Carl Icahn Gets Another Week To Screw Around With Dell, But This Is The Last Time, They Mean It

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I'm sure this is false but I'm going to carry on believing that someone, somewhere, flew to Round Rock, Texas last week for the Dell shareholder meeting, arrived to learn it was cancelled, got on the next plane back to New York or, I dunno, Switzerland, and then flew in again this morning for the rescheduled meeting, only to find out that it was cancelled again. Cartoon steam is coming out of his ears right about now, though this time at least he's being compensated for the delay:

The Special Committee of the Board of Dell Inc. (NASDAQ: DELL) announced today that it has received a revised proposal from Michael Dell and global technology investment firm Silver Lake under which they would increase the price at which they would acquire the company to $13.75 per share in cash, subject to certain conditions.

In light of the revised proposal, which the Special Committee is evaluating with the assistance of its financial and legal advisors, the Special Meeting of Stockholders previously scheduled to be reconvened today at 5:00 p.m. Central Daylight Time at the Dell Round Rock Campus, 501 Dell Way, Round Rock, Texas 78682 will be adjourned to August 2, 2013 at 9:00 a.m. Central Daylight Time at the same location.

OH SURE IT WILL. Honestly I don't know why Hollywood hasn't called about my romantic comedy idea. Transactionless in Texas, call it. You've Got Proxy.

If you're doing the math at home, that increase is 0.73%, which doesn't sound particularly big, though it totals to around $150 million in total, which I guess does. What's $150mm among friends etc. But they want something in exchange, viz. that Dell

modify the “Unaffiliated Stockholder Approval” requirement in the merger agreement to provide that the voting requirement is the approval of a majority of the outstanding shares held by the unaffiliated stockholders that are present in person or by proxy and voting for or against approval of the merger agreement at the stockholder meeting.

That is: they want to get the deal approved only by a majority of the minority that votes, as opposed to a majority of the entire minority.1 Right now abstentions count as no votes; if Dell makes this change then they'll count as nothing. Apparently the abstention rate is running about 27%, so it seems like the rule change would be enough to get the deal done.2

Here's what the buyout group has to say about that:

We believe our proposed change to the Unaffiliated Stockholder Approval requirement is fair and reasonable to the Company’s unaffiliated stockholders, particularly in the context of our willingness to increase the merger consideration. There is simply no rational basis for shares that are not voted to count as votes against the merger agreement for purposes of the unaffiliated stockholder vote. If a majority of the shares held by unaffiliated stockholders who vote are voted in favor of the merger agreement, it would be unfair to deny these stockholders the merger consideration they wish to accept solely because shares not voting are counted as votes against the transaction.

Sure, why not, I am moderately persuaded.3 But it raises a sort of interesting question which is why didn't you do that from day one? Like, if the "right" standard for shareholder approval is a majority of the non-Michael-Dell votes cast, as opposed to a majority of the non-Michael-Dell total shares, why not just write that into the merger agreement from the beginning and avoid all this trouble?

Part of the answer is of course "they didn't expect there to be all this trouble" but that is an unsatisfying answer.

For a better answer I'd refer you to this Deal Professor column from last month about the Dole Food buyout proposal, and this Dealpolitik column from January about the Dell deal, though neither should entirely satisfy you on this question. Simplifying drastically it goes like this:

  • Delaware courts review most mergers under the "business judgment rule," which means that they'll basically never second-guess a board's decision (except via appraisal).
  • But management buyouts are sometimes subject to "entire fairness review," which is sort of like appraisal for everyone: the court reviews the process and the price to see if they were fair, and if they weren't can effectively require the buyers to pay more.
  • You can avoid "entire fairness review" with either the approval of independent directors (i.e. a special committee) or the approval of independent shareholders (i.e. a majority-of-the-minority vote).
  • Unless the management buyer is also a controlling shareholder - meaning around 50%, give or take - in which case you need both.
  • Here: Dell probably doesn't have a controlling shareholder, so it only needs either a special committee or a majority-of-the-minority, and it has both, just in case.

So getting rid of one of those protections would probably still be fine? Also, softening the voting requirement - from "majority of the independent shares" to "majority of the independent shares that vote" doesn't necessarily lose you those protections; the cases I've seen have majority-of-all-the-independent-shares votes but I'm not aware of any that say "and if you just get a majority of the independent shares ignoring abstentions you lose."4 So Dell would seem to be on reasonably solid ground here if it changed the voting rules. [Update: Steven Davidoff agrees.]

But its current ground is even solid-er! I mean, sort of, who knows, the point is, why run any risk that a court will get mad at you? Why not - your lawyers might ask - provide the very highest level of legal protections to the deal, so that you can tell a judge that you've gone above and beyond what's required of you and your merger shouldn't be messed with?

This is why. In going the extra mile to minimize the legal risk to their deal, the Dell buyout group increased their risk of not having a deal at all. It'll be interesting to see how the lawyers (and principals) on the next management buyout evaluate that tradeoff.

Also here's an extra footnote.5

Dell Special Committee Receives Revised Proposal from Michael Dell and Silver Lake [EDGAR]
Dell Buyout Group Calls for Change in Voting Rules [WSJ]

1.I realize Michael Dell only has like 14% of the stock, so the remaining 86% isn't really a "minority," but I'm an old-timey M&A guy and I call it majority-of-the-minority, okay?

2.Unless all of those abstentions are really people who are opposed to the deal, too lazy to vote now, but not lazy enough to abstain if the rules change.

3.Maybe? The thing is that any merger of a Delaware company needs to be approved by a majority of the shares, not a majority of the shares that vote, under DGCL section 251(c). (In Dell, that's apparently fine, because (1) Michael Dell's shares plus (2) the yes-voting public shares add up to over 50% of the total shares. The abstentions just take them below 50% of the non-Michael-Dell shares, and the majority-of-the-minority vote is just a contractual requirement, not a legal one.) So of course if you had a merger where 45% of the shares voted in favor, 30% voted against, and 25% abstained, you could be all "it would be unfair to deny those 45% the merger consideration they wish to accept solely because shares not voting are counted as votes against the transaction," and everyone would be all "shove it, that's the law." So their argument maybe proves too much.

4.Though I haven't looked very hard. Or at all. Not your lawyer etc.

5.I want you to be aware that Carl Icahn is tweeting about this, but I'm ashamed to put it in the text. But he is:

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