Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., No. 565, 2016 (Del. Dec. 14, 2017) (Valihura, J.)
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.” 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.”
Dissenting stockholders sought appraisal following a management buyout at $13.75 per share led by Dell’s founder and affiliates of a private equity firm. An independent special committee negotiated with the buyout group, and evaluated alternatives through pre-signing and post-signing market checks that yielded rival bids from other PE firms. Throughout the process, Dell’s founder expressed willingness to partner with any of the bidders and to supply as much of his own equity as needed to complete a going- private transaction. The Court of Chancery observed that the buyout resulted from a thorough sale process that “easily would sail through if reviewed under enhanced scrutiny.”
Nevertheless, the Court of Chancery found that a confluence of factors justified assigning no weight to the deal price, and instead relied exclusively on its own DCF analysis, which resulted in a fair value of $17.62 per share. The Vice Chancellor concluded that both the market and the sale process did not reflect the company’s intrinsic value: the market was too focused on Dell’s short-term prospects and the participation of only financial bidders in the process resulted in a deal priced to clear internal rate of return hurdles. The Court also found that factors “endemic” to MBO go-shops cast doubt on the reliability of the deal price, because rival bidders could be discouraged from making topping bids due to perception that management had an informational advantage, fear that there was “no realistic pathway to success,” or risk of overpaying for the company (i.e., the putative “winner’s curse”).
In its appeal, Dell argued, and the Supreme Court agreed, that the Court of Chancery’s “decision to give no weight to any market-based measure of fair value [ran] counter to its own factual findings.” The evidence pointed to an efficient, rather than myopic, market for Dell shares. The Supreme Court observed that the lack of strategic bidders during the pre- and post-signing phases suggested that the deal price was not too low: if the deal price had substantially undervalued the company, then strategic competitors would have had strong incentives to bid. Furthermore, there was nothing in the trial record to suggest the presence of the putative features of MBOs that theoretically could undermine the reliability of deal price as evidence of fair value: Dell mitigated any informational asymmetry between the buyout group and other bidders by providing go-shop participants extensive due diligence and access to Dell’s founder; and, contrary to any “winner’s curse phenomenon,” two rival bidders submitted competing proposals during the go-shop period.
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., 172 A.3d 346 (Del. 2017), 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. 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.