In a decision issued May 11, 2016, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled that the 31.1 million shares of Dell Inc. held by T. Rowe Price Associates for various investors had not been properly perfected, as described here. See further news re this matter at the bottom of this post.
T. Rowe Price was, last Friday, attempting to find a resolution to this error as noted in the Wall Street Journal (subscription required). It turns out that, given the massive number of votes that T. Rowe Price is called upon to make because of its holdings of many securities, there is an automatic “for” vote that is generated. In the event that there is a desire to vote against a proposal, as T. Rowe Price wanted to do in the October 2013 management buyout (“MBO”) of Dell, Inc. led by Michael Dell, a human being at T. Rowe Price must manually change the vote to “against.”
In the first called shareholder meeting, scheduled for July 18, 2013, an “AGAINST” vote was prepared. What happened after that is described by Vice Chancellor Laster in his May 11, 2016 decision:
D. Dell Pushes off The July Meeting Three Times
On July 18, 2013, Dell convened the July Meeting for the sole purpose of adjourning it until July 23. iSS updated the date of the meeting, but did not send out a new meeting record for the adjourned meeting. The T. Rowe Price Governance Specialist nevertheless confirmed that T. Rowe’s instruction to vote “AGAINST” remained operative in both the T. Rowe Voting System and the ISS Voting System.
On July 23, 2013, the Buyout Group delivered a revised proposal that increased the merger consideration to $13.75 [per share]. Dell rejected the proposal, but adjourned the stockholder meeting until August 2. ISS updated the date of the meeting, but did not send out a new meeting record for the adjourned meeting. The T. Rowe Price Governance Specialist reconfirmed that T. Rowe’s instructions to vote “AGAINST” remained operative in both the T. Rowe Voting System and the ISS Voting System.
On July 31, 2013, the Buyout Group proposed a one-time special cash dividend that effectively increased the merger consideration to the final figure of $13.88 per share. On August 2, Dell accepted the revised proposal. Also on August 2, Dell convened the adjourned meeting for the sole purpose of adjourning it again until September 12 (the “September Meeting”). Dell set a new record date of August 13 for the September Meeting.
On August 12, 2013, ISS updated the date of the meeting to September 12, but the ISS Voting System did not generate a new meeting record. The T. Rowe Corporate Governance Specialist confirmed for a third time that T. Rowe’s instructions to vote “AGAINST” all three proposals remained operative in both the T. Rowe Voting System and the ISS Voting System.
E. The Voting Mix-Up For The September Meeting
On September 4, 2013, the ISS Voting System generated a new meeting record for the re-scheduled meeting (the “September Meeting Record”). The T. Rowe Voting System showed both the July Meeting Record and the September Meeting Record. In the ISS Voting System, however, the September Meeting Record replaced the July Meeting Record. This had the effect of deleting the voting instructions that had been entered in the ISS Voting System.
The T. Rowe Voting System automatically pre-populated the September Meeting Record with the default voting instructions called for by T. Rowe’s voting policies [“FOR”]. As a result, the T. Rowe Voting System populated the September Meeting Record with instructions to vote “FOR” the Merger, “AGAINST” the advisory resolution on golden parachutes, and “FOR” authority to adjourn the meeting.
No one from T. Rowe’s proxy team logged into the ISS Proxy System to check the status of T. Rowe’s voting instructions. As part of the routine operation of the two systems, the default instructions in the September Meeting Record were conveyed automatically to ISS.
The planned “AGAINST” vote by T. Rowe Price was the first step in perfecting the rights of the shares held to dissent and to appeal to the Delaware Court of Chancery for a determination of their “fair value.”
Everyone, including the representatives of T. Rowe Price and the board of directors of Dell Inc. thought that an “against” vote had been rendered. When it was later determined that a mistake had been made, the result was a trip to Chancery Court in Delaware. In the decision noted above, Vice Chancellor Laster ruled that the 31.1 million shares held for investors by T. Rowe Price had not been properly perfected.
