as well as projections provided to the buy-out group's
lenders. The court also rejected many of the conclusions offered by
the parties' experts concerning the proper DCF inputs, seeing them as
litigation-driven. Ultimately, the court selected different inputs
from each of the experts and valued Dell at $17.62 per share – an
approximate $6 billion increase from the total consideration paid.
However, because so few stockholders participated in the appraisal
action, Dell will likely pay former stockholders only $35 million in
additional consideration.
Comment
The Dell opinion reminds merger parties that although deal
price may be the best indicator of fair value in most instances, it is
not determinative. The Delaware Court of Chancery will scrutinise the
transaction process to evaluate whether it is a reliable measuring
stick for assessing fair value. Even if that process would pass muster
under a traditional fiduciary duty analysis, it may not be deemed the
best measure of value. Here, the contrast between the market's
"myopic" valuation of Dell and management's long-view assessment of
the company raised concerns that the transaction price was
artificially low and resulted from asymmetric information. Mr Dell's
role in the buy-out also raised concerns about conflicts of interest
and fairness. While some may view this opinion as breathing life into
Delaware appraisal actions, the facts and circumstances surrounding
the Dell transaction suggest that it may be an anomaly confined to its
particular circumstances. In a merger presenting none of these
concerns, the Delaware Court of Chancery might very well follow its
recent practice of giving substantial (often determinative) weight to
a transaction price fairly and rigorously set.
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For further information on this topic please
contact
Martin J Crisp
at Ropes & Gray LLP's New York office by telephone (+1 212 596
9000) or email (martin.crisp@ropesgray.com).
Alternatively, contact
Jason Freedman
at Ropes & Gray LLP's San Francisco office by telephone (+1 415 315
6300) or email (jason.freedman@ropesgray.com).
The Ropes & Gray website can be accessed at
www.ropesgray.com.
Endnotes
(1) In re Appraisal of Dell Inc, CA No 9322-VCL (Del Ch May 31
2016).
Ropes & Gray LLP
- Martin J Crisp, Jason Freedman
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