The Delaware Court of Chancery's decision in Dell, which held that the fair value of Dell Inc. was 28 percent higher than the price negotiated with the company's buyer group, generated significant angst in the M&A community (In re Appraisal of Dell Inc., (Del. Ch. May 31, 2016); for a full discussion of the Chancery Court's decision and the debate it triggered, see Legal Update, Dell Appraisal: Chancery Court Grants Appraisal Award, Rankles Deal Community). On December 14, 2017, the Delaware Supreme Court reversed the Chancery Court's decision and remanded it for further proceedings (Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., (Del. Dec. 14, 2017)). In so doing, the Supreme Court held that the negotiated deal price in a transaction that was fairly negotiated and buttressed by many target-favorable deal protections provided a reliable indicator of the company's "fair value" for purposes of Section 262 of the DGCL, the Delaware appraisal statute. The Supreme Court soundly rejected the premises of the Chancery Court's decision, in particular that the dynamics of a management buyout would inevitably render the deal price unreliable and that a sale process that only involved private equity buyers could not produce a deal price that reflected the fair value of the target company. The Supreme Court advised the Chancery Court that it could accept the deal price on remand without further proceedings, owing to the fact that all interested parties had had ample opportunity to submit a bid for the company and the absence of superior offers meant that the company had been fairly priced.

Much as with its recent decision in the DFC Global appeal, the Supreme Court declined to establish a presumption that a deal price negotiated at arm's length constitutes fair value as a rule (see DFC Global Corporation v. Muirfield Value Partners, L.P., , at *15 (Del. Aug. 1, 2017)). Yet the two decisions taken together can give comfort to practitioners and dealmakers (both strategic and financial) that a deal price negotiated at arm's length, supported by a non-conflicted and robust market check, will provide the court with powerful and frequently dispositive evidence of fair value and will not be vulnerable to appraisal awards.

The Dell going-private transaction is summarized in What's Market, Michael Dell and Silver Lake Partners/Dell Inc. Merger Agreement Summary. In the years leading up to the acquisition, Dell Inc. faced challenges from changing consumer preferences for mobile tech and increased competition from down-market computer manufacturers and cloud-based storage service providers. Michael Dell, the company's founder, CEO, and 15.4% stockholder, set out to change the company's focus from selling PCs to selling software and enterprise services. To that end, between 2010 and 2012, the company spent approximately $14 billion to acquire 11 businesses. Though Michael Dell was optimistic about the prospects for these new businesses, their integration and reflection in the company's operating results was not immediate and the company's stock price continued to decline. The Supreme Court emphasized that all the while Dell had a deep public float, was actively traded, and was widely covered by equity analysts—all indicators that the market for Dell's stock was semi-strong efficient (meaning that it quickly absorbed and reflected all publicly available information) and the stock price properly reflected the market's informed assessment of the company and its future prospects.

Failing to convince the market to get behind his turnaround plan for the company, Michael Dell proposed a management buyout (MBO) to the board to take the company out of the public eye. Michael informed the board that he would not proceed with the offer without the board's approval and engagement of a financial advisor. In response, the board formed a special committee with full powers with respect to any proposed transaction, as well as any other strategic alternatives that it determined to be advisable.

The special committee led a robust sale process in which it entered into confidentiality agreements with the private equity firms Silver Lake, KKR, TPG Capital, and Michael Dell himself. On the advice of its financial advisor, the committee did not approach any strategic buyers during the pre-signing phase at all, based on an expectation that strategic buyers would be uninterested in a deal to acquire the company. Michael Dell himself cooperated in the due diligence process throughout and expressed willingness to adjust his terms to seal a deal. The committee managed to negotiate a raised bid with Silver Lake at $13.65 per share in cash, with Michael Dell accepting a lower amount per share for his rollover. The board recommended the transaction on the basis of the certainty of the cash consideration and the generous premium over where the company's stock had been trading. Michael also signed a voting agreement pledging to vote his shares in proportion to the number of shares that would vote in favor of a superior proposal.

The parties' merger agreement contemplated a 45-day go-shop, a two-tier break-up fee, and a one-time match right. During the go-shop period, the company—with the assistance of a second financial advisor hired specifically to run the go-shop process—contacted 67 parties, including potential strategic buyers. Blackstone showed substantial interest and devoted hundreds of employees to the due diligence process, led by the former head of acquisitions at Dell who had just joined Blackstone. Carl Icahn, who opposed the MBO with Michael Dell, made several offers for a leveraged recapitalization deal, while GE Capital also proposed to buy the company's financial services business. To win over enough votes, the Michael Dell-Silver Lake buyer group eventually amended their offer to $13.75 per share, plus a special dividend and certain changes to the merger agreement's deal protections, while Michael would roll over his shares for a lower price. The merger was eventually approved by the stockholders, though by a narrower margin than is typical for public deals. The petitioners sought appraisal for their shares. Icahn, who filed a competing proxy statement announcing his intention to nominate his own slate of directors to the board, did not seek appraisal.

The Supreme Court reversed the Chancery Court's decision and remanded for further consideration, holding that the Chancery Court's decision to give no weight to the negotiated deal price was unsound given the Chancery Court's own factual findings. In so ruling, the Supreme Court, as it did in DFC Global, declined to establish a presumption that the deal price reflects fair value if the merger is the product of arm's-length negotiations and a robust, non-conflicted market check where bidders had full information and few barriers to doing a deal. The court preferred to embrace the statutory requirement that the Chancery Court consider "all relevant factors" when determining fair value (8 Del. C. § 262(h)), which sometimes may justify giving less than full weight to the deal price, and other times may mean elevating it above others in significance, depending on the circumstances. In a similar vein, the Supreme Court rejected the company's contention that the Chancery Court had wrongfully failed to consider the deal price, explaining that the Chancery Court in fact had considered it—but determined to give it no weight.

The Supreme Court did not try to assess whether the Chancery Court had attempted to establish as a rule that the deal price must be set aside if it is any less than the best evidence of fair value, or that deal prices can never be considered reliable indicators of fair value in MBO transactions. Instead, the Supreme Court picked apart how the Chancery Court determined not to assign the deal price any weight given its own findings about this transaction. Principally, the Supreme Court made the following rulings:

Although the Supreme Court declined to establish a rule that the deal price be considered probative when circumstances warrant, much of its language (as in DFC Global) amounts to nearly the same thing. The decision states explicitly that when the evidence of market efficiency, fair play, low barriers to entry, outreach to all logical buyers, and the chance for any topping bidder to have the support of the CEO's own votes is so compelling, then failure to give the resulting price heavy weight because the trial judge believes there was mispricing missed by all the stockholders, analysts, and potential buyers abuses even the wide discretion afforded the Chancery Court in appraisal cases. For many practitioners, this decision rights a wrong.

It is hard to escape the sense that the Supreme Court realizes that the appraisal statute and the common law are in tension as to whether a deal price negotiated at arm's length should by rule be considered presumptive of fair value. Though the court may simply be trying to preserve space for the Chancery Court to discount the deal price when circumstances warrant (such as where a controller is involved in the sale), it does not seem hard to craft a rule that takes those circumstances into account. Nevertheless, the Dell and DFC Global decisions should give comfort to both strategic and financial buyers that when they negotiate a deal at arm's length with ordinary deal protections that allow third parties to top the negotiated agreement, they will not later have to pay a substantial appraisal award. Another blow against appraisal arbitrageurs has been struck.