Business Organizations – Notes

Theodora Holding Corp. v.
Henderson
Delaware Court of Chancery
257 A.2d 398 (Del. Ch. 1969)

Rule of Law
Corporations can make valid donations for charitable purposes.

Facts
Girard Henderson (defendant) had a controlling interest in Alexander
Dawson, Inc. (Alexander Dawson) (defendant) and dominated its corporate
affairs. The defendant's ex-wife owned a large amount of the corporations’
stock through Theodora Holding Corp. (plaintiff). Over the years, Henderson
had caused Alexander Dawson to make charitable contributions to the
Alexander Dawson Foundation (the Foundation), a legitimate charitable
organization recognized by the Department of Internal Revenue. In 1967,
Alexander Dawson had a total income of $19,144,229.06. In April of the same
year, Henderson asked the board to approve a gift of company stocks valued at
$528,000 to the Foundation to finance a camp for under-privileged boys.
Although one director objected, Henderson got board approval of the gift by
getting rid of five directors. Theodora Holding Corp. brought suit against
Alexander Dawson, Inc. and Henderson in Delaware Court of Chancery,
challenging the gift.

Issue
Can corporations make valid donations for charitable purposes?

Holding and Reasoning (Marvel, J.)
Yes. Under Delaware law, Delaware corporations can make valid donations
for charitable purposes. Del. Code tit. 8, § 122. In A.P. Smith Mfg. Co. v
Barlow, 98 A.2d 581 (1953), the Supreme Court of New Jersey upheld a $1500
corporate gift to a university. The court also held that a charitable gift made by
a corporation must be reasonable both as to amount and purpose to be valid.
This court concludes that test of the validity of a charitable gift by a
corporation is that of reasonableness. The provisions of the Internal Revenue
Code regarding charitable gifts by corporations provide a helpful guide. In this
case, the Foundation is a legitimate charitable organization recognized by the
Department of Internal Revenue, and thus the gift to the Foundation is a
charitable donation. Further, in 1967, Alexander Dawson, had a total income
of $19,144,229.06. The $528,000 corporate gift was well within the federal tax
deduction limitation of 5 percent of the total income. In addition, the gift
reduced the Alexander Dawson unrealized capital gains taxes by $130,000,
which increased the balance-sheet net worth of stockholders of the
corporation. The relatively small loss of income otherwise payable to
shareholders is "far out-weighed by the overall benefits" of the gift, which will
provide under-privileged young people with rehabilitation and education.
Therefore, the charitable gift is reasonable and thus valid.

Answer to questions – Page 191

(1) If there is no provision as to the quorum, there must be a majority. In this case,

only four out of eight directors voted. Section 141 b Delaware Code
(2) No, directors cannot vote by proxy. It is usually only shareholders that can

vote by proxy.
(3) Yes. 141 i Delaware Code
(4) Yes, notice is not required by Delaware, as long as there is a majority quorum

(unless otherwise provided in by-laws). Section 141 b.
(5) No, same argument as before.

with Polan signing the relevant documents.2d 209 (4th Cir. Further. Industrial then subleased a portion of the building to PI. 1991) Rule of Law A shareholder in a corporation may be held personally liable for corporate obligations once the corporate veil is pierced to prevent injustice. Inc. Kinney then sued Polan personally.400 against Industrial. The district court concluded that Kinney had “assumed the risk of Industrial’s undercapitalization” and refused to pierce the corporate veil. Polan did not hold initial meetings or elect directors. (PI) under the laws of West Virginia. Kinney sued and obtained a judgment of $166. v. Polan made no capital investment into either company. Kinney Shoe Corporation (Kinney) (plaintiff) had a long- term lease on a building. Polan United States Court of Appeals for the Fourth Circuit 939 F. and no stock was ever issued. Issue May a shareholder in a corporation ever be held personally liable for corporate obligations? . Facts Lincoln M. Polan (defendant) incorporated Industrial Realty Company (Industrial) and Polan Industries. Polan made a single rental payment to Kinney from his personal account before Industrial defaulted on the lease. which Kinney subleased to Industrial. Kinney appealed to the United States Court of Appeals for the Fourth Circuit.Kinney Shoe Corp.

