Board’s lowering of voting standard to exclude non-votes draws proxy advisory firms’ approval but disturbs others
Carl Icahn has thrown in the towel in his more than year-long campaign to gain control of Dell, just three days before a shareholder vote on a proposal to take the technology company private in a leveraged buyout valued at $24.8 billion.
But the billionaire activist investor is getting credit from market observers for forcing the buyout group, made up of founder and CEO Michael Dell and hedge fund Silver Lake Management, to increase their offer from $13.65 to $13.88 per share, which includes a 13-cent special dividend that Michael Dell has agreed to fund.
The vote, now set for September 12 at a gathering of shareholders at the company’s headquarters in Round Rock, Texas, has been postponed twice after CEO Dell and Silver Lake realized they lacked sufficient support for the proposed deal to pass.
In an open letter to investors dated September 9, Icahn, who has amassed nearly 9 percent of Dell’s shares, said he and Southeastern Asset Management thought they had won when shareholders followed their recommendation not to give up on a higher valuation for the shares and reject the proposed transaction. Comparing the company to a dictatorship for changing the voting rules and record date for those eligible to vote when it became clear that management lacked the support they needed for the buyout, Icahn criticized the board for providing no excuse other than ‘the usual business judgment catchall’ and Delaware law to back their actions.
On August 16, the Delaware Chancery Court denied Icahn’s request to expedite his lawsuit against the proposed buyout, with Chancellor Leo Strine, Jr concluding there was no evidence to show shareholders were being coerced to accept the proposal.
Donna Dabney, executive director of the Governance Center at The Conference Board, says she sees nothing improper about the board’s actions.
‘Leo Strine in his opinion very carefully analyzed those issues and determined they were proper under Delaware law. That opinion covers it completely,’ she says.
As for changing the voting standard to no longer count abstentions and non-votes as no-votes, Dabney says it was mystifying why Dell, in its merger agreement, initially chose such a difficult standard to reach as requiring that a majority of outstanding votes not affiliated with Dell’s management team vote in support of the buyout proposal.
Since 2009, when the New York Stock Exchange amended its Rule 452 so that brokerages could no longer vote shares they hold for retail clients without specific instructions from the owners, all companies have had trouble getting most of their individual investors to vote their proxies.
Chancellor Strine’s opinion affirmed that changing the voting standard was entrely within the right of the board, according to Dabney.
‘There’s a big difference in what might be legal, which is what a judge would decide, versus what’s ethical,’ says John Steigerwald, president of JLS Associates, a small management consulting firm specializing in the technology sector. ‘One might argue that Icahn might not have made a play if he had known that in fact the rules were not going to count abstentions [as no-votes].’
Changing the rules in the middle of the game, unless it’s to the benefit of unaffiliated shareholders, can’t be justified and feels unethical, he adds.
Proxy advisory firms ISS, Glass Lewis and Egan Jones have all issued reports supporting the proposed buyout. The ISS report said the deal ‘provides certainty of value, and transfers the risk of the deteriorating PC business and the company's on-going business transformation to the buyout group.’
Glass Lewis conceded that changing the unaffiliated shares voting requirement warranted scrutiny given how rarely it occurs. ‘Now, at a total purchase price that is 23 cents per share higher than the original offer, equal to roughly $350 million in additional value for unaffiliated shareholders, we believe the board's agreement to lower the voting standard is justified,’ Glass Lewis’ report said.
Steigerwald says he didn’t object to the first postponement of the vote, especially if the board had decided it had set too early a date to avoid having the proposed deal hanging over its head for too long. But with the second delay, ‘you’re really straining to get the outcome you want,’ he says.
While Icahn has given up his bid to win control of Dell, he’s still pushing for a higher price than the buyout offer by seeking appraisal rights under Delaware law on the 152 million shares he owns and has advised other shareholders to do the same. The process entitles shareholders to get ‘fair value’ for their shares as determined by the Delaware Chancery Court. Depending on the court’s decision, Icahn runs the risk of receiving less for his shares than the $13.88 the buyout group is now offering.