[co-author: Michael Glasser]*
In Dell Inc. v. Magnetar Global Event Driven Master Fund, Ltd., the Delaware Supreme Court reversed the Court of Chancery’s determination in an appraisal proceeding relating to the 2013 management-led buyout of Dell Inc. Following its recent ruling in DFC Global Corp. v. Muirfield Value Partners, L.P., the Supreme Court again declined to adopt a bright-line rule for the determination of "fair value" in the appraisal context, but reinforced that the deal price should be afforded appropriate weight in the fair value determination and, more specifically, noted that in this instance the record suggested that "the deal price deserved heavy, if not dispositive, weight."
In 2013, Michael Dell, the company’s Founder, Chairman, and Chief Executive Officer, and private equity firm Silver Lake Partners, acquired Dell for US$13.75 per share in cash. The sale followed a limited pre-signing market canvass limited to a small number of financial buyers and a 45 day go-shop period that canvassed the interest of 67 parties. As a result of the efforts by a special committee of Dell’s board, Silver Lake increased its offer six times over the course of the negotiations. The final US$13.75 per share price represented a 37% premium over Dell’s closing share price during the 90 days ending on the last trading day before rumors of the sale went public on January 11, 2013.
Former stockholders of Dell commenced an appraisal proceeding. In its post-trial decision, the Court of Chancery held that the fair value of Dell’s shares exceeded the deal price by 28% based on its own discounted cash flow analysis. Despite stating that the sale process would "sail through" an enhanced scrutiny analysis, the Court of Chancery assigned no value to the deal price or the market price. It cited several grounds, including (1) a purported "valuation gap" between Dell’s market price and its fundamental value, (2) the decision to exclude strategic bidders, and (3) features endemic to MBOs that allegedly undermine the probative value of the deal price.
Delaware Supreme Court's analysis
The Supreme Court rejected the Court of Chancery’s rationale for assigning no weight to the deal price in the fair value determination and instead relying entirely on its own discounted cash flow analysis. Consistent with prior decisions, the Supreme Court did not establish a bright-line rule that the market always is the best indicator of fair value, but clarified that:
when the evidence of market efficiency, fair play, low barriers to entry, outreach to all logical buyers, and the chance for any topping bidder to have the support of Mr. Dell’s own votes is so compelling, then failure to give the resulting price heavy weight because the trial judge believes there was mispricing missed by all the Dell stockholders, analysts, and potential buyers abuses even the wide discretion afforded the Court of Chancery in these difficult cases.
The Supreme Court specifically rejected the three bases on which the Court of Chancery decided to afford no weight to the deal price, finding that (1) the record established an efficient market for Dell’s stock, (2) the decision to limit the pre-signing canvass to private equity bidders did not foreclose the sale price as an indicator of value, especially in the presence of a robust go-shop process, and (3) the record did not support a conclusion that issues endemic to MBOs undermined the reliability of the deal price because rival bidders faced minimal structural barriers to a deal and received the company’s cooperation with extensive due diligence.
Given the "dissonance between the key underpinnings of the decision to disregard the deal price and the facts as found," the Supreme Court remanded the case to the Court of Chancery, expressly granting the Vice Chancellor discretion to enter judgment at the deal price without further proceedings, but otherwise indicating that the decision on remand must accord with the Supreme Court’s reasoning and relevant, accepted financial principles.
The Dell decision, like the DFC decision, highlights the significant weight that may be afforded to the deal price in determining the fair value of shares in an appraisal proceeding. It bears emphasis, however, that the Delaware Supreme Court declined to mandate that the deal price be considered in assessing fair value, and expressly noted the possibility that it could be an appropriate exercise of discretion to reject the deal price altogether on appropriate facts. Thus, while the Dell and DFC decisions together may be read to suggest reduced risk that the appraised fair value will differ from the deal price, they should not be divorced from their facts. The decisions together demonstrate that while the deal price is likely to be a significant, if not dispositive factor, where there is a sufficiently robust, arm’s-length sale process, Delaware courts will continue to determine fair value on a case-by-case basis that turns on the facts presented at trial.
*With contributions by Michael P. Glasser, Professional Support Lawyer