the corporation provides no protection to its owner. Those parties are thought capable of “reasonable credit investigation” and will be imputed with the knowledge such an investigation would have turned up. Laya.Va. 1986). These failures caused general unfairness and justify piercing the corporate veil. J.E. Though the question is always a fact-specific inquiry.) Yes. Polan made no contributions to Industrial.Holding and Reasoning (Chapman.” Polan failed to comply with the formal requirements and cannot avoid liability on a theory that Kinney assumed the risk.2d 93 (W. There is an optional third prong in cases involving sophisticated parties. Walkovszky v. The burden of proof falls on the party seeking to pierce the veil. there is a two-pronged test for piercing the corporate veil: (1) the shareholder must have failed to maintain the separate character of the corporation. The third prong is not mandatory and need not be applied here to reach an equitable conclusion. the corporate veil may be pierced and personal liability imposed on shareholders if equity so requires. supra. thus “setting up a paper curtain constructed of nothing more than Industrial’s certificate of incorporation. such as financial institutions or banks. and (2) refusing to impose liability on the shareholder would cause “an inequitable result.” Laya v.. “When nothing is invested in the corporation. Polan is therefore personally liable.” The question of whether the third prong applies to parties other than financial institution lenders will not be reached. Carlton . 352 S. Under West Virginia Law. Polan obviously created Industrial as a shell corporation to provide another layer of insulation from personal liability. Erin Homes. who assume the risk of default. Inc. In this case. the two-part test is satisfied. Polan made no capital contributions to the corporation and performed none of the required formalities. and the ruling of the lower court is reversed and remanded.

In the lower court proceeding. as well as Seon Cab (under a respondeat superior theory). and the minimum amount of automobile insurance required by law. and all of Carlton’s other cab companies. Issue Can a personal injury plaintiff sue the owners of a cab company because of injuries the plaintiff sustained from one of the company’s cabs? Holding and Reasoning (Fuld. Carlton and his companies appealed.Court of Appeals of New York 223 N. including. and that a creditor could sue Carlton. Walkovszky sued the cab’s driver. Carlton (under a piercing the corporate veil theory). Walkovszky claimed that the cab companies did not act as separate organizations.E.) No. notably. One of the cabs owned by Seon Cab was in an accident with Walkovszky (plaintiff). A plaintiff can pierce the corporate veil and hold a company’s owners liable for the debts of the company if the company is a . J. but were set up separately to avoid liability. Each of the corporations owned one or two cabs. Seon Cab Corporation. Facts Carlton (defendant) owned 10 corporations (defendants).2d 6 (1966) Rule of Law A creditor cannot pierce the corporate veil without a showing that there is a substantial unity of interest between the corporation and its shareholders. The lower courts found that Carlton’s companies were set up to frustrate creditors.

because this suggests that the business is a fraud intended to rob creditors of the ability to fulfill their debts. without impinging the limited liability of the shareholders. while this is relevant. it is not enough to allow a plaintiff to pierce the veil. and carried only the bare minimum amount of insurance required by law.) When the legislature passed the automobile insurance minimum. That said. it assumed that companies that could afford insurance above the minimum would in fact purchase additional insurance. he could offer no proof to that effect. In this case. J. owners would be on the hook every time their corporation accrued liabilities outstripping its assets. While Walkovszky alleged that each of Carlton’s companies was actually part of a much larger corporate entity. but the company was kept intentionally undercapitalized. and labor between multiple corporate entities. the judgment of the lower courts is reversed. The insurance minimum should not be used here to prevent Walkovszky from the type of recovery that the law was meant to provide for. Seon Cab was profitable enough to afford more than the minimum insurance coverage. . and limited liability would be meaningless. and Carlton should not be allowed to benefit from a corporate form he adopted merely to abuse it.dummy corporation. Seon Cab Company was undercapitalized. It is also relevant that the formal barriers between companies are not respected. liabilities. The mere fact that Walkovszky might not have been fully able to recover his damages was not enough to justify letting him pierce Seon Cab’s veil. there must be some evidence that the owners themselves were merely using the company as a shell. Instead. However. It is very relevant to the discussion of veil- piercing if a business is undercapitalized. Accordingly. Dissent (Keating. a business enterprise may divide its assets. otherwise. whose interests are not distinguishable from those of the owner or owners. The goal of the act was to ensure that there was a pot of money provided for victims of automobile accidents.

