Court reverses Dell buyout ruling that alarmed dealmakers

By Tom Hals

By Tom Hals

 

WILMINGTON, Del. (Reuters) - Delaware's Supreme Court ruled on Thursday that a lower court erred in finding that the 2013 buyout of computer maker Dell Inc was vastly underpriced, in an opinion that will likely restrict a hedge fund strategy aimed at wringing cash from mergers.

 

Thursday's ruling stems from an "appraisal" lawsuit, which allowed Dell shareholders who opposed the $24.9 billion buyout to ask a judge to determine the fair value of their stock.

 

Last year, a Delaware Court of Chancery judge ordered Dell to pay Magnetar Capital and other Dell investors $17.62 for each of their 5.5 million shares, well above the $13.75 per share deal price paid by Michael Dell and Silver Lake Partners.

 

The Supreme Court said Vice Chancellor Travis Laster abused his discretion by rejecting the deal price as a way to measure the fair value of Dell stock.

Dell declined to comment. Stuart Grant, the lawyer who represented the investors seeking appraisal, did not immediately respond to a request for comment.

The Supreme Court opinion will likely be welcomed by corporate dealmakers who have warned that Laster's ruling would encourage hedge funds to seek a quick profit by scooping up shares just before a deal closes, then pursuing appraisal.

As corporate lawyers express it, Dell was properly shopped to potential buyers such as Blackstone and the price was driven up during the process.

However, there was plenty of criticism of the sale. It was approved by a slim majority of shareholders. Billionaire investor Carl Icahn encouraged dissatisfied Dell shareholders to seek appraisal.

Laster said he rejected the use of deal price to determine fair value because private equity buyers and management-led buyouts inherently undervalue a company.

The Supreme Court said Laster should have given "heavy weight" to the deal price, given the evidence of fair play and market efficiency in the sale.

The Supreme Court remanded the case to Laster and said he should follow the ruling's guidance to determine fair value, which the court suggested should be the deal price.

"We give the vice chancellor the discretion on remand to enter judgment at the deal price if he so chooses, with no further proceedings," said the 82-page unanimous opinion written by Justice Karen Valihura.

In an August appraisal ruling, the Supreme Court said Chancellor Andre Bouchard erred in finding payday lender DFC Global Corp was sold too cheaply and criticized his finding that private equity buyers do not necessarily pay fair value.

Larry Hamermesh, a professor at the Delaware Law School, said the two rulings taken together will reduce appraisal cases, continuing a recent trend of weeding out what the court sees as weaker shareholder lawsuits.

"The whole program here since Leo Strine became chief justice is about getting rid of the crappy lawsuits," Hamermesh said.

Strine took over the court in 2014.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Matthew Lewis and Leslie Adler)

 
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