In 2013, Michael Dell and Silver Lake Group LLC took Dell, Inc. private through a leveraged buyout. The privately held successor of Dell, Inc. was Dell Technologies Inc. (the “Company”), which Mr. Dell and Silver Lake control.
In 2016, the Company sought to acquire EMC Corporation, a data-storage firm. One of EMC’s most valuable assets was its ownership of 81.9% of the equity of VMware, Inc. The Company proposed to acquire EMC using a combination of cash and newly issued shares of Class V common stock, which would trade publicly and track the performance of a portion of the equity stake in VMware that the Company would own as a result of the deal.
The Class V shares were subject to a “Forced Conversion” right: If the Company listed its Class C shares on a national exchange, then the Company could forcibly convert the Class V shares into Class C shares pursuant to a pricing formula.
In January 2018, the Company’s board of directors (the “Board”) charged one of the existing committees of the Board with negotiating a redemption of the Class V shares. Endeavoring to qualify for the safe harbor established by Kahn v. M & F Worldwide Corp. (MFW), the Board conditioned any redemption or similar transaction on both (i) committee approval, and (ii) approval from holders of a majority of the outstanding Class V shares.
Compliance with MFW would establish that the business judgment rule governed the transaction rather than entire fairness. The Company however reserved the right to bypass the MFW process by engaging in a Forced Conversion.
Over the next three months, the Company negotiated with the committee. During this process, both Company representatives and the committee’s advisors repeatedly told the committee that if they did not agree to a negotiated redemption, then the Company would proceed unilaterally with a Forced Conversion. Both Company representatives and the committee’s advisors stressed that a Forced Conversion was the least attractive option for the Class V stockholders.
The committee agreed to a negotiated redemption of the Class V shares (the “Committee-Sponsored Redemption”). Large holders of Class V stock objected to the Committee-Sponsored Redemption, and the Company did not believe that the Class V stockholders would approve it. Rather than negotiating further with the committee, the Company began negotiating directly with six large holders of Class V stock (the “Stockholder Volunteers”). While doing so, the Company took steps publicly to prepare for a Forced Conversion, underscoring the reality of this alternative.
After four and a half months, the Company reached agreement with the Stockholder Volunteers (the “Stockholder-Negotiated Redemption”) on improved terms when compared to the Committee Sponsored Redemption. The committee had not involved itself in the negotiations between the Company and the Stockholder Volunteers. The Company informed the committee of the terms of the Stockholder-Negotiated Redemption. The committee met for an hour and approved it.
During a special meeting of the Class V stockholders, the Stockholder-Negotiated Redemption received approval from unaffiliated holders of 61% of the outstanding Class V shares. Two weeks later, the Stockholder-Negotiated Redemption closed.
Litigation ensued (captioned In re Dell Technologies Class V Stockholders Litigation) and plaintiffs, who were former holders of Class V stock, contended that Mr. Dell, Silver Lake, and the members of the Board breached their fiduciary duties when negotiating and approving the Stockholder-Negotiated Redemption. In a motion to dismiss, all of the defendants claimed that the Stockholder-Negotiated Redemption complied with the requirements of MFW and was therefore subject to the irrebutable version of the business judgment rule.
In their motion to dismiss, the defendants argued that they properly implemented the framework outlined in MFW. If they did, then a version of the business judgment rule applied. If, by contrast, the defendants failed to properly implement the MFW framework, then entire fairness becomes the applicable standard of review. The defendants did not contend that the complaint failed to state a claim when judged under the entire fairness standard, so the motion to dismiss would be denied if entire fairness were applicable.
Under MFW, the irrebuttable business judgment rule governs only if the “controller irrevocably and publicly disables itself from using its control to dictate the outcome of the negotiations” amongst other things. That was not the case here.
The court found the complaint supported a reasonable inference that the Company failed to properly establish the MFW conditions at the outset. Mr. Dell and Silver Lake sought to eliminate the Class V tracking stock and consolidate the Company’s ownership of VMware. The Company identified three paths to that outcome: (i) a negotiated acquisition of VMware, (ii) a negotiated redemption of the Class V stock; or (iii) a Forced Conversion. The definition of Potential Class V Transaction that framed the Special Committee’s mandate only included the first two paths and excluded a Forced Conversion.
The court held by failing to include the exercise of the Conversion Right within the definition of a Potential Class V Transaction and the universe of actions that the Company would not take without satisfying the MFW conditions, the Company failed to comply with the requirements of MFW. The Company did not empower the Special Committee and the Class V stockholders with the ability to say “No.”
The court also held the complaint supported a reasonable pleading-stage inference that the Company failed to respect the MFW conditions when it bypassed the Special Committee and negotiated directly with the Stockholder Volunteers. MFW’s dual protections contemplate that the Special Committee will act as the bargaining agent for the minority stockholders, with the minority stockholders rendering an up-or-down verdict on the committee’s work. Those roles are complements, not substitutes. A set of motivated stockholder volunteers cannot take over for the committee and serve both roles.
Approval by the Class V stockholders was not a substitute for an effective special committee. The MFW framework contemplates that the special committee will act as “an independent negotiating agent whose work is subject to stockholder approval.” Through the involvement of the special committee, the MFW framework ensures that there are “independent, empowered negotiating agents to bargain for the best price and say no if the agents believe the deal is not advisable for any proper reason. The committee has superior access to internal sources of information, can deploy the Board’s statutory authority and can “act as an expert bargaining agent.” Like a board of directors, the committee “does not suffer from the collective action problem of disaggregated stockholders” and is therefore well positioned “to get the last nickel.”
The court noted that within the MFW framework, if the committee’s initial work is rejected by the stockholders, that does not mean the committee’s role is over. Nor does it mean that the committee passes the baton to a handful of stockholder volunteers to negotiate for themselves. Instead, the committee must return to the bargaining table, continue to act in its fiduciary capacity, and seek to extract the best transaction available.