Dell’s Proposed Take-Private Transaction Brings Appraisal Rights Into Focus
In response to Michael Dell’s recent offer of $13.65 per share to take Dell Inc. private, Carl C. Icahn reminded his fellow shareholders of a powerful but underutilized tool under Delaware law to maximize their investment returns in the proposed transaction. His message: exercise your appraisal rights, it’s a “no-brainer.”
Of course, Mr. Icahn publicly opposes Mr. Dell’s proposal and hopes that the transaction is defeated. However, the appeal of his message should not be lost on ordinary investors. Appraisal rights offer stockholders a chance to present expert valuations proving that the true value of their shares warrants a premium value in excess of a proposed acquisition price (which itself typically includes a premium over the current market price). Delaware courts have made clear that the merger price is not a substitute for “fair value,” and they will closely examine the fundamentals of the transaction and the future prospects of the company before determining what the present value of the company’s stock really is.
Mr. Icahn expressed his encouragement of appraisal rights in an open letter to Dell stockholders on July 11, 2013. In response, the company tried to dampen shareholder enthusiasm for appraisal rights, asserting that the exercise of such rights can be time-consuming, costly and risky; after all, there is some risk that a court considering the company’s growth prospects could attribute a value to the shares even lower than what the merger price presented.
So who is right on these points? As litigation goes, appraisal rights cases are among the most efficient, typically concluding within 18 to 24 months after the deal date. With respect to cost, there is no need to show wrongdoing — the only issue is price. Thus, the primary expense is the price of a valuation expert, as these cases are typically decided by a battle of such experts. Finally, on the question of risk, there are two factors suggesting that the risk may be worth taking: first, as Mr. Icahn emphasized in his letter to Dell shareholders, the law allows shareholders to change their mind up to 60 days after the transaction is consummated. Mr. Icahn likened this to a free put, providing a shareholder a free look at the 60-day period following closing to see if the company chooses to settle with appraisal rights seekers. Or, if post-closing the company discloses increases in its future prospects while syndicating the loans used to finance the acquisition, such information provides ready evidence for a stockholder to argue for higher value. Naturally, because a shareholder must vote against the merger, there is always the risk that the no-votes of too many dissenters will scuttle the deal. However, if the deal goes through, the 60-day look-back allows sufficient breathing room for those dissenters who foresee a difficult challenge ahead based on a change in circumstances, or for those who simply change their mind and want to cash out.
In analyzing the risk of litigation the other important factor to consider is that studies have shown that the mean adjudicated premium based on a survey of all published Delaware appraisal decisions resulting in awards between 1983 and 2002 was an impressive 449.14% over the merger price, with a median premium of 82.1% over the merger price. And some studies indicate that those premium statistics have only improved over the past decade. Furthermore, even apart from the value the court ultimately attributes to the appraised shares, the law provides for an award of interest at 5% over the Federal discount rate from the date of closing up until the time the award is actually paid, compounded quarterly.
It remains to be seen whether Dell shareholders can enhance value by pursuing their appraisal rights. But Mr. Icahn strikes a chord of truth in describing the exercise of such rights as a “no-brainer”, whether in the case of Dell or another possibly undervalued deal.