The question of jurisdiction turned on whether Radaszewski could pierce the corporate veil and hold Telecom liable for the conduct of its subsidiary. Inc. . The district court nonetheless held that it lacked jurisdiction over Telecom on other grounds. Eighth Circuit Court of Appeals 981 F. When Telecom formed Contrux. it contributed loans.Radaszewski v. because of the insurance it had provided to Contrux. is a wholly owned subsidiary of Telecom Corporation (defendant). and $10 million in excess coverage. Telecom did provide Contrux with $1 million in basic liability coverage.2d 305 (1992) Rule of Law A plaintiff may ordinarily pierce the corporate veil and bring a parent corporation into a case against a subsidiary where the subsidiary was operating while undercapitalized. Contrux. Facts Radaszewski (plaintiff) was injured in an automobile accident when the motorcycle he was driving was struck by a truck driven by an employee of Contrux. Contrux. Inc. Telecom argued that the district court lacked personal jurisdiction over it. Telecom Corp. Telecom argued that the corporate veil could not be pierced on the basis of undercapitalization. The district court rejected Telecom’s argument that insurance could determine a subsidiary’s financial responsibility. Contrux’s excess liability insurance carrier became insolvent two years after Radaszewski’s accident. not equity. and did not pay for all of the stock that was issued.

but was provided with more than adequate liability insurance. Telecom argues that Contrux was financially responsible because it was provided with $11 million in liability insurance to pay judgments such as the one now sought by Radaszewski. the district court found that Contrux was undercapitalized according to generally accepted accounting principles. or existence of its own.2d 273 (Mo. Inc..Issue May a plaintiff pierce the corporate veil to bring a parent corporation into a case against a subsidiary where the subsidiary was undercapitalized in a traditional accounting sense. since creating a business and operating it without sufficient funds to be able to pay bills or satisfy judgments against it implies a deliberate or reckless disregard of the rights of others. policy. 1986).App. A person injured by a corporation or its employees may generally recover only from the assets of the employee or the employer corporation. The district court rejected the argument that insurance could . A plaintiff may not pierce the corporate veil and bring a parent corporation into a case against a subsidiary if the subsidiary was undercapitalized in a traditional accounting sense. In this case. not equity. but was provided with more than adequate liability insurance? Holding and Reasoning (Arnold. and business of the corporation.W. and not from the shareholders of the corporation or its parent corporation. Undercapitalizing a subsidiary satisfies the second element of the Collet test. so that the corporation at the time of the transaction had no separate mind. and (3) the control and breach of duty proximately cause the plaintiff’s injury. to violate a legal duty. However.J. will. to pierce the corporate veil and make corporate shareholders liable a plaintiff must show: (1) complete domination and control over the finances. or to act dishonestly or unjustly in violation of the plaintiff’s legal rights. Telecom contributed loans. C. and did not pay for all of the stock that was issued. As found in Collet v. American National Stores. 708 S. (2) the control was used by the defendant to commit fraud.) No.

Dissent (Heaney. the factfinder at trial could conclude that the insurance alone does not require a judgment for Telecom.determine a subsidiary’s financial responsibility. Something more than an error in business judgment is required under Collet. The purpose of the limited liability doctrine is to protect a parent corporation when a subsidiary becomes insolvent. although closely related.3d 588 (5th Cir.) While Contrux’s liability insurance is one relevant factor. but modified to be with prejudice. Facts . This doctrine would be destroyed if a parent corporation could be held liable for errors in business judgment. The district court’s dismissal of the complaint for lack of jurisdiction is therefore affirmed. Insurance meets this policy just as well as other forms of capitalization. The policy behind the second element of the Collet test is to ensure financial responsibility. keep their corporate entities separate. Gardemal v. United States Court of Appeals for the Fifth Circuit 186 F. Westin Hotel Co.J. C.1990) Rule of Law A parent corporation is not liable for acts committed by its subsidiary if the two corporations. This court disagrees.

