Dell Decision Grants Claimants Fair Value Award Above Merger Price
P. Clarkson Collins
Delaware Business Court Insider
June 14, 2016
P. Clarkson Collins Jr.
law has long made clear that the price established for a company in a
market transaction, while a relevant factor, does not necessarily
equate to the fair value that shareholder claimants are entitled to
receive in an appraisal proceeding. But a series of more recent
decisions in the Delaware Court of Chancery reinforced the view that
the market value for a company set in an arm's-length transaction,
achieved by a thorough sale process, usually represents the best
evidence of fair value. Vice Chancellor J. Travis Laster's May 31
In re Appraisal of Dell,
C.A. No. 9522-VCL (Del.Ch. May 31, 2016), provides a
sharp reminder of the limits of market price as an indicator of fair
value when the transaction involves a leveraged management buyout (MBO),
even one resulting from a careful sales effort free of any fiduciary
makes clear, appraisal claimants in transactions involving inherent
conflicts of interest (including an MBO) or an unreliable sales
process, or both, will have an excellent opportunity to persuade the
court that fair value exceeds the transaction price. The Dell decision
affirms the primacy of the court's role in making such determinations
in MBO and other conflict transactions. Left unresolved is what effect
this will have on the structuring of such transactions and the
criteria to which deal participants and their fiduciaries may turn to
be confident they have captured fair value.
29, 2013, Dell effected a going-private merger resulting in a
management buyout group led by Silver Lake and Michael Dell, the
company's founder, chairman and CEO, acquiring the shares held by
Dell's public shareholders. Dell was a difficult company to value as
it was in the midst of executing a business plan that would transform
it from a primarily personal computer company selling to end-users
into an integrated company with substantial additional business lines
selling software and services to enterprise customers. During the
first half of 2012, Dell's stock declined from a high of $18/share to
$12/share, as the market doubted Dell's plan or its ability to execute
it successfully. The merger followed a lengthy process begun in August
2012 when Michael Dell was invited to participate in an MBO and so
advised Dell's board. The appointment of a strong independent
committee, well-advised by sophisticated legal and financial advisers
followed. The committee led a sales-negotiation process which the
court acknowledged "easily would sail through if reviewed under
enhanced scrutiny." The sale process attracted interest from leading
financial buyers and sought to garner the interest of strategic
buyers. The merger agreement initially reached with the Silver Lake
buyout group at $13.65/share included a 45-day go-shop provision and
modest deal protections. During the go-shop period, the committee
solicited the interest of HP and other strategics; Blackstone invested
substantial resources analyzing the deal; and Carl Icahn ultimately
surfaced to oppose the merger and to propose an alternate leveraged
recapitalization. HP chose not to pursue a transaction, and Blackstone
dropped out of the bidding process citing a rapidly eroding financial
profile for Dell inconsistent with management's projections. Icahn
eventually withdrew his opposition to the merger and plan to seek
appraisal after his and other shareholder opposition led to a 2
percent price bump.
best evidence of the company's fair value, the company relied heavily
on the sale process and the final merger consideration of $13.75 (plus
a dividend of $0.13), which was corroborated by its expert's use of a
DCF model indicating fair value of $12.68/share. The petitioner
contended the MBO sale process was flawed and relied on an expert's
DCF model to contend the company had a fair value of $28.61.
court appraised the company at $17.62/share, an increase of
approximately 28 percent above the final merger price. The court
arrived at the value by relying primarily on modifications to the
company's DCF model. Acknowledging that the final merger price was a
relevant factor, the court nonetheless found that it was not the best
evidence of the company's fair value for several reasons.
the mere fact that the process followed by Dell met fiduciary
standards did not equate to fair value. Second, the court determined
that a number of factors undermined the reliability of the merger
price as evidence of fair value:
pre-signing phase had limited competition when the presence of a
realistic threat of competition during this period is most important
in driving up the price.
bidders relied on an LBO pricing model that is designed to set a price
based on the buyer achieving a minimum internal rate of return on its
invested equity rather than a price based on the present value of the
firm as a going concern.
existed a valuation gap between the market's perception of Dell and
the company's operative reality.
when the company's stock was trading at $9 to $10/share in October
2012 and Dell was out of favor with analysts, Dell's management
projections and financial advisers generated valuations ranging from
$14 to $27/share.
post-signing go-shop phase failed to cure the lack of pre-signing
competition and this, along with other structural limitations in the
go-shop process, failed to achieve fair value even with the 2 percent
price increase that resulted.
the court rejected the company's argument that another party would
have topped the management bid if the company was actually worth more.
The court agreed that a topping bid would likely have emerged had the
disparity been as great as the petitioner alleged. Implicitly the
court concluded that an underpricing of 28 percent, representing
almost $6 billion, was not a sufficient disparity to generate a
topping bid given the economic and structural constraints of the
near term pending further appraisal decisions, advisers to parties in
conflict transactions will struggle to structure such transactions in
a way that will achieve fair value with some measure of confidence,
and not result in an unexpected additional transaction expense.
"Appraisal-out" conditions giving the buyer an out if appraisal
demands exceed a certain percentage is one course, although such
conditions threaten deal certainty and are disfavored by sellers.
like Dell, where a process not susceptible to attack for breach of
fiduciary duty fails to produce strategic bidders or sufficient
competition at critical phases of the sales process, and where the
financial bidders relied on an LBO pricing model, the independent
committee may need to give greater consideration to just saying "no"
and staying the course. The vice chancellor suggested as much when he
noted that "as a practical matter, the committee negotiated without
determining the value of its best alternative to a negotiated
The decision also will likely add fuel to the debate
over the merits of appraisal arbitrage. The practice of arbitrage
involves hedge funds and other large investors acquiring stock in a
company after the announcement of a transaction with a goal of
bringing an appraisal action claiming the merger price was too low.
Dell will likely encourage such specialists to acquire large positions
in MBO transactions, even those with pristine sale processes, in the
expectation they will be able to convince a court that the transaction
price did not capture the "fair value" of the company for
stockholders. The debate will continue with some who will say that
Dell makes appraisal a more powerful remedy to address underpricing
inherent in MBO transactions; while others will argue Dell may result
in greater uncertainty and fewer transactions to increase shareholder
P. Clarkson Collins Jr.
is a corporate governance and fiduciary litigation partner at Morris
James in Wilmington.
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