Delaware Supreme Court Reverses Dell Appraisal Award

Emphasizes, But Does Not Require, Deference to Deal Price in Appropriate Circumstances

On December 14, the Delaware Supreme Court reversed a Chancery Court decision that had found the "fair value" of Dell shares in the 2013 MBO by Michael Dell and Silver Lake to be about 28% more than the final negotiated deal price.[1] The Supreme Court found instead that, based on the facts in the record with respect to the company and the transaction process, the deal price "deserved heavy, if not dispositive weight."

Dell is the second recent reversal of a Chancery Court appraisal ruling for failure to give sufficient weight to a deal price resulting from a fair process.[2] In Dell, the Supreme Court declined (again) to establish a rule requiring deference to the deal price in an appraisal contest. However, the Supreme Court emphasized the "long endorsed" efficient market hypothesis which, as described by the Supreme Court, "teaches that the price produced by an efficient market is generally a more reliable assessment of fair value than the view of a single analyst, especially an expert witness who caters her valuation to the litigation imperatives of a well-heeled client."

Background

The Chancery Court and Supreme Court opinions describe the market status of Dell and the chronology of the transaction and appraisal contest. Following are highlights from the Supreme Court opinion relating to the deal process.

Mr. Dell owned about 15% of Dell. After two PE firms discussed with him the potential for a MBO, he reached out to a third PE firm and, after getting positive feedback, informed the Board. The Board created a Special Committee of independent directors, with power to hire its own legal and financial advisors, and determined not to recommend that stockholders approve a transaction without a prior favorable recommendation from the Special Committee. Mr. Dell signed a confidentiality agreement that required him to "explore in good faith the possibility of working with any such potential counterparty or financing source" if requested by the Special Committee.

The Special Committee initially focused its efforts on two PE firms. Ultimately, the Special Committee recommended an offer by Mr. Dell and Silver Lake (the "Buyout Group") that would cash out existing stockholders and result in a company owned 74.9% by Mr. Dell, 25.1% by Silver Lake. Mr. Dell agreed to vote his shares in proportion to the number of unaffiliated shares that voted for either a...