Further. Mexico to attend a seminar held at the Westin Regina Resort Los Cabos (Westin Regina). Westin Mexico is a Mexican corporation and a subsidiary of Westin Hotel Company (Westin) (defendant). While staying at the hotel. Westin moved for summary judgment. a parent corporation is not liable for acts committed by its subsidiary if the two corporations. Although Westin and Westin Mexico were closely related through stock ownership. Gardemal brought wrongful death and survival actions against Westin and Westin Mexico under Texas law. Issue Is a parent corporation liable for acts committed by its subsidiary if the two corporations. alleging that her husband drowned because Westin Regina's doorman negligently directed them to the beach and failed to warn them of the dangerous conditions. although closely related. The alter ego doctrine allows the court to . Westin Regina is managed by Westin Mexico (defendant).Lisa Gardemal (plaintiff) and her husband. Without knowing the beach's conditions. keep their corporate entities separate. John went swimming and was swept into the ocean by a rogue wave and thrown against the rocks. Under Texas law. travelled to Cabo San Lucas. Allegedly. the hotel's doorman directed the Gardemals to a beach that had rough surf and strong undercurrents without warning the Gardemals of the danger. John. although closely related. The magistrate judge rejected Gardemal's theory that the alter ego and single-business-enterprise doctrines allowed the court to impute liability to Westin. John drowned. a Delaware corporation. claiming that it was a separate corporate entity and thus should not be liable for acts committed by its subsidiary. etc.) No. J. Gardemal appealed. The district court granted Westin's motion for summary judgment based on the magistrate judge's recommendation. keep their corporate entities separate? Holding and Reasoning (DeMoss. the two corporations strictly adhered to their corporate formalities. the Gardemals decided to go snorkeling. common officers. financing arrangements.. Westin Mexico was sufficiently capitalized.

common officers. OTR Associates v.2d 407 (App." Alter ego can be proven by "a blurring of lines" between the two corporations. there is insufficient evidence that Westin Mexico is Westin's alter ego. The district court's grant of Westin's motion for summary judgment is affirmed. even viewed in a light most favorable to Gardemal. 2002) Rule of Law The corporate veil of a parent corporation may be pierced if the parent: (1) dominates and controls the subsidiary and (2) abuses . no evidence shows that Westin Mexico is undercapitalized so that Gardemal could not recover directly from Westin Mexico. Similarly. Undercapitalization is an important indication that a subsidiary acts as alter ego of its parent. both formally and substantively. shows only "a typical corporate relationship between a parent and subsidiary. financing arrangements. Therefore. Inc." In this case. etc.hold a corporation liable for acts of another corporation when the latter is operated as "a mere tool or business conduit. Further. the single- business-enterprise doctrine allows the court to hold a corporation liable for the acts of another corporation when the corporations are "so integrated as to constitute a single business enterprise. the record. IBC Services. Evidence shows that Westin and Westin Mexico are incorporated in two different countries and strictly adhere to their corporate formalities. is insufficient to apply the alter ego doctrine. Similarly. there is insufficient evidence that Westin and Westin Mexico are so integrated as to constitute a single business enterprise. Div. Superior Court of New Jersey 801 A." The mere fact that Westin and Westin Mexico are closely related through stock ownership.

The transaction happened in this way: IBC entered into the lease with OTR. 1414 Avenue of the Americas.000. IBC subleased the space to the franchisee. New York. New York. OTR sued Blimpie for unpaid rent in the amount of $150. the lease was terminated due to continued late payment of rent. The persons who approached OTR and asked to rent space in the mall were wearing Blimpie uniforms. Blimpie appealed. IBC did not have its own business place and employees. (IBC) (defendant).) . Issue May the corporate veil of a parent corporation be pierced if the parent: (1) dominates and controls the subsidiary and (2) abuses the privilege of incorporation by using the subsidiary to commit a fraud or injustice? Holding and Reasoning (Pressler. (the franchisee). It leased space to Samyrna. IBC had no assets except the lease and no income except the rent payments by the franchisee. having an address at c/o International Blimpie Corporation. Later. Inc. The trial court found for OTR. J. a franchisee of International Blimpie Corporaiton (Blimpie) (defendant). IBC was created for the sole purpose of holding the lease for the space occupied by the franchisee. and then with OTR's consent. OTR’s partners believed that they were dealing with Blimpie instead of IBC and did not discover the separate corporate entities until after the eviction. the tenant identified in the lease was “IBC Services. Inc. Facts OTR Associates (OTR) (plaintiff) owns a shopping mall in New Jersey. and Blimpie retained the right to approve and manage the lease. Inc.” and the letters sent to OTR bore the Blimpie logo. Blimpie wholly owned a subsidiary named IBC Services.the privilege of incorporation by using the subsidiary to commit a fraud or injustice.

