The Delaware Supreme Court heard oral arguments last week in the Dell matter. If you have a spare 57 minutes, the live (or now recorded) stream of the arguments is available on the Court’s web page and imbedded below:
Greg Williams from Richards Layton & Finger argued on behalf of Appellant, Dell Inc. and Stuart Grant from Grant & Eisenhofer argued on behalf of Appellees. In addition, Samuel Hirzel of Heyman Enerio Gattuso & Hirzel argued on behalf of Magnetar regarding the Chancery Court’s apportionment of expenses and fees.
The fee argument is interesting as are some of the other legal arguments but I am going to focus here on the fair value-related arguments. Unfortunately, the financial buyer/fair value issue was not tackled head on but Chief Justice Strine clearly telegraphed where he was going on that issue.
Dell argued there was no evidence in the record that anyone in the "real world" was willing to pay anything close to the $17.62 per share awarded by the Chancery Court - no stock market investor, no financial buyer, and no strategic buyer. Further, Dell argued that Vice Chancellor Laster’s rationalization for this disconnect between his award and the purported real world evidence was not supported by the record. According to Dell, Vice Chancellor Laster claimed that the stock market got it wrong, the financial buyers were constrained by their LBO pricing models, and no other strategic buyer would engage due to the massive integration risk.
In addition, Dell argued that the Chancery Court’s opinion suffered from a number of reversible errors:
(1) The court acknowledged that deal price was a relevant factor but that it must be disregarded if the court can not quantify the exact degree by which the deal price differs from fair value;
(2) The sales process functioned imperfectly as a price discovery tool; and
(3) The Chancery Court put the transaction in a "timeout room" because the M&A market has less confidence-promoting attributes than the public trading markets, particularly in the case of an MBO.
Mr. Williams maintained that there was no statutory or legal basis for reading into Section 262 standards of "exactitude or perfection" and even if the transaction were held to some higher level of scrutiny because it was an MBO, the Chancery Court found that Mr. Dell’s conduct was praiseworthy.
At the tail end of his argument, Justice Valihura presented Mr. Williams with a hypothetical situation where the Court of Chancery finds no fiduciary breach yet bases its fair value decision solely on a discounted cash flow model. Asked if such a scenario indicates that the court has abused its discretion, Mr. Williams replied that it needs to be a case-specific and fact-based decision but that such a finding should be extremely rare.
Mr. Grant began his argument on behalf of Appellees by suggesting Mr. Williams was effectively asking the Supreme Court to eliminate appraisal and find that appraised value is equal to deal price. Citing Appellant’s brief, Mr. Grant argued that Dell alleges the Chancery Court abused its discretion when it failed to give any mathematical weight to the deal price.
At that point, Justice Valihura again interjects asking Mr. Grant:
When you have a situation where in the DCFs you have two experts who have impeccable credentials and...are galaxies apart, why isn’t it advisable in a situation like this to look at the deal price...?
Mr. Grant replied that the court did, in fact, consider the deal price when it decided to reject, out of hand, Petitioners’ expert’s DCF value because it was too high above the deal price:
He used deal price to reject my expert.
Chief Justice Strine then intervened echoing, to a large degree, the argument Mr. Williams had just made:
I’m trying to make sense of an opinion that says no possible class of buyers would have bought at the price that I’m awarding as fair value. The last couple pages of the opinion say, I’m picking a number that no strategic would pay and no private equity would pay. In the real world Mr. Grant, whether it takes twenty-five or thirty billion dollars to buy an asset, is relative to its value. Either somebody is going to buy it, or their not.
Mr. Grant responded, indicating that there seems to be an axiom at play here that says that the price awarded needs to be a price that someone is willing to pay, right now, for the asset and that such a view ignores another option - namely not selling the asset and continuing to execute on your business plan. Mr. Grant further contends that going it alone and allowing Mr. Dell to execute was a viable option in Dell’s case.
This really was the core of the argument - Appellant claims that there needs to be "real world" evidence of an actual buyer willing to pay the price awarded by the Chancery Court and Appellees claim that simply isn’t true. In support of his point, Mr. Grant argues that every one of the bankers that valued Dell as part of the transaction, valued the company at between $20 to $27 per share, evidence of what Dell was worth on a standalone (i.e., no deal) basis.
If, in fact, the accompaniment of "real world" evidence becomes a prerequisite to the fair value finding, that would, in my opinion, seem to be a departure from Delaware precedent that would likely alter the appraisal landscape considerably. Furthermore, if a vast discrepancy between expert fair value opinions afforded the deal price additional weight, that too would seem to be a new paradigm given the number of prior decisions with larger expert gaps where the court based its fair value decision solely on a DCF model.
Note: Expert Gap / Deal PX = (Petitioner Fair Value - Respondent Fair Value) / Deal Price.