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In Re Appraisal of Dell Inc.

In May 2016, Vice Chancellor J. Travis Laster (Vice Chancellor Laster), sitting in the Delaware Court of Chancery (the Court), held in an appraisal proceeding that the fair value of Dell Inc.’s common stock at the time of its sale was significantly higher than the price paid for it by the buyout group led by Michael Dell in 2013.

In this decision, Vice Chancellor Laster departed from several recent appraisal opinions in ruling that the actual merger consideration was an unreliable measure of fair value.This was despite the Court also finding that the special committee of the board had acted in a “praiseworthy” manner and that no breach of fiduciary duty had arisen.

Vice Chancellor Laster held that three factors may result in the variation of market prices from fair value: (1) the length of time between agreement on price and the closing of the merger, (2) the relative thinness of the mergers and acquisitions market relative to public trading markets, and (iii) the existence of synergies.

This decision is notable for the Court’s criticism of the leveraged buyout pricing model and endorsement of a discounted cash flow analysis in determining fair value.  Vice Chancellor Laster also delivered a reminder that in appraisal proceedings the Court is the final arbiter of whether a share price represents fair value, and not the market. As Vice Chancellor Laster commented “the concept of fair value under Delaware law is not equivalent to the economic concept of fair value” and is “largely a judge made creation, freighted with policy considerations”.

Unless overturned on appeal, this decision will be warmly welcomed by shareholders seeking protection from insider-trading or other forms of furtiveness by buyout groups, even though those particular circumstances did not arise here.  It confirms the independent and reasoned approach the Court will take to determining fair value.

The decision is also a victory for the particular portion of hedge funds that have progressively tried to maximise pay-outs from mergers through appraisal suits. It is likely that the Court’s ruling will make it more complex for a company to complete a buyout going forward, although the lasting effect of judge-led policy on merger premiums is yet to be fully determined. One thing is for sure: those engaging in the ever increasing practice of “appraisal arbitrage” will be fortified by this result.

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