The Delaware Supreme Court recently issued a much-anticipated appraisal ruling and reversed a lower court’s decision that found a 2013 buyout of Dell Inc. was vastly underpriced. The ruling in Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd. comes just months after the court’s ruling in another appraisal case. Together, the rulings emphasize the importance of a deal price in appraisal valuations.
The lawsuit was filed in Chancery Court by former Dell shareholders who opposed the $24.9 million buyout led by Dell founder and CEO Michael Dell and affiliates of a private equity firm, Silver Lake Partners. The petitioners believed Dell’s shares were worth more than the deal price of $13.75 per share.
Following a four-day appraisal trial, Vice Chancellor J. Travis Laster in a May 2016 decision found the fair value of the deal was $17.62 per share, a difference that valued the deal approximately $7 billion higher than the transaction price. In doing so, the court gave the stock and deal price no weight, relying instead on its own discounted cash flow analysis.
In doing so, the court said a valuation gap existed between Dell’s stock price and the company’s intrinsic value because investors were focused on short-term profit. It also suggested the lack of strategic buyers, and the involvement of only private equity bidders, pushed the deal below fair value.
In a unanimous ruling Dec. 14, the Delaware Supreme Court reversed the decision and rejected each of the lower court’s grounds for not assigning weight to the market values.
Writing for the court, Justice Karen L. Valihura said the evidence provided no factual basis for a valuation gap, noting Dell’s long-range outlook was scrutinized by analysts. It also said the lower court’s analysis ignored the “efficient market hypothesis long endorsed by this court,” which teaches that the price produced by an efficient market is generally a more reliable assessment of fair value than the view of “an expert witness who caters her valuation to the litigation imperatives of a well-heeled client.”
The court also said the lack of strategic bidders wasn’t a credible reason for disregarding the deal price. Much like its August ruling in DFC Global Corp v. Muirfield Value Partners LP, the court rejected the concept of a so-called private equity carve out, in which the deal price in a private equity transaction is viewed as a less reliable indication of fair value. The court said 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” and held that the deal price in the Dell case should be given “heavy, if not dispositive, weight.”
Finally, the court rejected concerns about “problems supposedly present in all” management-led buyouts, saying none of the issues the Vice Chancellor focused on – including structure and management’s inherent value to the company – detracted from the reliability of the deal price in this case. “Though the Court of Chancery’s theories about MBO’s might hold up as applied to other facts, they are not supported by the fact here. This was a case where the supposed prerequisite elements for problematic MBOs did not exist.”
The court was careful to note that it was not indicating that market is always the best indicator of value, or that it should always be granted some weight. “We only note that, 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 missed by all the Dell stockholders, analysts, and potential buyers abuses even the wide discretion afforded the Court of Chancery in these difficult cases.”