In Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., et al., No. 565, 2016, (Del. Dec. 14, 2017), the Delaware Supreme Court reversed the Court of Chancery’s appraisal valuation of Dell, Inc. (“Dell”) and remanded for reconsideration of the deal price following a diligent and “best practices” sale process. The opinion expanded on the Court’s appraisal decision, DFC Global Corp. v. Muirfield, et. al (“DFC”). In DFC, the Delaware Supreme Court found that although the Court of Chancery has wide statutory discretion in determining fair value in appraisal procedures, it must still account for the weight it assigns the deal price in a valuation analysis. The Court found that the weight assigned to the deal price in DCF’s valuation analysis had not been explained, and had not been supported by either the record nor established economic principles.
In the late 2000’s, Michael Dell, leading Dell as its Chief Executive Officer, began to pursue opportunities to take the company private. Mr. Dell communicated with interested parties and Dell’s board formed a committee to vet potential buyers. In early 2013, Dell entered into a merger agreement with Silver Lake Partners (“Silver Lake”), completed a go-shop period of communicating with other bidders, and ultimately held a shareholder vote. 57% of Dell’s shareholders voted to accept the Silver Lake deal. Dissenting shareholders filed an appraisal action, which the Court of Chancery heard in 2015. The petitioners and shareholders argued that the $13.75 per share deal price was too low suggesting that fair value was actually $28.61 per share, while Respondent, Dell, argued that fair value was $12.68 a share, with shareholders receiving an 8% premium.
Delaware’s appraisal statute, 8 Del. C. § 262, permits shareholders to receive “fair value for their shares as of the merger date instead of the merger consideration.” The statute provides that the Court of Chancery must “take into account all relevant factors” in assessing the “fair value” of the shares. However, the appraisal process is purposely designed broadly to give the Court of Chancery wide discretion in determining what factors are relevant for valuation.
The Delaware Supreme Court took issue with the Court of Chancery’s decision to give no weight at all to Dell’s deal price. The trial court, in discounting the relevance of the deal price, felt that Dell’s primary bidders, all of whom were financial sponsors, were too focused on the rate of return, rather than the value of the company, and as such, the deal had unfairly limited competition. Further, as a management-led buyout transaction, the trial court felt that with Mr. Dell at the helm, potential bidders may have been discouraged from trying to out-bid a group that had support of the company’s CEO.
On appeal, Dell argued that the Court of Chancery erred for three reasons. First, that Delaware law does not require that the deal price be the best evidence of fair value to be given any weight. The Court agreed, holding that all relevant factors must be taken into consideration in an appraisal, especially the deal price, which has a substantial substantive effect on the valuation. Second, that Delaware law does not require that the Court of Chancery give no weight to the deal price if it cannot account for mispricing in the sale process, and third, that the court erred in adopting a seemingly “bright line rule” that deal prices in management-led buyouts should be discarded because they are allegedly distorted. The Court agreed with Dell, that the trial court erred in not assigning weight to the deal price, despite its probative value supported by the record.
The Delaware Supreme Court found a disconnect between the evidence on record and the Court of Chancery’s rationale for giving no weight to the deal price. As in DFC, the Court explained that most buyers in any transaction would logically focus on the rate of return when they evaluate the risks and rewards of a transaction. Further, during the go-shop period, the committee spoke to sixty-seven potential bidders. The small number of interested parties and actual bidders did not suggest a higher value, the Court said, but rather a lower one.
Finally, the Court held that the involvement of Mr. Dell did not preclude buyers from bidding. He was not a controlling shareholder, and he signed a voting agreement that would automatically apportion his pro-rata voting power (15%) to the highest bidder. In addition, he made himself readily available to any and all bidders for due diligence.
Given these factors, the Court held that there was fair play throughout bidding process, and the market in determining the deal price was accurate; therefore, discounting the deal price was an abuse of discretion by the Court of Chancery.
In Dell, the Delaware Supreme Court carried forward its ruling in DCF that in appraisal cases, while the Court of Chancery has wide discretion in valuation, the deal price and market price should be carefully considered, and any limitation of such must be fully supported by the record and rooted in economic principles.
Jill is a 2L staff member on the Delaware Journal of Corporate Law. Jill will also have an article published in Volume 43 of the Journal.
Suggested Citation: Jill Dolan, The Deal Price Matters: Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., et. al, Del. J. Corp. L. (Feb. 2, 2018), www.djcl.org/blog.