In one of the most anticipated opinions of 2017, Delaware’s Supreme Court reversed the Court of Chancery’s appraisal decision valuing Dell, Inc.’s shares after its management-led buyout in 2013. In its unanimous en banc decision, the Supreme Court ruled that the Court of Chancery abused its discretion by relying exclusively on its own discounted cash flow (DCF) analysis while affording no weight to the transaction price when valuing the company’s shares at the time of its 2013 going-private merger. So, consistent with its recent decision in DFC Global v. Muirfield Value Partners, the Supreme Court provided context where a deal price should represent strong evidence of fair value.
In October 2013, Michael Dell, along with a private equity firm, led a management buyout of Dell. The transaction was negotiated and approved by a special committee. During the transaction’s go-shop window, a competing bid was lodged which resulted in Michael Dell’s group negotiating a higher purchase price of $13.75 per share. Ultimately, 57 percent of Dell’s stockholders approved the merger at the special stockholder meeting. In aftermath of the merger, numerous stockholders made appraisal demands. In May 2016, the Court of Chancery held that the fair value of Dell’s stock was $17.62 per share, approximately $7 billion, and nearly 30%, greater than the transaction price. The Court of Chancery relied on its own DCF analysis, despite noting the robust sale process run by the special committee. The trial court noted, in declining to give weight to the deal price, that (i) there was a “valuation gap” between Dell’s intrinsic value and the company’s stock price; (ii) the potential interested parties were financial acquirers and not strategic acquirers; and (iii) there exists certain problems “endemic” to management buyouts which undercut the reliability of the deal price.
In Dell v. Magnetar Global Event Driven Master Fund, the Supreme Court reversed the Court of Chancery’s finding of fair value. In so doing, the Supreme Court held that “the trial court’s decision to give no weight to any market-based measure of fair value runs counter to its own factual findings.” The Supreme Court disagreed with the trial court’s finding of a “valuation gap” between the company’s intrinsic value and the stock price, holding that the record did not support such a finding as Dell was publicly traded, had a deep public float and did not have a controlling stockholder. Rather, the Supreme Court noted that Dell’s stock traded in an efficient and transparent market and rejected the trial court’s finding that the company’s investors suffered from “investor myopia” by being focused on short-term profits.
The Supreme Court also held 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,” thus providing no reason to discount the thorough Dell sale process. The Supreme Court stated that all potential acquirers, whether financial or strategic, would target a certain rate of return on their investment. Further, nothing in the record suggested that any strategic acquirers were interested in purchasing the company, prompting the Supreme Court to note that 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.”
Finally, the Supreme Court ruled that the characteristics of management buyouts do not necessarily detract “from the reliability of the deal price on the facts presented here.” For instance, the Supreme Court stated that the trial court’s concern over potential buyers being unwilling to outbid a management-led acquirer was “theoretical” and not supported by the record. While noting that market indicators do not always equate to fair value, the Supreme Court stated “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 … abuses even the wide discretion afforded the Court of Chancery [in appraisal litigation].” The Supreme Court ultimately remanded the action to the Court of Chancery for further proceedings, where the trial court can enter judgment at the deal price with no further proceedings or, if a different determination of fair value is made, craft a decision that conforms to the Supreme Court’s guidance in this decision.
Coupled with the Supreme Court’s decision in DFC Global, it is clear that while the Supreme Court states that there is no presumption in favor of a deal price being fair value, the Court of Chancery will need to afford great weight to the deal price when analyzing fair value for company’s engaged in arm’s-length mergers. Going forward, appraisal petitioners should read these decisions as highlighting their need to demonstrate significant flaws in the arm’s length process in order to overcome the substantial weight afforded to the deal price.