Why Del. Chancery rejects merger price in 'Dell' statutory appraisal action

In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS 81 (May 31, 2016)

In one of the most-watched cases coming out of the Delaware Court of Chancery this year, In re Appraisal of Dell Inc., Vice Chancellor Laster managed to jolt deal makers and deal watchers alike. Although the company, and Michael Dell, its founder and the driving force behind the management buyout, went through great length to affect a proper sale (with a special committee, outside advisors, a glut of valuations, and a go-shop period during which competing bids emerged), the court found the sales process “functioned imperfectly as a price discovery tool."

Therefore, it decided to give no weight to the final merger price—$13.75 per share, and a special $0.13 dividend issued to all shareholders—but rely exclusively on its own post-transaction DCF analysis to determine the fair value of the company. In so doing, the court deviated from a number of Chancery decisions—several issued in 2015—that considered the deal price the most reliable indicator of the company’s fair value.

What happened?

In an expansive opinion, which at times resembles a treatise on appraisal jurisprudence, the court explains why the company failed to show the price emerging from the sales process was the best evidence of the company’s fair value.

The paramount problem with the transaction was that all the players were financial sponsors—there was no outreach to strategic bidders—and all the valuations driving the merger were premised on leverage buyout (LBO) models , which calculate what a financial investor would be willing to pay to achieve a certain internal rate of return. That’s not a “fair value” determination, the court said. “Fair value” under the appraisal statute means “the value to a stockholder of the firm as a going concern as opposed to the firm’s value in the context of an acquisition or other transaction.”

Find a two-part discussion of the case here and here.