The purpose of appraisal rights is not to say what a company's market
price should have been - it is to give shareholders a remedy if they
think the negotiated deal is just not good enough. So the appraisal is based on "fair value," which can have a different meaning to "market price."
This difference is at the heart of this decision and courts are
struggling to figure out what "fair value" is in light of the emergence
of hedge funds specializing in exercising appraisal rights.
The proceedings were historically a corporate finance exercise with each party hiring an expert to value the company.
In the case of the Dell buyout, Glenn Hubbard, dean of Columbia's
business school and former chairman of the Council of Economic Advisers,
calculated the fair value to be $12.68. Brad Cornell, a professor at
the University of California, Los Angeles, calculated on behalf of the
dissident shareholders that the value was $28.61.
Frustration over this sort of battle among experts has led Delaware
courts to change how they calculate appraisal prices. Instead of
puzzling through conflicting opinions, judges in recent cases have looked at the merger price to determine if the price was fair.
So long as the price paid was negotiated through an arm's-length
process, the court deemed this to be fair value. The underlying
assumption was that the fairly bargained market price was fair value.
Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found
that the process was not entirely complete because the Dell board did
not reach out to all parties. He also pointed out that because the pricing was based on a leveraged buyout model, it was not a market price.
So the judge determined that the market price was not a reliable one
because it showed the price the private equity firm could pay, not one
that was "fair value."
So the judge conducted an old-style appraisal proceeding, using a
discounted cash flow analysis to compute "fair value" using the expert
This is why the case is unlikely to be a game changer. The market price
is likely to continue to be the price used because it is so difficult to
compute "fair value" otherwise. The effect it might have - forcing would-be managers to work hard to justify buying their own companies - would be better for shareholders.
THE MERGER THAT WASN'T? The 2014 merger
of Herman Miller, the famed purveyor of classics like the Eames lounge
chair, and Design Within Reach, the emporium for sleek modern
furnishings, seemed a no-brainer. But a lawsuit brought by two longtime
shareholders contends that the $154 million merger never happened at all,
Michael J. de la Merced reports in DealBook.
The lead plaintiff, Andrew Franklin, president of UTR, an investment firm, called it "the most-botched merger in Delaware history."
Mr. Franklin and another shareholder, Charles Almond, are seeking
unspecified damages and their argument could theoretically lead to the
court ordering that the merger be rescinded and DWR carved out of the
company. The lawsuit is in the discovery phrase and may not succeed, but
it threatens to mar a merger that was seen as an important combination in the world of high-end furniture.
Representatives for Herman Miller and the four men who made up DWR's
board declined to comment. In court filings, they denied the allegations
and contended that "the plaintiffs suffered no damages."
The plaintiffs say that because of a series of technical mistakes,
Herman Miller's agreement to buy Design Within Reach never took effect.
A series of moves by DWR's directors, led by Glenn Krevlin, a hedge fund
manager, sought to squeeze out minority shareholders, the lawsuit says.
The capstone of that campaign proved to be the Herman Miller deal.
Mr. Franklin contends that DWR never successfully carried out a reverse split of its shares, meaning that Herman Miller never collected the roughly 90 percent of the retailers stock needed to carry out the takeover.
"Once you don't know the capital structure, what are these shares worth?" Mr. Franklin asked. "They didn't do the split right."
In February, shareholders received a notice from Design Within Reach
acknowledging "defective corporate acts," but contending that it had
remedied those mistakes under a provision of Delaware law.
Mr. Krevlin's investment firm had made a $15 million investment in DWR
that, along with the 17 percent of DWR it already owned, gave it 91
percent of the retailer.
Several months later, the company de-registered with the Securities and
Exchange Commission, ending public filings, but still trading over the
counter as a penny stock. In 2010, DWR sought to reduce its total
authorized shares from 31.5 million to just 630,000. Mr Franklin argued
that while DWR declared the reserve split effective in August 2010, it had not notified minority shareholders of the move.
When an agreement was struck with Herman Miller, it said that DWR had
7.5 million authorized shares, with 6.6 million outstanding.
The lawsuit contends that because of failures to comply with Delaware law, DWR had 30 million shares outstanding.
ON THE AGENDA The House Financial Services Committee will hold a hearing on terrorism financing at 9 a.m.
RENAUD LAPLANCHE SAID TO CONSIDER LENDING CLUB TAKEOVERRenaud Laplanche, who helped found Lending Club, has been speaking to private equity firms and banks about financing a buyout of the online lender,
Reuters reports, citing people familiar with the matter.
Mr. Laplanche, who left Lending Club after an internal investigation
found the company had falsified documentation when selling loans, has
approached firms about a possible bid to take the company private. The talks were only preliminary, the sources told Reuters. Mr. Laplanche and Lending Club declined to comment.
It could be difficult for Mr. Laplanche to secure funding while the company is being investigated
by both the Justice Department and the New York Financial Services
Department. The regulatory issues are already putting pressure on buyers
of the company's loans, some of whom have already paused their
purchases, squeezing a key source of funding for the company.
On Tuesday, the company abruptly canceled its annual meeting and rescheduled it for June 28, saying it was not yet ready to provide stockholders with a complete report of the state of the company.
Tribune Publishing Vote Hands Board a RebukeMore than 40
percent of shareholders withheld votes for Tribune's slate of directors,
virtually unheard of when proxy advisers support the candidates,
Jennifer Saba writes in Breakingviews.
Deutsche Börse Workers Demand a Change of Headquarters A group
representing Deutsche Börse's workers has demanded that the company
formed as part of the proposed takeover of London Stock Exchange Group
be based in Frankfurst instead of London, Bloomberg reports, citing a
letter to staff and shareholders.
Société Générale Is Ordered to Pay Trader Who Almost Ruined ItJérôme Kerviel
persuaded a French labor tribunal that he should not have been fired for
his trades, which nearly brought about the demise of the bank.
Sovereign Debt Rule Changes Threaten E.U. Bank Finances Expected
changes to regulation could lead to a 30 percent increase in capital
requirements for the main banks in the European Union, according to
research to be published on Wednesday by the credit rating agency Fitch.
Blackstone Bids to Buy Insurance Broker Acrisure Blackstone
Group is in advanced discussions to buy Acrisure, the insurance
brokerage, in a deal that could value it at over $2 billion including
debt, Reuters reports, citing people familiar with the matter.
Salesforce to Invest $50 Million in Start-Ups Salesforce will
also create an incubator for early-stage cloud start-ups as part of its
push to foster an ecosystem of applications that run on its
Longtime U.S. Prosecutor to Join Covington & BurlingThe prosecutor,
Arlo Devlin-Brown, went after Wall Street giants like SAC Capital
before leading the United States attorney's public corruption unit.
Oklahoma Police Find No Evidence of McClendon Suicide Oklahoma City
police said on Tuesday that an inquiry had found no evidence suggesting
that Aubrey McClendon, the former chief executive of Chesapeake Energy,
committed suicide when he died in a car crash in March, but acknowledged
that his state of mind at the time was unknowable.
Valeant Reports First-Quarter Loss and Cuts Its ForecastValeant, the
pharmaceuticals company facing questions about its business and
accounting practices, said it lost nearly $374 million in the quarter.