On December 14, 2017, the Delaware Supreme Court, in an opinion by Justice Karen L. Valihura, reversed and remanded an appraisal ruling by the Court of Chancery that had determined that the management-led buyout (“MBO”) of Dell, Inc. (“Dell”) by its CEO and founder, Michael Dell, and affiliates of a private equity firm, Silver Lake Partners (“Silver Lake”), at $13.75 per share significantly undervalued the stock of Dell. In re Appraisal of Dell Inc., No. 565, 2016 (Del. Dec. 14, 2017). After a trial, the Court of Chancery had disregarded the deal price and instead applied its own discounted cash flow (“DCF”) analysis, arriving at a valuation of $17.62 per share reflecting an approximate 28% premium. The Delaware Supreme Court, however, found that the evidence suggested that the market for Dell shares was efficient and that features of an MBO that might render a resulting deal price unreliable were largely absent here. Therefore, the Court concluded that “the deal price deserved heavy, if not dispositive, weight.” The Court thus reversed and remanded with instructions to give such weight to the deal price, and explain the weight given to each factor considered, or—at the Court of Chancery’s discretion—to enter judgment at the deal price without further proceedings.
Under Delaware’s appraisal statute, 8 Del. C. § 262, stockholders who perfect their appraisal rights are entitled “to receive ‘fair value’ for their shares as of the merger date instead of the merger consideration.” The Court of Chancery is thus required to assess the “fair value” of such shares and, in doing so, “take into account all relevant factors.” This appraisal action was commenced by stockholders exercising their appraisal rights in connection with Dell’s 2013 “go-private” merger, which was structured as an MBO sponsored by the company’s founder and CEO Michael Dell with the support of private equity firm Silver Lake. The deal provided for the conversion of each non-dissenting Dell share into $13.75 in cash. After a trial, the Court of Chancery found the deal price to be an unreliable indicator of “fair value” and instead conducted its own DCF analysis and awarded $17.62 per share to stockholders that properly exercised their appraisal rights.
Reversing and remanding, the Delaware Supreme Court rejected the various grounds identified by the Court of Chancery to “disregard” the market-based indicators of value and deal price. For example, the Supreme Court disagreed with the Court of Chancery’s finding that “investor myopia” caused by a focus on short-term profits created a valuation gap between Dell’s stock price and its intrinsic value. The Supreme Court highlighted that analysts had in fact “scrutinized Dell’s long-range outlook when evaluating the company and setting price targets,” and that the market “was capable of accounting for Dell’s recent mergers and acquisitions and their prospects in its valuation of the company.” In this regard, the Supreme Court found that the Court of Chancery’s analysis “ignored the efficient market hypothesis,” even though the market for Dell stock possessed many of the hallmarks of an efficient market, including a deep public float, extensive coverage by equity analysts and market makers, active trading of the shares, and the absence of a controlling stockholder.
Similarly, the Delaware Supreme Court rejected the Court of Chancery’s finding that the dominance of private equity sponsors and the lack of a strategic buyer in the MBO process yielded a deal price that did not reliably reflect fair value. As it recently held in DFC Global v. Muirfield Value Partners, L.P., No. 518, 2016 (Del. Aug. 1, 2017), the Court reiterated that there is “no rational connection between a buyer’s status as a financial sponsor and the question of whether the deal price is a fair price.” Moreover, the Court found that the sale process here bore “objective indicia of reliability” including that it was “choreographed” by an independent special committee and its financial advisors to encourage competition among bidders at every stage—both pre-signing and during a forty-five day “go-shop” period—leading Silver Lake to raise its bid multiple times. Indeed, the bankers canvassed the interest of 67 parties, including 20 possible strategic acquirers. Further, the Supreme Court questioned the Court of Chancery’s view that a lack of competition from a strategic buyer made the deal price less reliable, noting that this “assumes there was some party interested in proceeding” despite no support in the factual record and emphasizing that “if a company is one that no strategic buyer is interested in buying, it does not suggest a higher value, but a lower one.”
Likewise, the Delaware Supreme Court rejected the Court of Chancery’s determination that certain features endemic to MBOs—such as structural barriers to a deal with another bidder, information asymmetry and uncooperative management—rendered the deal price unreliable, finding that here the company conducted a “robust sale process” without these features. Specifically, the Supreme Court found that “rival bidders faced minimal structural barriers to a deal; extensive due diligence and cooperation from the company helped address any information asymmetries . . . and, assuming his value, Mr. Dell would have participated with rival bidders.”
Accordingly, the Delaware Supreme Court rejected the Court of Chancery’s fair value calculation of $17.62 based on its own DCF analysis as the “antithesis of any economist’s definition of fair market value” as it was higher than any ordinary stockholder, private equity buyer, or strategic buyer was willing to pay. The Supreme Court also noted that “[i]n addition to the relatively sound economic reasons, there are also important policy reasons” also supported “strong reliance upon the deal price and far less weight, if any, on the DCF analyses.” Specifically, the Court expressed concern that if sellers believe that following “best practices” in a sale process would nevertheless subject them to the risk that courts will add a premium based on a subjective DCF analysis, “the incentives to adopt best practices will have been greatly reduced.” Therefore, the Supreme Court reversed and remanded to the Court of Chancery instructing it to “enter judgment at the deal price” or to conduct an analysis that accords the deal price the “heavy weight” it deserves and explain any “weighting based on reasoning that is consistent with the record and with relevant, accepted financial principles.”
Click here to view In re Appraisal of Dell Inc.