the tenant identified in the lease was IBC Services. Among such evidence we find that New Higgins was . The judgment is affirmed. and (2) undercapitalization of the subsidiary makes it difficult to recover from the subsidiary.Yes. Precision Tools Problem 1 . Inc. IBC failed to explain its relationship with Blimpie and intentionally misled OTR to believe that it was Blimpie: the persons who approached OTR and asked to rent space in the mall were wearing Blimpie uniforms. Such purpose was fraudulent and improper.. Blimpie’s domination and control over IBC is obvious: IBC was created for the sole purpose of holding the lease for the space occupied by Blimpie’s franchisee. In this case. To pierce the corporate veil in New Jersey. according to Kinney Shoe Corp. Further. In this case. IBC did not have its own business place and employees. Indicators of such abuse are that: (1) the subsidiary has no independent business but provides services exclusively for the parent. and the letters sent to OTR were headered by the Blimpie logo. the corporate veil was properly pierced. Therefore. and Blimpie retained the right to approve and manage the lease.Evidence of the case shows that PTC and New Higgins were separate corporate entities. a court must find that the parent corporation dominates and controls the subsidiary and that the parent abuses the privilege of incorporation by using the subsidiary to commit a fraud or injustice. the shareholders have maintained the separate character of the corporation. These facts indicate that Blimpie created IBC for the purpose of insulating Blimpie from liability on the lease if the franchisee defaulted. IBC had no assets except the lease and no income except the rent payments by the franchisee. Blimpie abused the privileged of incorporation by using IBC to commit a fraud or injustice. avoiding one of the requisites for the pierce of the corporate veil. OTR’s partners believed that they were dealing with Blimpie instead of IBC and did not discover the separate corporate entities until after the eviction.

The shareholders leveraged the company heavily. it is also to note how New Higgins and PTC have a close relationship which could have been avoided. as New Higgins is using some facilities and services of PTC but it is paying for it. There does not seem to be operational confusion. assets etc) IN RE: APPRAISAL OF DELL INC. Possibly. providing loans that we place them above if the company is liquidated. The shareholders will have to prove that the interests of New Higgins differ from those of its shareholders and that New Higgins was not just a shell corporation. Criteria for Piercing the Veil Control + Undercapitalization (intentional) + Creditors misled + No Respect for Corporate Formalities + No Respect for Economic Formalities (Confusion of Assets) + No Respect for Operational Formalities (same location. the distribution of all the profits of the last two years could be seem as a way of emptying the company and avoiding the payment of creditors. . Further. such as board and shareholders’ meetings. PTC offered loans. 2 – The issue here is that the shareholders must prove that New Higgins was not a shell corporation. The fact that they shared the same personnel.sufficiently capitalized with equity ($25k). offices etc may be used in court as a argument for the piercing of the corporate veil. The issue is that there is control of PTC by New Higgins. debt ($125k) and proper insurance coverage. Further. which may be viewed as no respect for economic formalities. plaintiffs would try to use the argument of Walkovszky and try to prove that New Higgins was a dummy corporations. New Higgins held proper corporate formalities. part of the PTC conglomerate. For that matter. employees.

