The future of Dell Inc. now rests on whether a special committee will grant Michael Dell’s request to change shareholder voting rules in his quest to purchase the computer maker.
But the proposal has sparked allegations that the Round Rock-based company’s founder is trying to remake the rules at the 11th hour — and raises questions about whether the change, if approved, would pass legal muster.
As part of his ongoing buyout bid for the company he founded, Michael Dell this week added 10 cents a share to his previous offer, bringing the deal’s value to $13.75 per share. He called it his “best and final” offer — but he made it contingent on the special committee to Dell Inc.’s board agreeing to change the shareholder voting rules. The committee delayed its shareholder meeting for a second time, moving it to Aug. 2 to give the board time to consider the offer.
Under the current voting rules, a majority of all Dell Inc. investors are needed to approve the deal. Any shares that aren’t voted would count as “no” votes. That means only about 43 percent of all holders could block the buyout, because Michael Dell has agreed not to count his roughly 16 percent stake in the company in the vote.
Michael Dell’s group wants the rules amended to require only a majority of the shares that are actually voted — a change that would boost his chances of completing the buyout.
“If he gets the voting rule changed, it’s a game changer, and I think the deal is a done deal,” said Angelo Zino, an analyst at S&P Capital IQ in New York.
The proposal has drawn fire from major investors, including billionaire activist Carl Icahn and Southeastern Asset Management Inc. of Memphis, who are leading the effort to defeat the buyout.
Icahn said Wednesday that changing the rules of the vote would remove an important shareholder protection.
“Michael Dell and Silver Lake crossed the Rubicon by trying to take away the one provision in the merger agreement that actually provided stockholders with a voice in their company,” Icahn said in a letter.
The original voting rules would have helped the transaction fall under the protection of the “business judgment” rule as interpreted by the Delaware courts, said Erik Gordon, a University of Michigan business professor.
If the buyout was in compliance with that rule, it would make it more likely that Delaware judges would defer to the actions of Dell Inc.’s board and not subject the deal to heightened scrutiny, Gordon said. Like many Fortune 500 companies, Dell Inc. is incorporated in Delaware, due to that state’s corporation-friendly laws.
“Michael Dell is risking losing the protection of the business judgment rule in return for an easier vote rule,” Gordon said. “The real big thing here is: ‘Wow, he just doesn’t think he has the votes and is willing to take a risk that is rarely taken in order to try to get this deal done.’”
But other analysts say they don’t see anything wrong with what Michael Dell is proposing.
“Michael Dell and the special committee aren’t asking for anything unreasonable,” analyst Patrick Moorhead said. “All they’re asking for is a change that states if someone doesn’t vote, it doesn’t become a ‘no’ vote. That’s not unprecedented, nor is it unfair.”
University of Texas law professor Henry Hu emphasized that the overall structure of the voting rules in the Dell Inc. situation was a negotiated matter.
“Delaware law doesn’t specifically mandate that ‘nonvotes’ be counted as ‘no votes’ here,” he wrote in an email. “The special committee negotiated a voting structure tilted against Michael Dell in at least two ways. First and, most important, there’s a complete neutralization of Michael Dell’s voting power. Second, there’s the ‘nonvotes equals no-votes’ provision.
“Rightly or wrongly, the special committee presumably believed that both provisions were needed to protect shareholders. Apart from the modest price change, does the special committee now believe that the second provision really wasn’t necessary after all? It’s unclear if the committee will change its mind as to this provision.”
In terms of Delaware law, Judge Leo Strine – who Hu called one of the most sophisticated judges in the country — has already emphasized the significance of the neutralization of Michael Dell’s votes when Strine weighed in last month on a lawsuit filed by Dell Inc. shareholders.
“He was also clear that he didn’t think Michael Dell was a ‘controlling shareholder’ as a legal matter — making court challenges to Dell more difficult,” Hu wrote. “Although … Strine did not focus in June on the ‘nonvotes equals no-votes’ provision, I’d be a bit surprised if a change as to this provision would materially increase Dell’s risk under Delaware law.”
Dell Inc. is the largest private employer in Central Texas, with about 14,000 employees in the Austin area. The company’s stock closed up 6 cents per share, or 0.50 percent, on Thursday to $12.98.
A look back at the year of twists and turns in the Dell Inc. buyout saga. In Sunday Business