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(Article from Securities Law Alert, January 2018) 

For more information, please visit the Securities Law Alert Resource Center

On December 14, 2017, the Delaware Supreme Court reversed and remanded a widely-covered appraisal decision in which the Chancery Court placed no weight on the $13.75 per share deal price, but instead relied on its own discounted cash flow (“DCF”) analysis to arrive at a fair value of $17.62 for Dell (approximately 30% higher than the deal price and 75% higher than the unaffected stock price). Based on the record before it, the Delaware Supreme Court found “the deal price deserved heavy, if not dispositive, weight.”Dell v. Magnetar Global Event Driven Master Fund Ltd., 2017 WL 6375829 (Del. 2017) (Dell II) (Valihura, J.). 

In the decision below, the Chancery Court acknowledged that the sales process (both pre- and post-signing) was “praiseworthy.” In re Appraisal of Dell, 2016 WL 3186538 (Del. Ch. May 31, 2016). However, it identified multiple concerns which led it to disregard both the stock price and deal price in calculating fair value. The Chancery Court concluded that investor short-sightedness led the company to be chronically undervalued in the market despite Michael Dell’s long-term strategy to transform and reinvigorate the company. The Chancery Court was also critical of a pre-signing process of exclusively private equity firms, and questioned whether private equity buyers ever pay “fair value” under the appraisal statute due to their use of leveraged buyout (“LBO”) models targeting high internal rates of return (“IRR”). The Chancery Court was finally skeptical that the post-signing go-shop process helped establish that Michael Dell and Silver Lake Partner’s bid was at a market clearing price due to structural concerns inherent in management buyout (“MBO”) transactions. 

The Delaware Supreme Court found the Chancery Court’s “decision to rely ‘exclusively’ on its own DCF analysis [was] based on several assumptions that [were] not grounded in relevant, accepted financial principles.” Dell II, 2017 WL 6375829. First, the Delaware Supreme Court determined that the record reflected that the market for the company’s securities was efficient (e.g., significant analyst coverage, robust trading volume, rapid price reactions to significant company news). 

Second, the Delaware Supreme Court again reaffirmed (as it had in DFC Global Corp. v. Muirfield Value Partners, 172 A.3d 346 (Del. 2017)[1]) that there is no “private equity carve out” in appraisal. Where there is an appropriate sales process, the Chancery Court can defer to the merger price as the best evidence of fair value, even if that process included only private equity bidders. 

Third, the Delaware Supreme Court concluded that the Chancery Court’s elevation of “theoretical” concerns about MBO go-shops over the facts of the transaction, which suggested a fair and relatively open post-signing market check, was an error.

The Delaware Supreme Court was also critical of the Chancery Court’s reasoning that its own DCF analysis was superior to the stock market consensus on Dell’s value and the agreed deal price. The Delaware Supreme Court observed that the $17.62 per share value derived from the Chancery Court’s DCF analysis was a price that, as reflected in the record, no real world party (private equity bidder, strategic bidder or public market investor) was willing to pay for Dell. The Delaware Supreme Court found that the “Court of Chancery’s DCF value was the antithesis of any economist’s definition of fair market value” and wrote that the facts suggested “strong reliance upon the deal price and far less weight, if any, on the DCF analyses.”

The Delaware Supreme Court determined that there was “compelling” “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 [the CEO’s] own votes.” Under these circumstances, the Delaware Supreme Court found the Chancery Court’s decision to place no weight on the market price “abuse[d] even the wide discretion afforded the Court of Chancery in these difficult cases.”

Although the Delaware Supreme Court did not hold “that the market is always the best indicator of value, or that it should always be granted some weight,” its opinion—particularly when read in conjunction with its earlier guidance in DFC Global—signals that the Delaware Supreme Court believes that greater deference should be given to the deal price resulting from an appropriate sale process. 

The Delaware Supreme Court instructed that on remand, the Chancery Court may “enter judgment at the deal price … with no further proceedings.” If the Chancery Court instead “chooses to weigh a variety of factors in arriving at fair value,” the court must “explain that weighting based on reasoning that is consistent with the record and with relevant, accepted financial principles.”