By Peg Brickley
Observers expect a Delaware corporate law tribunal Monday to
fast-track Carl Icahn's legal challenge to Michael Dell's buyout
deal for Dell Inc. (DELL), setting up a potential showdown between
the two billionaires over their competing visions for the computer
giant.
Mr. Icahn has asked Chancellor Leo Strine of Delaware's Court of
Chancery to force Dell to hold simultaneous votes on the almost
$24.8 billion buyout offer from Mr. Dell and Silver Lake Capital
and on Mr. Icahn's attempt to set the stage for a competing offer.
Mr. Icahn wants a vote on ousting Dell's board and replacing it
with directors sympathetic to his proposal for a leveraged
recapitalization of the computer maker.
Mr. Icahn is arguing that changes to voting rules have robbed
the company's shareholders of the right to choose between the
dueling deals. Dell, meanwhile, says Mr. Icahn's lawsuit is "just
another soapbox" to publicize his fight with the special committee
of the company's board that is putting the offer from Mr. Dell and
Silver Lake to the shareholders for a vote.
The issue up for decision Monday is how fast the case will move.
But with a shareholder vote set Sept. 12 on the buyout from Mr.
Dell and Silver Lake, the financing for Mr. Icahn's rival offer set
to expire Sept. 30, and Dell's board vote set Oct. 17, failure to
get a speedy hearing on his challenge could be fatal to Mr. Icahn's
legal case, he argues.
Chancellor Strine could move the case along quickly or let the
deal action play out and leave Mr. Icahn to pursue his remedies
after the fact. Delaware courts are reluctant to interfere in
shareholder votes, but the question of whether the shareholder
voting changes are fair is one the judge may want to tackle in
advance, observers say. They also expect the market is right in
betting that Mr. Dell's deal for the computer company he founded
will survive the legal attack, unless new facts turn up.
"When dealing with voting rights like this, I'd be stunned if
[Chancellor Strine] didn't just say, 'Let's cut to the chase and
get this scheduled,'" said Lawrence A. Hamermesh, professor of
corporate and business law at Widener University's Institute of
Delaware Corporate Law.
Don't expect earth-shaking pronouncements Monday, Mr. Hamermesh
said, but do look for an important decision soon on a "troublesome
area" of corporate law: how much power do boards have to change the
rules on a shareholder vote?
The Dell special committee recently moved the record date--the
date which determines which shareholders are entitled to vote-- to
Aug. 13 from June 3. The special committee also removed a
requirement that Mr. Dell's buyout offer be approved by holders of
a majority of the outstanding shares. Instead, a majority of the
votes actually cast can approve the deal. So Mr. Dell's offer can
be approved without being backed by majority of outstanding
shares--if large numbers of shares aren't voted.
The company says the voting changes, allowing shareholders to
consider a recent $350 million improvement in the buyout offer,
were appropriate.
Delaware, the legal homeland of thousands of major corporations,
holds shareholder voting rights sacred and has invalidated board
decisions that interfere with them unfairly, requiring a
"compelling justification," such as the need to weigh material new
information.
Mr. Icahn says the special committee, in essence, delivered Dell
into the hands of deal arbitrageurs, short-term investors who jump
into a stock as it heads toward a deal and jump out just as fast.
The new voting record date gives voting rights to late buyers of
the stock, meaning arbitrageurs, while the tally rule change
amplifies the effect of the arb votes, because it will only take a
majority of shares voted for the buyout to pass. According to Mr.
Icahn, that unfairly dilutes the votes of long-term investors who
care about Dell's future, and it's too high a price to pay for a
small improvement in the price.
In Dell, it will come down to whether the board's special
committee had the right advice and the right motives for changing
the record date, Mr. Hamermesh said. "Are they biased or genuinely
trying to pursue a course of action that places the voting rights
in the right hands? It's all about whether the board is promoting
voting rights appropriately or impairing them."
If Dell's decision to change the voting rules passes muster,
dealmakers get clarity in a murky area and an important tool to
push shareholders toward a deal the board endorses, said Hunton
& Williams LLP's Steven Haas.
"Within the M&A bar you usually have one high-profile deal
every two or three years that is so significant everyone is
watching," Mr. Haas said. The fight over Dell, he said, is one of
those cases.
In a 2007 ruling, Chancellor Strine suggested the "compelling
justification" standard for changing voting rules should be eased
to allow boards to abide by their duties to screen deals and let
shareholders know what they think. That decision was not appealed
to the Delaware Supreme Court, but the ruling in Dell, whatever it
is, may well be, Mr. Haas said.
That's another reason for thinking Mr. Icahn's lawsuit will get
onto the fast track: if Chancellor Strine clears the voting changes
and Mr. Dell and Silver Lake win the vote and complete the buyout,
it could be tough to undo the deal if the state's high court
ultimately reverses the ruling.
What of the arbs, the fast-buck artists of the investing world?
Will their presence convince Chancellor Strine that the effect of
the changed voting schedule, as Mr. Icahn contends, will be to
allow short-term profiteers to decide Dell's fate?
Probably not, said Mr. Haas. Chancellor Strine "is going to be
reluctant to craft any kind of a holding around the assumption that
certain investors are always going to behave a certain way," Mr.
Haas said.
Mr. Hamermesh agrees.
"Arbs are stockholders. People buy shares for long-term and
short-term reasons, and we don't distinguish between the voting
rights of someone who bought recently and someone who bought a long
time ago," he said.
Write to Peg Brickley at peg.brickley@wsj.com.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires