Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd., et al., No. 565, 2016 (Del. Dec. 14, 2017): Delaware Supreme Court Reverses Dell Appraisal Decision, Remands for Consideration of Market Data and Deal Price
December 14, 2017
The Delaware Supreme Court has reversed and remanded the Court of Chancery’s appraisal valuation of Dell Inc. and remanded for reconsideration in light of market data and the transaction price following a robust sale process.
In its post-trial decision, the Court of Chancery had determined, based exclusively on its own discounted cash flow analysis, that the fair value of Dell Inc., at the time of its October 2013 going-private transaction, was $17.62 per share, or approximately 28% above the $13.75 per share transaction price. See In re Appraisal of Dell Inc., 2016 WL 3186538 (Del. Ch. May 31, 2016). The Company appealed, contending that the trial court improperly declined to consider the deal price and made several errors in its discounted cash flow valuation.
The Delaware Supreme Court wrote: “[W]e agree with the Company’s core premise that, on this particular record, the trial court erred in not assigning any mathematical weight to the deal price. In fact, the record as distilled by the trial court suggests that the deal price deserved heavy, if not dispositive weight.”
The Supreme Court identified and rejected three premises on which the trial court had relied in deciding to assign no weight to the transaction price:
First, the trial court had concluded that there had been a “valuation gap” between the trading price of Dell’s stock and the intrinsic value, leading the trial court to believe that the bidding during the sale process had been anchored at an artificially low value. The Supreme Court rejected this premise, emphasizing that Dell’s stock was widely traded in a liquid and efficient market and that the Company had been transparent about its long-term plans.
Second, the trial court had focused on the absence of strategic (as opposed to financial) bidders during the pre-signing market check. Following its ruling in DFC Global Corp. v. Muirfield Value Partners, __ A.3d __, 2017 WL 3261190 (Del. Aug. 1, 2017), the Supreme Court wrote that it saw “‘no rational connection’ between a buyer’s status as a financial sponsor and the question of whether the deal price is a fair price.” The Supreme Court emphasized that “Dell’s sale process bore many of the same objective indicia of reliability that we found persuasive enough to diminish the resonance of any private equity carve out or similar such theory in DFC.”
Third, the trial court had credited expert testimony to the effect that management-led buyouts tend to suffer from structural problems, such as the “winner’s curse” and the perceived value of management to the company, that undercut the reliability of the deal price as evidence of fair value. The Supreme Court held that “none of these theoretical characteristics detracts from the reliability of the deal price on the facts presented here.” With regard specifically to the “winner’s curse,” the Supreme Court wrote: “If a deal price is at a level where the next upward move by a topping bidder has a material risk of being a self-destructive curse, that suggests the price is already at a level that is fair. The issue in an appraisal is not whether a negotiator has extracted the highest possible bid. Rather, the key inquiry is whether the dissenters got fair value and were not exploited.”
The Supreme Court concluded that the market-based indicators of value, including both stock price and deal price, had “substantial probative value.” The Court also emphasized that Dell’s sale process had “adopt[ed] many mechanisms designed to minimize conflict and ensure stockholders obtain the highest possible value,” and noted that if a company’s reward for adopting “best practices” in deal structuring is to be exposed to the risk of appraisal at a premium to deal price based on a discounted cash flow analysis, the incentives to adopt “best practices” will diminish.
The Supreme Court therefore reversed the Court of Chancery’s valuation determination and remanded for further proceedings.