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By Yin Wilczek
A ruling concluding that Dell Inc.'s 2013 management-led buyout undervalued the company deserves a second look, Delaware’s highest court said.
The Delaware Supreme Court Dec. 14 partially reversed a chancery court decision that Dell’s “fair value” was $17.62 per share. That’s about 28 percent more than the $13.75 per share (for a total value of $25 billion) that Dell founder Michael Dell and private equity firm Silver Lake Partners paid for Dell in October 2013. The chancery court’s ruling potentially put the company on the hook for millions of dollars more in additional payments to investors that didn’t vote in favor of the buyout.
The chancery court properly considered all the relevant factors, including Dell’s stock and deal prices, the state high court said. However, the lower court erred because “its reasons for giving that data no weight—and for relying instead exclusively on its own discounted cash flow ('DCF') analysis to reach a fair value calculation of $17.62—do not follow from the court’s key factual findings and from relevant, accepted financial principles.”
Delaware’s appraisal statute allows shareholders that choose not to participate in a merger to file appraisal actions asking the chancery court to assess a fair value for their shares.
The Delaware Supreme Court’s Dec. 14 judgment comes amid ongoing efforts by the state and its courts to limit such appraisal claims, which have climbed in the last five years. Earlier this year, the state high court said in another case that the merger price negotiated by the parties should be given great weight unless the sale process was less than robust or tainted by conflicts.
Dell’s take-private transaction was challenged by investors holding about 34 million shares. They argued that their stock was worth as much as $28 per share.
In May 2016, the chancery court concluded that the 14-month sale process led by Dell’s independent special committee was sound. Nonetheless, it found that the fair value of the company was $17.62 per share. Dell appealed, arguing that the decision was inconsistent with the appraisal statute.
In its Dec. 14 decision, the Delaware Supreme Court again emphasized the great weight that should be given to merging parties’ negotiated deal price. In asking the chancery court to reconsider its “fair value” conclusion, the state high court said it wouldn’t “dictate” that the chancery court find Dell’s buyout price—$13.75 per share—to be the company’s fair value.
“That said, we give the Vice Chancellor the discretion on remand to enter judgment at the deal price if he so chooses, with no further proceedings,” Justice Karen L. Valihura wrote. “If he decides to follow another route, the outcome should adhere to our rulings in this opinion, including our findings with regard to the DCF valuation. If he chooses to weigh a variety of factors in arriving at fair value, he must explain that weighting based on reasoning that is consistent with the record and with relevant, accepted financial principles.”
The case is Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd. , 2017 BL 447089, Del., No. 565, 2016, 12/14/17 .
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