CLIENT ALERT: Delaware Supreme Court Reverses Dell Appraisal Decision, Affording Court of Chancery Discretion to Choose Deal Price
Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd.
In this unanimous en banc decision, the Supreme Court of Delaware held that the Court of Chancery erred in giving no weight to Dell’s pre-deal stock price or the deal price when determining the fair value in this appraisal proceeding. In the Court’s view, “the market-based indicators of value – both Dell’s stock price and deal price – have substantial probative value” and “deserved heavy, if not dispositive, weight.” Thus, once again giving a nod to the deal price, the Court cautioned the Court of Chancery to “be chary about imposing the hazards that always come when a law-trained judge is forced” to rely on discounted cash flow (DCF) analyses and “divergent partisan expert testimony.”
Following a buyout at $13.75 per share led by the Company’s founder and affiliates of a private equity firm, petitioners filed an appraisal proceeding. The Court of Chancery determined the fair value of Dell’s stock to be $17.62 per share. The Court of Chancery considered but assigned no weight to the deal price, and instead relied exclusively on its own DCF analysis. The Vice Chancellor found that several factors justified rejecting the pre-deal stock price and deal price, including a “valuation gap” that existed between Dell’s stock price and the Company’s intrinsic value, the fact that the interested acquirers were all financial sponsors, and factors “endemic” to go-shop periods in management buyout transactions. In reversing, the Supreme Court found that “the trial court’s decision to give no weight to any market-based measure of fair value runs counter to its own factual findings.”
This latest appraisal decision from the Supreme Court is consistent with its earlier ruling this year in DFC Global Corp. v. Muirfield Value Partners, L.P., where it eschewed a bright-line presumption in favor of the deal price in appraisal actions, but nevertheless outlined conditions in which the deal price will be deemed strong evidence of fair value. The Court emphasized that the deal process undertaken by Dell had many qualities that Delaware courts favor in giving the deal price substantial weight. The Dell opinion also highlights practical and policy pitfalls of the Court of Chancery’s reliance on its own DCF analyses. The Supreme Court cautioned against constructing DCF analyses that attempt to reconcile “enormous valuation chasms caused by the over 1,100 variables” in competing DCF analyses when reliable market-based indicators are available.
The Supreme Court also addressed other issues in the appeal and the petitioners’ cross-appeal. First, the Supreme Court found that, “for the most part, the trial court did not abuse its discretion” regarding certain features of the Court of Chancery’s DCF analysis, although the Supreme Court questioned whether a DCF analysis remained necessary and appropriate on remand. The Supreme Court also reversed the trial court’s allocation of attorney’s expenses and fees among petitioners.