The perfection process is somewhat arcane and must be precisely followed. In failing to render an “AGAINST” vote for the Merger, representatives at T. Rowe Price inadvertently failed to follow the rules at a considerable cost. I estimated the cost to be $213 million in both foregone fair value ($3.87 per share) and interest at the Federal Reserve Discount Rate (1%) plus 5%, compounded quarterly, or an additional $2.98 per share. See the bottom portion of the figure below.
Yesterday, T. Rowe Price announced that it would pay up to $194 million in restitution to shareholders of Dell Inc. that were being managed by the institution. I estimate the opportunity cost at $213 million. Regardless of which calculation is closest to what will be paid, either $194 million or $213 million, the restitution of investors by T. Rowe Price will be expensive.
Why was T. Rowe Price so timely following Vice Chancellor Laster’s determination that the fair value of Dell Inc. shares was $17.75 per share, rather than the transaction price of $13.78 per share (both adjusted for a pre-merger dividend)? My previous post discussed that decision, which was issued May 31, 2016. T. Rowe Price was quick to admit the error and seek to make restitution precisely because Vice Chancellor Laster’s earlier decision that the T. Rowe Price shares’ dissent had not been properly perfected was basically a pre-trial of the issue for the plaintiffs’ bar. At least that’s my observation from a business perspective.
A Painful Lesson for Asset Managers
Transactions that give rise to the right to dissent are different from other transactions that asset managers are called upon to vote on. Transactions with potential “dissenters’ rights” provide a path to receive “fair value” for shares, and not the transaction value offered by management. When this remedy is available, certain steps should be considered.
- Focus management’s attention on the transaction. If large dollars are at stake, transactions giving rise to the right to dissent need to be taken out of any “automatic” decision-making tree. Large dollars were at stake for T. Rowe Price investors. I’m not suggesting that their specialists did not focus on the transaction. T. Rowe Price representatives were vocal in their opinion that the merger price was too low. Things inadvertently slipped through the crack, as outlined above. That was unfortunate. Perhaps with that much at stake a manual vote would have been appropriate.
- Assess the fair value of the shares. There was no discussion in the Dell Inc. proxy, which was issued May 31, 2013, for the management buy-out of the special committee’s or the board of directors’ consideration of the fair value of Dell Inc. shares. Since the proxy addresses the right to dissent and states that dissenters who properly perfect their dissents are entitled to a court-determined “fair value” per share, the absence of any discussion of the board’s consideration of fair value should have been a flag for investors. With 31.1 million shares held, T. Rowe Price might have engaged an appraisal professional to estimate, based on Delaware precedent cases, the fair value of the Dell Inc. shares. This action is not unprecedented. We (Mercer Capital) have been retained to provide this service for institutional investors in other transactions.
- Be sure that any votes are both timely and correct. If an asset manager follows steps one and two above, chances are there will be sufficient focus on any relevant vote to assure that the right people render the right vote.
- Take all required steps to perfect the dissent. The proxy statement of Dell Inc. provided a road map of the steps necessary to perfect dissenters’ rights. With a transaction at hand, it is important to lay out all the steps in advance to be sure that they are taken timely. The process is a pain, but it is the legal process required in Delaware (and similar processes in other jurisdictions).
It is unfortunate that T. Rowe Price made a mistake in handling the vote for the October 2013 management buyout of Dell Inc. by Michael Dell and a financial sponsor. They have recognized the mistake and stepped forward immediately to make their investors whole. Asset managers will likely remember this public and expensive mistake and use it to prevent something similar on their watches.
For more information, visit
- T. Rowe Price To Take $194 Million Charge Due To Voting Error On Dell LBO (Forbes)
- After Nearly $200 Million Dell Flub, T. Rowe Price Seeks a Solution (Wall Street Journal)
- T. Rowe Price Pays Up for Botched Vote (Wall Street Journal)
- T. Rowe Price to Pay Out $194 Million to Shareholders in Four Mutual Funds, Other Clients (Investment News)
- T. Rowe Price Will Compensate Investors Up To $194 Million For Dell-Related Voting Blunder (Barron’s)
Until next time, be well!
Chris
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