If it costs millions to win an appraisal
case, are the suits worth it?
Alison Frankel |
October 19, 2016
Frankel updates On the Case multiple times throughout the day on
WestlawNext Practitioner Insights. A founding editor of the Litigation
Daily, she has covered big-ticket litigation for more than 20 years.
Frankel’s work has appeared in The New York Times, Newsday, The
American Lawyer and several other national publications. She is also
the author of Double Eagle: The Epic Story of the World’s Most
opinions expressed here are the author's own.
There is a hidden message in a Delaware Chancery Court
decision this week to grant the
shareholder firm Grant & Eisenhofer about $8 million in fees and
expenses for convincing the court that Michael Dell and his private equity
partner underpriced their $24.9 billion buyout of Dell in 2013.
The ruling by
Vice-Chancellor Travis Laster is obviously a win – and a relief –
for Grant & Eisenhofer, which was lead counsel in an expensive and
time-consuming challenge to the Dell buyout price by shareholders who
asked Chancery Court to determine the fair value of their shares in an
appraisal action. Last May, Laster ruled that flaws in the sale
process depressed the buyout price
by nearly $4 per share, or 22 percent. For the 5.5 million shares in the
appraisal class, the vice-chancellor’s decision is worth about $25
Eisenhofer requested fees that, with interest, come to just over $4
million. Its fee request was protested by two of the big shareholder
groups in the appraisal action, Magnetar Capital and Global Continuum
Fund, which argued that the request didn’t account for the $4.2 million in
fees G&E is slated to receive from a separate settlement between Dell and
G&E’s big client in the case, T. Rowe Price.
T. Rowe Price –
by far the biggest shareholder to challenge the Dell buyout price – was
part of the appraisal class through the trial before Vice-Chancellor
Laster. After the trial, the judge bounced T. Rowe Price’s 30 million
shares from the class because a fund manager mistakenly voted in favor of
the Dell buyout. Dell subsequently agreed to pay the merger price plus $28
million in interest to T. Rowe Price.
Global said Grant & Eisenhofer’s fee request from the appraisal class was
based on the firm’s contingency fee agreement with T. Rowe Price – an
agreement the other funds never approved. (Straight appraisal cases are
not typically litigated on contingency.) Vice-Chancellor Laster, however,
said that based on the recovery it obtained for shareholders, Grant &
Eisenhofer could actually have been entitled to as much as $7 million
under Delaware’s prevailing precedent on contingency fees. Grant &
Eisenhofer’s lodestar billings in the case were nearly $7.8 million, the
judge noted. Basically, Laster told the protesting funds that they’re
lucky to be paying only about $4 million in fees for the more than $20
million Grant & Eisenhofer netted them.
interesting discussion in Vice-Chancellor Laster’s opinion, which I first
saw reported in The Chancery Daily, involves expenses. Grant & Eisenhofer
said it had laid out more than $4 million in costs to litigate the Dell
appraisal action, nearly $3.5 million of it in fees for expert witnesses.
(The next-highest costs were for copying and e-discovery hosting
services.) Those expenses, of course, are in addition to the $7.8 million
in lawyer time Grant & Eisenhofer said it had invested in the litigation.
Global said Grant & Eisenhofer had spent too much. (They also protested
that T. Rowe Price should bear some of the burden of the expenses since
the trial outcome gave the mutual fund leverage in its separate
negotiations with Dell.) But according to Vice-Chancellor Laster, working
up an appraisal case is an expensive proposition.
pointed out, Chancery Court judges in the five appraisal cases immediately
preceding his Dell opinion all concluded that the deal price is the most
reliable indicator of a company’s fair value. To prove otherwise in the
Dell case, Vice-Chancellor Laster wrote, Grant & Eisenhofer “had to
conduct discovery into the sale process and develop well-supported
arguments as to why the process fell short for purposes of price
truth, the vice-chancellor wrote, is that appraisal actions have “become
more complex” in the past few years. Defendants have been able to persuade
Delaware judges that when the sale process is robust and transparent, the
price is most likely fair. To counter that defense, shareholders have to
bring in experts and conduct discovery to expose flaws in the sale
process. Investors can’t just hire a valuation expert and expect to win.
vice-chancellor didn’t even delve into this summer’s change in Delaware’s
law on appraisal actions, which allows appraisal defendants to avoid
accruing interest charges at a high statutory rate. (That change didn’t
apply in the Dell case.) The high interest rate had spurred the business
of “appraisal arbitrage,” in which hedge funds bought shares of
just-acquired companies in order to bring appraisal suits, betting that
the statutory interest rate would make the investment profitable even if
courts found the market price to be fair value.
But it seems to
me that the hidden-in-plain-sight message Vice-Chancellor Laster means to
send shareholders in the Grant & Eisenhofer opinion is that they should
think hard about the costs and benefits of appraisal litigation. According
to the judge, it took $4 million just in expenses to win the Dell case –
and that, he suggests, is what it’s going to take future appraisal
plaintiffs to win these increasingly complex cases. Add in a few million
bucks for legal fees, since, as I mentioned above, appraisal plaintiffs
usually pay their lawyers on an hourly basis. Subtract the safety net of
high statutory interest rates. And suddenly, appraisal arbitrage isn’t
nearly as attractive a business model as it used to be.
I ran my theory
past Samuel Hirzel of Proctor Heyman Enerio, who represents
Global, one of the funds that challenged Grant & Eisenhofer’s fee and
expense request. (He is also Delaware counsel to Magnetar but was not
speaking on behalf of that client.) Hirzel said that appraisal actions can
be tried much less expensively than the Dell case – and that if T. Rowe
Price hadn’t been in this case through trial, Dell investors would not
have spent as much money as Grant & Eisenhofer laid out. “Four million
dollars only made sense when T. Rowe was in the case,” he said.
to say whether Global planned to appeal the fee ruling when
Vice-Chancellor Laster enters final judgment in the case.
Stuart Grant of
G&E didn’t respond to my email.
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