The Delaware Supreme Court has found that the Chancery Court erred in failing to give market data, stock price, and deal price appropriate weight in arriving at an appraisal price for dissident shareholders involved in Dell’s 2013 management buyout. The reasons provided by the Chancery Court for giving the data no weight and relying instead on its own analysis to reach the fair value calculation contradicted its own findings and failed to comport with accepted financial principles, the court found. In addition to remanding the appraisal decision, the court also reversed and remanded the Chancery Court’s determination allocating fees and expenses among the appraisal class (Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., December 14, 2017, Valihura, K.).
Appraisal case. The Delaware Chancery Court found that factors in the pre- and post-signing phases of the Dell merger negotiations meant that the merger consideration of $13.88 per share was not the best evidence of a fair price. According to the court, three factors during the pre-signing phase of the sale process undercut the persuasiveness of the deal price as evidence of fair value. First, the original merger consideration was determined by use of a leveraged buyout pricing model, strongly indicating that the original merger consideration undervalued the company as a growing concern. Second, there was compelling evidence of a significant valuation gap driven by analysts’ focus on short-term results and the company's nearly $14 billion investment in its transformation, which had not yet begun to generate the anticipated results. Finally, there was a lack of meaningful competition during the pre-signing phase, the court found.
Two higher bids emerged during the post-signing go-shop process, and the company’s argument that another party would have topped the reigning bid if the company were worth more was sufficient, in the court’s view, to discount the idea of a large valuation gap. However, in light of leverage constraints and other factors, the go-shop process was not sufficiently persuasive to rule out smaller gaps, the court stated. The court credited an expert's testimony to the effect that go-shops can be inadequate for price discovery; given that the pre-signing phase did not generate a price equivalent to fair value, the 2-percent bump achieved through the go-shop was not sufficient to prove that the final consideration was the best evidence of fair value, according to the court.
The court found two of the cash-flow cases used by the petitioners' experts to be realistic and weighted them equally, which approximated the cost-savings number that management cited as attainable at the time of the merger. Opting for a discounted cash flow analysis, the court arrived at $17.62 per share as the fair value of the company on the closing date.
Fair value determination rejected. The Delaware Supreme Court noted that the trial court took into account Dell’s pre-transaction stock price and deal price and market data before arriving at its own determination of fair value but took issue with its decision to give no weight to any market-based measure of fair value. Delaware law requires courts to "take into account all relevant factors" when determining fair value and give fair consideration to "any techniques or methods which are generally considered acceptable," the court noted, and the trial court’s conclusions will be upheld if they follow logically from record and relevant financial principles. However, the reasons provided by the Chancery Court for giving the data no weight and relying instead on its own DCF analysis to reach the $17.62 fair value calculation ran counter to its own factual findings and were not grounded in accepted principles, the court found.
The trial court did not demonstrate a credible basis for finding a gap between Dell’s market and fundamental values, and the absence of strategic bidders was not a valid reason to disregard the deal price, the court stated. Further, the court continued, the trial court’s own findings suggest that the potentially problematic features of a management-led buyout transaction that could undermine the evidentiary value of the deal price were not present in this case. The evidence suggests that the market for Dell’s shares was actually efficient and a possible proxy for fair value, the court explained.
In reversing and remanding, the court gave the vice chancellor the discretion to enter judgment at the deal price with no further proceedings or, if weighing a variety of factors to arrive at fair value, to explain the weighting consistent with the record and with relevant, accepted financial principles.
The court also reversed and remanded the Chancery Court’s decision concerning the allocation of fees and costs among the appraisal class, finding the allocation was inequitable. It is unclear how the court could refuse to reduce the amount of expenses owed by certain stockholders to account for the benefits received by other parties, the court concluded.
The case is No. 565, 2016.
Attorneys: Gregory P. Williams (Richards, Layton & Finger, PA) for Dell, Inc. Samuel T. Hirzel, II (Heyman Enerio Gattuso & Hirzel LLP) and Lawrence M. Rolnick (Lowenstein Sandler LLP) for Magnetar Global Event Driven Master Fund Ltd., Magnetar Capital Master Fund Ltd. and Global Continuum Fund, Ltd.
Companies: Dell, Inc.; Magnetar Global Event Driven Master Fund Ltd.; Magnetar Capital Master Fund Ltd.; Global Continuum Fund, Ltd.
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