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On December 14, the Delaware Supreme Court released a long-awaited opinion in Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd. that reversed and remanded a high-profile appraisal case decided by the Delaware Court of Chancery in 2016. The Delaware Supreme Court built on its recent opinion in DFC Global Corporation v. Muirfield Value Partners L.P. to reiterate the potential for negotiated merger consideration to constitute the most important evidence of fair value in appraisal actions. While refusing to establish a presumption equating fair value to the deal price, taken together DFC and Dell suggest that strong evidence in the factual record undermining the reliability of the deal price — such as the existence of material flaws in the sales process or an inefficient public market for the target’s stock — will be necessary for petitioners to demonstrate that they are entitled to a higher price.
Delaware courts have recently given significant attention to appraisal actions filed by dissident stockholders in connection with M&A transactions. Among those decisions were two notable shareholder appraisal cases decided by the Court of Chancery. Specifically, in In re Appraisal of Dell Inc.,1 filed in connection with Michael Dell and private equity fund Silver Lake Partners’ leveraged buyout of Dell Inc. Vice Chancellor Laster determined a fair value of the company’s shares nearly $7 billion above the transaction price based solely on a discounted cash flow analysis and without assigning any weight to the final merger consideration. Despite stating that the special committee’s process “easily would sail through if reviewed under enhanced scrutiny,” the court held that the final merger consideration was an unreliable indicator of fair value due to multiple factors, including a lack of strategic bidders, “investor myopia” focused on short-term profit, and the structure of the transaction as a management-led buyout. Two months later, in In re Appraisal of DFC Global Corp., filed in connection with Lone Star Funds’ leveraged buyout of DFC Global Corp., Chancellor Bouchard weighed the final merger consideration equally with a discounted cash flow analysis and a comparable companies analysis in determining fair value, similarly stating that merger consideration was an unreliable indicator of fair value due to the buyer being a financial sponsor. In both cases, the corporations appealed the appraisal decision, arguing that the merger consideration was in fact the best evidence of fair value.
In August 2017, the Delaware Supreme Court reversed and remanded the Court of Chancery’s decision in DFC Global Corporation v. Muirfield Value Partners L.P. Writing for a unanimous court, Chief Justice Leo E. Strine Jr. held, that under the circumstances of the case, the best evidence of fair value was the merger consideration because it was the result of an open process with robust public information and easy access to non-public information. Though the court declined to create a judicial presumption in favor of the deal price, it made clear that the deal price should ordinarily be accorded significant weight: “the sale value resulting from a robust market check will often be the most reliable evidence of fair value, and that second-guessing the value arrived upon by the collective views of many sophisticated parties with a real stake in the matter is hazardous.” The court also rejected a so-called “private equity carve out,” a theory that suggests the sale price in a deal involving a private equity buyer is an unreliable indicator of fair value due to a focus on an internal rate of return.
On December 14, the Delaware Supreme Court reversed and remanded the Court of Chancery’s decision in Dell in an opinion that echoed its holding in DFC Global. Writing for a unanimous court, Justice Karen Valihura held that “the trial court erred in not assigning any mathematical weight to the deal price” because the record suggested “that the deal price deserved heavy, if not dispositive, weight.” Notably, however, the court again declined to establish a presumption in favor of the deal price as a measure of fair value.
The court rejected the lower court’s finding that “investor myopia” caused a valuation gap between fair value and the deal price that “anchored” the bidding over Dell “at an artificially low price” and depressed the ultimate deal price below fair value. The court found, that in so holding, the Court of Chancery disregarded the well-established efficient market hypothesis without a basis in the record for doing so. To the contrary, the evidence established an active trading market for Dell’s shares, transparency regarding Dell’s long term strategy and no controlling stockholder. “In these circumstances, a mass of investors quickly digests all publicly available information about a company, and in trading the company’s stock, recalibrates its price to reflect the market’s adjusted, consensus valuation of the company.”
The court again dismissed a “private equity carve out,” holding that the absence of strategic bidders in the sales process was not a credible reason to disregard the deal price because 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.” Indeed, the court noted that the trial court’s complete discounting of the deal price due to financial sponsors’ focus on obtaining a desirable IRR was in error, as “all disciplined buyers, both strategic and financial, have internal rates of return that they expect. …” The court observed that Dell’s sale process contained many of the same “objective indicia” of reliability that were persuasive in DFC Global, including a robust sales process, a canvassing of logical buyers, an independent and properly empowered special committee and a meaningful go-shop period with few structural barriers. According to the court, “The Court of Chancery ignored an important reality: if a company is one that no strategic buyer is interested in buying, it does not suggest a higher value, but a lower one.”
The court also disagreed with the Court of Chancery’s findings that the structure of the deal as a management-led buyout, in and of itself, provides a basis for not giving any weight to the deal price in the determination of fair value. The trial court was skeptical of Dell receiving topping bids during the go-shop period because, in the circumstance of an MBO, potential bidders may believe “they have no realistic pathway to success.’” While acknowledging that “may be true in some MBOs,” there was no evidence that such was the case here where well-financed, sophisticated potential bidders, such as Blackstone, TPG and HP, considered proposals. The court further noted that Dell took steps to mitigate the likelihood of a “winner’s curse,” which “describes a theory that, in outbidding incumbent management to ‘win’ a deal, a buyer likely overpays for the company because management would presumably have paid more if the company were really worth it.” This concern, however, was “mitigated” in this case by allowing fair access to all necessary information to competing bidders thereby mitigating the information asymmetry that can lead to the winner’s curse. The court also noted that there was no evidence of the Court of Chancery’s assertion that Mr. Dell’s value to the company imposed an obstacle to the emergence of rival bidders. In so noting, the court held that no evidence existed of Mr. Dell’s value to the company, particularly in light of certain bidders expressing that his continued involvement was not essential to their bids, and even if such value were to be assumed, no evidence existed that Mr. Dell would not have continued on with a competing bidder.
The court concluded that Dell’s pre-transaction stock price and the deal price had substantial probative value and found no rational reason for the Court of Chancery’s decision to assign no weight to reliable market indicators. In providing the Court of Chancery the discretion to enter judgment at the deal price, the court held that “[d]espite the sound economic and policy reasons supporting the use of the deal price as the fair value award on remand, we will not give in to the temptation to dictate that result.”
The full text of Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd. can be found here.
1 C.A. No. 9322-VCL (Del. Ch. May 31, 2016).