Dell, Inc. v. Magnetar Global Event Driven Master Fund LTD

• Decision Date: 14 December 2017
• Docket Number: No. 565, 2016,565, 2016
• Citation: 177 A.3d 1
• Parties: DELL, INC., Respondent–Below, Appellant/Cross–Appellee, v. MAGNETAR GLOBAL EVENT DRIVEN MASTER FUND LTD ; Magnetar Capital Master Fund Ltd ; Global Continuum Fund, Ltd; Spectrum Opportunities Master Fund Ltd. ; Morgan Stanley Defined Contribution Master Trust ; Blackwell Partners LLC ; Aamaf, LP ; Wakefield Partners, LP; CSS, LLC; Merlin Partners, LP ; William L. Martin ; Terence Lally; Arthur H. Burnet; Darshanand Khusial; Donna H. Lindsey; Douglas J. Joseph Roth Contributory Ira; Douglas J. Joseph & Thuy Joseph, Joint Tenants; Geoffrey Stern ; James C. Aramayo; Thomas Ruegg; Cavan Partners LP ; and Rene A. Baker, Petitioners–Below, Appellees/Cross–Appellants.
• Court: Supreme Court of Delaware

177 A.3d 1

DELL, INC., Respondent–Below, Appellant/Cross–Appellee,

v.MAGNETAR GLOBAL EVENT DRIVEN MASTER FUND LTD ; Magnetar Capital Master Fund Ltd ; Global Continuum Fund, Ltd; Spectrum Opportunities Master Fund Ltd. ; Morgan Stanley Defined Contribution Master Trust ; Blackwell Partners LLC ; Aamaf, LP ; Wakefield Partners, LP; CSS, LLC; Merlin Partners, LP ; William L. Martin ; Terence Lally; Arthur H. Burnet; Darshanand Khusial; Donna H. Lindsey; Douglas J. Joseph Roth Contributory Ira; Douglas J. Joseph & Thuy Joseph, Joint Tenants; Geoffrey Stern ; James C. Aramayo; Thomas Ruegg; Cavan Partners LP ; and Rene A. Baker, Petitioners–Below, Appellees/Cross–Appellants.

No. 565, 2016

Supreme Court of Delaware.

Submitted: September 27, 2017

Decided: December 14, 2017

Gregory P. Williams, Esquire (argued), John D. Hendershot, Esquire, Susan M. Hannigan, Esquire, and Andrew J. Peach, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware. Of Counsel: John L. Latham, Esquire, and Susan E. Hurd, Esquire, Alston & Bird LLP, Atlanta, Georgia; Gidon M. Caine, Esquire, Alston & Bird LLP, East Palo Alto, California; and Charles W. Cox, Esquire, Alston & Bird LLP, Los Angeles, California, for Appellant/Cross–Appellee Dell Inc.

Stuart M. Grant, Esquire (argued), Michael J. Barry, Esquire, Christine M. Mackintosh, Esquire, and Rebecca A. Musarra, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware, for Appellees/Cross–Appellants Morgan Stanley Defined Contribution Master Trust; AAMAF, LP; CSS, LLC; Merlin Partners, LP; William L. Martin; Terence Lally; Arthur H. Burnet; Darshanand Khusial; Donna H. Lindsey; Douglas J. Joseph Roth Contributory IRA; Douglas J. Joseph & Thuy Joseph, Joint Tenants; Geoffrey Stern ; James C. Aramayo; Thomas Ruegg; and Rene A. Baker.

Samuel T. Hirzel, II, Esquire (argued), and Melissa N. Donimirski, Esquire, Heyman Enerio Gattuso & Hirzel LLP, Wilmington, Delaware of Counsel: Lawrence M. Rolnick, Esquire, and Steven M. Hecht, Esquire, Lowenstein Sandler LLP, New York, New York, for Appellees/Cross–Appellants Magnetar Global Event Driven Master Fund Ltd; Magnetar Capital Master Fund Ltd; Global Continuum Fund Ltd; Spectrum Opportunities Master Fund Ltd; Blackwell Partners LLC; and Wakefield Partners LP.

Before STRINE, Chief Justice; VALIHURA, VAUGHN, and TRAYNOR, Justices; and LeGROW, Judge^* constituting the Court en Banc.

VALIHURA, Justice:

The petitioners left standing in this long-running appraisal saga are former stockholders of Dell Inc. ("Dell" or the "Company") who validly exercised their appraisal rights instead of voting for a buyout led by the Company's founder and CEO, Michael Dell, and affiliates of a private equity firm, Silver Lake Partners ("Silver Lake"). In perfecting their appraisal rights, petitioners acted on their belief that Dell's shares were worth more than the deal price of $13.75 per share—which was already a 37% premium to the Company's ninety-day-average unaffected stock price.

Our appraisal statute, 8 Del. C. § 262, allows stockholders who perfect their appraisal rights to receive "fair value" for their shares as of the merger date instead of the merger consideration. The appraisal statute requires the Court of Chancery to assess the "fair value" of such shares and, in doing so, "take into account all relevant factors." The trial court complied: it took into account all the relevant factors presented by the parties in advocating for their view of fair value—including Dell's stock price and deal price—and then arrived at its own determination of fair value.

