If it costs millions to win an appraisal case, are the suits worth it?

October 19, 2016

(Reuters) – There is a hidden message in a Delaware Chancery Court decision this week to grant the shareholder firm Grant & Eisenhofer about $8 million in fees and expenses for convincing the court that Michael Dell and his private equity partner underpriced their $24.9 billion buyout of Dell in 2013.

The ruling by Vice-Chancellor Travis Laster is obviously a win – and a relief – for Grant & Eisenhofer, which was lead counsel in an expensive and time-consuming challenge to the Dell buyout price by shareholders who asked Chancery Court to determine the fair value of their shares in an appraisal action. Last May, Laster ruled that flaws in the sale process depressed the buyout price by nearly $4 per share, or 22 percent. For the 5.5 million shares in the appraisal class, the vice-chancellor’s decision is worth about $25 million.

Grant & Eisenhofer requested fees that, with interest, come to just over $4 million. Its fee request was protested by two of the big shareholder groups in the appraisal action, Magnetar Capital and Global Continuum Fund, which argued that the request didn’t account for the $4.2 million in fees G&E is slated to receive from a separate settlement between Dell and G&E’s big client in the case, T. Rowe Price.

T. Rowe Price – by far the biggest shareholder to challenge the Dell buyout price – was part of the appraisal class through the trial before Vice-Chancellor Laster. After the trial, the judge bounced T. Rowe Price’s 30 million shares from the class because a fund manager mistakenly voted in favor of the Dell buyout. Dell subsequently agreed to pay the merger price plus $28 million in interest to T. Rowe Price.

Magnetar and Global said Grant & Eisenhofer’s fee request from the appraisal class was based on the firm’s contingency fee agreement with T. Rowe Price – an agreement the other funds never approved. (Straight appraisal cases are not typically litigated on contingency.) Vice-Chancellor Laster, however, said that based on the recovery it obtained for shareholders, Grant & Eisenhofer could actually have been entitled to as much as $7 million under Delaware’s prevailing precedent on contingency fees. Grant & Eisenhofer’s lodestar billings in the case were nearly $7.8 million, the judge noted. Basically, Laster told the protesting funds that they’re lucky to be paying only about $4 million in fees for the more than $20 million Grant & Eisenhofer netted them.

The more interesting discussion in Vice-Chancellor Laster’s opinion, which I first saw reported in The Chancery Daily, involves expenses. Grant & Eisenhofer said it had laid out more than $4 million in costs to litigate the Dell appraisal action, nearly $3.5 million of it in fees for expert witnesses. (The next-highest costs were for copying and e-discovery hosting services.) Those expenses, of course, are in addition to the $7.8 million in lawyer time Grant & Eisenhofer said it had invested in the litigation.

Magnetar and Global said Grant & Eisenhofer had spent too much. (They also protested that T. Rowe Price should bear some of the burden of the expenses since the trial outcome gave the mutual fund leverage in its separate negotiations with Dell.) But according to Vice-Chancellor Laster, working up an appraisal case is an expensive proposition.

As Laster pointed out, Chancery Court judges in the five appraisal cases immediately preceding his Dell opinion all concluded that the deal price is the most reliable indicator of a company’s fair value. To prove otherwise in the Dell case, Vice-Chancellor Laster wrote, Grant & Eisenhofer “had to conduct discovery into the sale process and develop well-supported arguments as to why the process fell short for purposes of price discovery.”

The plain truth, the vice-chancellor wrote, is that appraisal actions have “become more complex” in the past few years. Defendants have been able to persuade Delaware judges that when the sale process is robust and transparent, the price is most likely fair. To counter that defense, shareholders have to bring in experts and conduct discovery to expose flaws in the sale process. Investors can’t just hire a valuation expert and expect to win.

And the vice-chancellor didn’t even delve into this summer’s change in Delaware’s law on appraisal actions, which allows appraisal defendants to avoid accruing interest charges at a high statutory rate. (That change didn’t apply in the Dell case.) The high interest rate had spurred the business of “appraisal arbitrage,” in which hedge funds bought shares of just-acquired companies in order to bring appraisal suits, betting that the statutory interest rate would make the investment profitable even if courts found the market price to be fair value.

But it seems to me that the hidden-in-plain-sight message Vice-Chancellor Laster means to send shareholders in the Grant & Eisenhofer opinion is that they should think hard about the costs and benefits of appraisal litigation. According to the judge, it took $4 million just in expenses to win the Dell case – and that, he suggests, is what it’s going to take future appraisal plaintiffs to win these increasingly complex cases. Add in a few million bucks for legal fees, since, as I mentioned above, appraisal plaintiffs usually pay their lawyers on an hourly basis. Subtract the safety net of high statutory interest rates. And suddenly, appraisal arbitrage isn’t nearly as attractive a business model as it used to be.

I ran my theory past Samuel Hirzel of Proctor Heyman Enerio, who represents Global, one of the funds that challenged Grant & Eisenhofer’s fee and expense request. (He is also Delaware counsel to Magnetar but was not speaking on behalf of that client.) Hirzel said that appraisal actions can be tried much less expensively than the Dell case – and that if T. Rowe Price hadn’t been in this case through trial, Dell investors would not have spent as much money as Grant & Eisenhofer laid out. “Four million dollars only made sense when T. Rowe was in the case,” he said.

Hirzel declined to say whether Global planned to appeal the fee ruling when Vice-Chancellor Laster enters final judgment in the case.

Stuart Grant of G&E didn’t respond to my email.

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