Court Rules Dell, Silver Lake Shortchanged Shareholders 20 Percent In 2013 Buyout

When Dell Chairman and CEO Michael Dell and Silver Lake Partners took Dell Inc. private in 2013 for nearly $25 billion, they underpaid by more than 20 percent and now may have to pay as much as $15 million to investors who opposed the buyout, a Delaware judge has ruled.

The ruling comes as the expected closing date for Dell's pending acquisition of EMC approaches. The more than $60 billion transaction -- the largest in the history of the IT industry -- is expected to close by the end of October.

One partner executive said he sees the ruling as not much of an impediment to Dell in its move toward acquiring EMC. "It doesn't really give me any pause," said Michael Gray, director of network operations at Tewksbury, Mass.-based Dell partner Thrive Networks. "A juggernaut is a juggernaut. The lawsuit, I think, is just a way to get some more money out of Dell."

[Related: Resurgent VMware Stock Pulls Value Of Dell's EMC Acquisition Higher]

"Worst case scenario, say they don't get the EMC deal done," Gray said. "Even then, both companies press on, and I'd be more concerned about EMC than Dell, honestly. Dell has so much more opportunity, there's still so much they can go out and do. It may erode some confidence, but I don't think anyone can stop this train. The more time that goes on, the more likely [the merger] is to happen. They've already got so much time invested in the deal, they're going to take it to the finish line."

Delaware Vice Chancellor Travis Laster filed his 114-page opinion in the long-running dispute Tuesday, ruling that the fair value of Dell's stock at the time of the buyout was $17.62 per share rather than the $13.75 per share the company and its private equity partners paid.

The suit was brought by investment funds about two years ago as a so-called appraisal case. The appraisal strategy allows investors to realize a price increase in a transaction by voting against it and later arguing in court that the deal was worth more than what the buyers paid.

Shareholders in this case argued that Dell, facing mounting competition in the PC market, was on track for a turnaround and was worth more than twice what Dell and Silver Lake paid in the buyout.

Laster previously disqualified the 27 million shares held by T. Rowe Price from the case, leaving Illinois-based hedge fund Magnetar Capital as the largest holder of Dell stock seeking an "appraisal." With 3.8 million shares, Magnetar could collect about $15 million plus interest, although Dell has the opportunity to appeal the ruling.

A Dell spokesman Tuesday declined to comment on the case.

Attorneys for Dell's lead firm in the case, Richards, Layton & Finger, as well as Magnetar's firm, Grant & Eisenhofer, did not respond for requests for comment Tuesday.

In a recent filing with the U.S. Securities and Exchange Commission, Dell and its holding company Denali Holding acknowledge that an unfavorable ruling in the appraisal case "could have a material adverse effect on the company's results of operation and liquidity."

Still, the ruling puts Dell on the hook for far less than it could've been required to pay, and the company has the right to appeal. In the same SEC filing, Dell estimated that the total amount it could have been made to pay in the case might have reached $593 million, plus $72 million in interest.

Regardless, the ruling comes as Dell prepares to take on as much as $49.5 billion in debt to finance its acquisition of EMC. As it did in the 2013 buyout, Dell has a plan to pay down that debt aggressively in the first couple of years after the acquisition closes.

The buyout used $13.9 billion in debt between Dell and Denali. Since that time, Dell has brought down its debt load some $3.1 billion, and Denali has reduced its burden by $5.1 billion, according to regulatory documents.

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