The problem with the trial court's opinion is not, as the Company argues, that it failed to take into account the stock price and deal price. The trial court did consider this market data. It simply decided to give it no weight. But the court nonetheless erred because its reasons for giving that data no weight—and for relying instead exclusively on its own discounted cash flow ("DCF") analysis to reach a fair value calculation of $17.62—do not follow from the court's key factual findings and from relevant, accepted financial principles.

"When reviewing a decision in a statutory appraisal, we use an abuse of discretion standard and grant significant deference to the factual findings of the trial court. This Court ‘will accept [the Court of Chancery's] findings if supported by the record ....’ "¹ We defer to the trial court's fair value determination if it has a "reasonable basis in the record and in accepted financial principles relevant to determining the value of corporations and their stock."²

Here, the trial court gave no weight to Dell's stock price because it found its market to be inefficient. But the evidence suggests that the market for Dell's shares was actually efficient and, therefore, likely a possible proxy for fair value. Further, the trial court concluded that several features of management-led buyout ("MBO") transactions render the deal prices resulting from such transactions unreliable. But the trial court's own findings suggest that, even though this was an MBO transaction, these features were largely absent here. Moreover, even if it were not possible to determine the precise amount of that market data's imperfection, as the Court of Chancery concluded, the trial court's decision to rely "exclusively" on its own DCF analysis³ is based on several assumptions that are not grounded in relevant, accepted financial principles.

We REVERSE, in part, and AFFIRM, in part, and REMAND for these reasons and those that follow. In addition, for reasons discussed in Section IV, we REVERSE and REMAND the Court of Chancery's decision concerning the allocation of fees and costs among the appraisal class.

I.

A. Dell

In June 2012, when the idea of an MBO first arose, Dell was a mature company on the brink of crisis: its stock price had dropped from $18 per share to around $12 per share in just the first half of the year. The advent of new technologies such as tablet computers crippled the traditional PC-maker's outlook. The Company's recent transformation struggled to generate investor optimism about its long-term prospects. And the global economy was still hungover from the financial crisis of 2008.

Other than a brief hiatus from 2004 to his return in 2007, Michael Dell had led Dell as CEO, from the Company's founding in his first-year dorm room at the University of Texas at Austin when he was just nineteen years old, to a Fortune 500 behemoth with global revenues hitting $56.9 billion in the fiscal year ending February 1, 2013.⁴ Dell was indisputably one of the world's largest IT companies.⁵

i. Michael Dell's Return and the Company's Challenges

Upon his return to the Company in 2007, Mr. Dell⁶ perceived three key challenges facing Dell. First, low-margin PC-makers such as Lenovo were muscling into Dell's market share as the performance gap between its higher-end computers and the cheaper alternatives narrowed. Second, starting with the launch of Apple's iPhone in 2007, the impending onslaught of smartphones and tablet computers appeared likely to erode traditional PC sales. Third, cloud-based storage from the likes of Amazon.com threatened the Company's traditional server storage business.

In light of these threats, Mr. Dell believed that, to survive and thrive, the Company should focus on enterprise software and services, which could be accomplished through acquisitions in these spaces. From 2010 through 2012, the Company acquired eleven companies for approximately $14 billion. And Mr. Dell tried to sell the market on this transformation. He regularly shared with equity analysts his view that the Company's enterprise solutions and services divisions would achieve annual sales growth in the double-digits and account for more than half of Dell's profits by 2016.

Yet despite Dell's M & A spurt and Mr. Dell's attempts to persuade Wall Street to buy into the Company's future, the market still "didn't get" Dell, as Mr. Dell lamented.⁷ It still viewed the Company as a PC business, and its stock hovered in the mid-teens.

ii. The Market for Dell's Stock

Dell's stock traded on the NASDAQ under the ticker symbol DELL. The Company's market capitalization of more than $20 billion ranked it in the top third of the S & P 500.⁸ Dell had a deep public float⁹ and was actively traded as more than 5% of Dell's shares were traded each week.¹⁰ The stock had a bid-ask spread of approximately 0.08%.¹¹ It was also widely covered by equity analysts,¹² and its share price quickly reflected the market's view on breaking developments.¹³ Based on these metrics, the record suggests the market for Dell stock was semi-strong efficient, meaning that the market's digestion and assessment of all publicly available information concerning Dell was quickly impounded into the Company's stock price.¹⁴ For example, on January 14, 2013, Dell's stock jumped 9.8% within a minute of Bloomberg breaking the news of the Company's take-private talks, and the stock closed up 13% from the day prior—on a day the S & P 500 as a whole fell 0.1%.¹⁵

B. The Sale Process

The first inkling of a Dell MBO can be traced to June 2012, when private equity executive Staley Cates of Southeastern Asset Management suggested to Mr. Dell that he might consider taking the Company private.¹⁶ Mr. Dell was intrigued as he believed it would be easier to execute the Company's transformation plan unencumbered by stockholder pressure.¹⁷ However, the Company's financial advisor, Goldman Sachs, warned that an MBO would be too difficult to pull off.¹⁸ But after Silver Lake's Egon Durban also proposed the idea of an MBO that August, Mr. Dell enlisted the advice of friend and private equity executive George Roberts of Kohlberg Kravis Roberts & Co. L.P. ("KKR").¹⁹ This time, he received positive feedback, including an indication that KKR might be interested in participating should the Company go that route.²⁰ Mr. Dell then brought the idea to Dell's Board by calling the Company's lead independent...