How Judge’s Ruling Ends Legal Threat to Dell Buyout

Carl C. Icahn once threatened “years of litigation” over the Dell buyout. Unfortunately for him, a Delaware court appeared to disagree at a hearing on Friday, leaving the investor to make a last stand at Dell’s Sept. 12 shareholder meeting.

The Friday hearing was ostensibly a procedural one, held to decide whether to expedite Mr. Icahn’s lawsuit against the Dell board. The suit brought by the Icahn funds claimed that the Dell directors had breached their fiduciary duties in renegotiating the buyout deal with Michael S. Dell and Silver Lake Partners, and in particular resetting the record date for the shareholder meeting to vote on the transaction.

Mr. Icahn also made a second claim that Dell’s annual meeting should be ordered held at the same time as the vote on the merger. This would give him a chance to get the merger voted down while simultaneously seeking to replace the Dell board.

The hearing was by all accounts one of the more well-attended scheduling conferences ever in Delaware. And as is often the case with judicial hearings, it had a surprise or two. While the initial reports that Mr. Icahn lost are on the whole correct, a nuance or two will affect both this Dell deal and future buyouts.

The first surprise was that the judge in the matter, Chancellor Leo E. Strine Jr., decided to turn the scheduling hearing into a more substantive one on the merits.

The judge refused to expedite claims that Mr. Icahn has made about the buyout process and the deal Dell has cut with Mr. Dell and Silver Lake. In finding that Mr. Icahn had stated no “colorable claim” that the board had breached its fiduciary duties, it is clear the judge believe that - based on the facts known - the board has done a good job, or at least that it is not his place to second-guess the board’s decisions. In this regards, the judge stated that “I’m not a special committee member, and under our law, deference is due to independent directors.”

The Dell board has also been criticized by Mr. Icahn and others for changing the record date for the shareholder vote and lowering the threshold of approval for the deal in exchange for Mr. Dell’s latest price increase.

But Chancellor Strine offered a defense of the board, stating, “I’m not sure what other leverage they really had.” In particular, the judge said the change in the record date was justified because of the turnover of almost 25 percent of Dell’s shares after the old date was set, and because of the numerous revised proposals made by Mr. Icahn himself, which also affected the composition of the shareholder base.

The judge’s statements are a vindication for the Dell board and the so-called superprocedures put in place that, the board argued, empowered and protected shareholders. These procedures have put a shine on the board’s independence, and the Delaware courts focus on things like independence and good faith.

In light of the judge’s apparent view that these standards have been met, he clearly did not want to meddle with this deal. In fact he went out of his way to state that the Delaware courts did not want to drag this matter out any further.

Chancellor Strine’s findings are so complete that they justify the superprocedures this board has put in place, even when it stepped back from them slightly in this most recent iteration. And again, Chancellor Strine found the board’s action wholly justified because the consideration was increased. (Deal Professor: How Dell Tried to Avoid Potential Buyout Pitfalls)

His view was no surprise in light of his prior endorsement of these procedures. It is also effectively a death knell for attempts by Mr. Icahn and other shareholders to challenge the buyout on the basis that the board failed in its decision-making.

The court effectively stymied Mr. Icahn’s attempt to have Dell’s annual meeting held on the same date as the vote on the merger. His claim is based on a Delaware statute that requires that an annual meeting be held within 13 months of the prior meeting. If this 13th-month period elapses, Delaware courts may order that the meeting be held.

I had previously written that Mr. Icahn had a claim here, since other courts had held the 13-month requirement to be “virtually absolute.”

The Delaware court also agreed. Chancellor Strine handed Mr. Icahn a victory here, ordering that there be expedited proceedings on the meeting claim.

Prior courts, he noted, had ordered these meetings to be held within 30 to 90 days after the 13-month period.

The Dell meeting is set for Oct. 17, so the judge stated that it was already in this time frame, adding that he was not inclined to order that it be held sooner. This was particularly true since “under the relevant federal securities standards, it does not seem at all possible to have a compliant meeting on the time frame that the Icahn group suggests.”

Thus, Chancellor Strine stated that while he was expediting this claim and certainly not ruling on it right now, if he did rule he would probably just order that the meeting be held on Oct. 17 anyway. Then he set a briefing schedule that would not result in a hearing until late August or early September.

Essentially, he left it to the parties to negotiate an order that implemented his desired ruling. And that was that.

As Brian Quinn at the M&A Law Prof blog noted in speculating about what the court would do at this hearing, sometimes Delaware hands out Pyrrhic victories. He was right about that, to Mr. Icahn’s detriment.

For the Dell buyout, this is truly an end to the litigation threat. Unless new facts emerge, the judge in the matter appears quite ready to see this go to a vote. Not only that, to the extent a litigation threat hung over this deal to push the Dell board to do something, it is clear that this threat is gone.

The fact that the judge made these rulings at a scheduling hearing shows his eagerness to get the Delaware courts out of the way of this buyout going to a vote. Boiling this down, you can think what you will of the sale process, but the Delaware courts are unlikely to give you solace if you are a Dell shareholder.

And given the judge’s statements, it is hard to see a path to victory for shareholders who exercise dissenters’ rights. While a dissenters’ rights procedure focuses on whether a fair price is paid, it is hard to see how a Delaware court would award more than the buyout price given the firm endorsement of the procedures used in this case.

This essentially leaves everything with the shareholder vote. Mr. Icahn, Southeast Asset Management and the other buyout opponents will have to fight this battle based on the new rules the Dell board has negotiated. The tide is against them though the vote is still likely to be a nail-biter.

But don’t worry about Mr. Icahn â€" he is already in the black on this trade. As he often does, Mr. Icahn will win even if he loses on Sept. 12.