Updated, 1:32 p.m. |
The endgame for Dell is here.
Michael S. Dell, the company’s founder, and his partner, Silver Lake Partners, have made their final move, raising their bid by 10 cents a share and calling it their “best and final” proposal. Best and final offers are often anything but, and the latest reports say that Dell’s board is pressing for Mr. Dell to raise his offer to $ 14 a share, or another 25 cents a share, in order to accept his terms.
Even if Mr. Dell refuses to raise this entreaty, it will cost Mr. Dell another $ 150 million. But the second request made by Mr. Dell is really what this maneuver is all about. Mr. Dell has demanded that, in connection with this increased bid, the Dell board modify the voting rules on the deal.
As of right now, the Dell board requires that the deal be approved by a majority of all shares of Dell held by shareholders unaffiliated with the buyout group. This knocked out the 14 percent of Dell held by Mr. Dell himself, meaning that shareholders holding a majority of about 86 percent of Dell’s shares must vote yes on the deal for it to occur. For those doing the math here, this requires shareholders holding 43 percent of Dell’s shares to vote yes.
The provision was put in the deal to protect shareholders. And it also complied with Delaware law, which was necessary to ensure that the courts signed off on a buyout in which management was involved.
Carl C. Icahn and Southeastern Asset Management, who oppose the buyout offer, have leveraged this requirement to the hilt. Together they own about 13 percent of the shares and have been lobbying other shareholders to join them in voting no.
The way the provision is currently worded, any shareholder who doesn’t cast a vote is counted as a no vote.
But in connection with their raised offer, Mr. Dell and Silver Lake are seeking the approval of a majority of only unaffiliated shareholders voting at the meeting. This would exclude shareholders who simply don’t show up to the meeting or don’t care to about the vote. The number of shareholders who don’t vote is likely to be lower in a controversial deal like this, but this is still likely to be a significant percentage of Dell’s shares.
This would be a small change with big consequences. First, it means that the approval for Mr. Dell’s bid will be easier. And it is also a signal that the vote is close enough that this small change will make a difference.
Second, it affects how this buyout will be reviewed under Delaware law. Previously, inclusion of this condition meant that the Delaware courts would review it deferentially. But this modification, if accepted by the Dell board, would mean that it is reviewed under entire fairness. The Delaware court will scrutinize the buyout for fair price and fair process.
Still, this may not amount to much. Chancellor Leo E. Strine Jr., the judge considering this litigation, has already praised the Dell sale process. At a June hearing, he said: “I do not see any plausible, conceivable basis in which to conclude that it is a colorable possibility that you could deem the choices made by this board to be unreasonable with all the different safeguards.” The fact that Mr. Dell is giving so little time here means he is perhaps not that worried about litigation risk.
The question now is whether the Dell board bites. If it accepts this proposal, or one closer to $ 14 a share, the board may also ask for some tweaks on how the condition is worded.
Any tweaks are likely to focus on the second big issue this proposal raises. The shareholder vote has already been rescheduled for Aug. 2. But will the board reset the record date from its current date of June 3, 2013?
In his letter, Mr. Dell addresses this by saying that a reset of the record date was acceptable, provided that “the resulting delay in the special meeting is the minimum required by law.” Delaware law requires that it be not more than 60 days nor less than 10 days from the meeting date. That means Dell’s board still has a week and a half to hold the meeting.
The record date could be reset, but it is not strictly required because Dell has one day of room to maneuver before is must reset the record date. In other words, Mr. Dell specifically timed this raise and worded his letter to allow for a short time period in which to reset the record date and keep that window as small as possible. This is Mr. Dell’s check move – trying to lock in the shareholder vote in an optimal manner.
Stirring into this mix is how any record date change will affect the vote. The conventional wisdom is that resetting actually helps a buyout pass (and that is Mr. Dell’s assumption presumably). There are anecdotal reports of more arbitrageurs buying in the last few days, and if this is true, they are likely to vote to approve the buyout because the stock price is only trading at about $ 13 a share. Any change in the record date is likely to lead to litigation as shareholders accuse Mr. Dell of tying to manipulate the shareholder mix to influence the buyout.
Any such litigation is likely to focus on whether the record date reset is appropriate and whether shareholders have enough time to consider this change. Federal law doesn’t have a strict requirement, but it is generally considered appropriate under federal law to give five to 10 days for shareholders to consider material changes deal terms.
Delaware law has also addressed this matter. In 1986, In re Anderson Clayton Shareholders’ Litigation, a Delaware court stated that directors have “no duty to delay an otherwise appropriate transaction“ and that three days to consider an offer might not be long enough but seven to 11 days could. It looks as though the Aug. 2 date is in that range where there is arguably enough time to consider the revised deal.
This puts Dell in the harbor where it really has to think hard about the record date and how it affects the vote and what is best for shareholders. Either way, Dell may be embroiled in litigation, but then again, given that Mr. Icahn has threatened “years of litigation” over this buyout, everyone might be inured to it right now.
No doubt the parties will haggle over whether the bid should be increased by 10 cents or 35 cents a share. But just as big an issue is how the Dell board treats the record date and the majority voting condition. It all means that deliberate consideration and a thorough review of the choices here is probably prudent.
Unfortunately, there isn’t much time.