In Appraisal of Dell Inc. (May 31, 2016), the Delaware Court of Chancery awarded an appraisal amount that was 30% higher than the price that was paid in the $25 billion merger in which Michael Dell (the founder and CEO of Dell) and private equity firm Silver Lake Partners took Dell private. In the merger, Mr. Dell obtained 75% ownership of the company. The court utilized a discounted cash flow (DCF) analysis to appraise Dell's “fair value” for appraisal purposes (i.e., the going concern value of Dell at the time of the merger, excluding the value of any expected synergies), having concluded that, in this case, the merger price was not a reliable indicator of fair value.
Some broad language in the decision has given rise to concern among some commentators that the decision reflects a new direction by the court with respect to use of the merger price to determine “fair value” in appraisal cases involving financial buyers. In our view, the decision is consistent with the court's recent approach in appraisal cases—and underscores that the court will base appraised “fair value” on the merger price only when the court believes that the merger price is the best indicator of fair value. The court regarded the Dell sale process as well-crafted for fiduciary duty purposes—but, for appraisal purposes, as insufficient to outweigh the factors that undermined the reliability of the merger price as an indicator of “fair value.” The decision serves as a reminder that the extent to which the court will view a sale process as having been sufficiently competitive to establish that the merger price is the best indicator of appraised fair value will depend on the facts and circumstances—and that the court will take into account its view of the underlying reality of the sale process based on real-world factors. The decision also reflects that the courts generally are skeptical that the merger price in an MBO (i.e., an LBO with a significant management buyout component) is a reliable indicator of “fair value” for appraisal purposes. Due to a number of features present in Dell (not all of which are always present in MBOs—and none of which necessarily are present in strategic transactions or in LBOs without a significant management buyout component), that skepticism was heightened.