Even though the deal price represented a nearly 30% premium to market and was within the range of DCF values provided by the Dell special committee’s financial advisors. who owned approximately 15. the Court held that a DCF valuation. was 28% higher than the price paid for it by Michael Dell and Silver Lake Partners and approved by a majority of the unaffiliated shares after a lengthy. using the Court’s inputs.) held in an appraisal proceeding that the fair value of Dell Inc. and the agreed-upon price was the product of a competition among like- minded financial bidders who were price-constrained by targeted internal rates of return in LBO pricing models.4% of Dell. The Court concluded that the deal price undervalued Dell because there was a significant “valuation gap” between the long-term value of Dell and the market’s short-term focus.. V. the company’s revenues and earnings continued to decline. After having been approached by a number of financial sponsors about a possible MBO and believing that the market failed to appreciate his long term vision.Delaware Court of Chancery Determines Fair Value Is 28% Higher Than Merger Price Following an Auctioned Arm’s-Length MBO SUMMARY In In re: Appraisal of Dell Inc. as did its stock price (to approximately $12 per share in June 2012). believed would transform Dell into a company with less reliance on declining PC sales and increased sales of enterprise software and services. However. BACKGROUND Between 2010 and 2012.49 per share (by line of business). public and wellrun arm’s-length sale process. produced a better approximation of the “fair value” of Dell than the results of the sales process. Mr. Dell approached the Dell Board about a . In a sum of the parts analysis in 2011. Dell spent approximately $14 billion acquiring 11 new businesses that Michael Dell. management valued Dell at $22.C. the Delaware Court of Chancery (Laster.

Under the deal. In July.25 to $19. On February 6. 2012. In September. Dell agreeing with Silver Lake to roll over his shares at a lower per share valuation and to invest additional cash.possible buy-out. with Mr. Silver Lake submitted improved proposals in December 2012 and January of 2013 of $12. and a DCF range of $15.70 and $12. after rejecting Silver Lake’s lower offers.65 cash per share. management revised the projections downward somewhat to reflect Dell’s poor performance during the period. as well as any other strategic alternatives or any other matters it determined to be advisable. The Dell special committee eventually determined that it would target a sale price of $13. respectively. 2012. KKR and Silver Lake submitted initial proposals. The Dell Board formed a special committee with full powers with respect to any proposed transaction.90 cash per share. Dell would own approximately 75% of Dell following the transaction. Mr. Dell did not participate in the pricing. It also included its view that a financial buyer applying an LBO pricing model at 3.1x leverage and assuming a 20% five-year IRR would likely pay a price of approximately $14 per share. The Dell special committee’s financial advisors provided a preliminary stand-alone valuation of Dell at the time that included a DCF range of $20 to $27 per share using the September projections.25 per share using the Street’s consensus case. At the time. one of the Committee’s financial advisors had provided DCF ranges of $11. 2013.75 per share. Mr.50 to $16 per share using the Street . the Dell special committee agreed with Silver Lake to a transaction at $13. but KKR dropped out following Dell’s disappointing third quarter 2013 results. management presented the Dell Board with its projections which indicated that management thought the company was worth $25 billion more than the then current market capitalization of $15 billion. The Dell special committee thought that even the September projections were overly optimistic but included them in the sale data room.

including strategics. THE COURT’S DECISION The Dell Court concluded that the sale price did not create a reliable indication of fair value even though Dell’s sale process “easily would sail through if reviewed under enhanced scrutiny”5 and Delaware Courts have recognized that a merger price resulting from arm’s-length negotiations is a strong indication of fair value. Dell agreeing to a lower value for his rolled shares.consensus and $12 to $16. The Dell special committee and Dell’s Board approved the transaction. Dell’s unaffiliated shareholders voted in favor of the transaction. Carl Icahn submitted a leverage recapitalization alternative and Blackstone submitted a $14 per share cash proposal but later withdrew the proposal following disappointing Dell sales results. assuming 25% of management’s projected cost-savings could be realized. and (3) the lack of “meaningful” pre-signing competition. 2013. The Court indicated that three factors in the pre-signing phase contributed to establishing that the deal price was below fair value: (1) the use of an LBO pricing model to determine the original merger price. (2) the “compelling” evidence of a significant “valuation gap” between the long-term value of Dell in the view of Dell’s management and the market price of the Dell stock. During the 45-day go-shop period that followed. the Dell special committee’s financial advisors reached out to 60 parties.13 per share. In the post-signing go-shop phase.50 per share. On September 12.4 The merger was completed on October 29. an offer that was financed by Mr. using the projections produced by the Committee’s own advisor. with 57% of the outstanding shares voting in favor and 70% of those voting approving.75 cash per share plus a cash dividend immediately preceding the merger of $0. Certain Dell shareholders sought appraisal of their shares. 2013. Silver Lake eventually raised its offer to $13. .

namely: (1) the size and complexity of Dell. the price the bidders were willing to pay did not reflect intrinsic value but. (2) the “winner’s curse” informational asymmetry between insiders and potential bidders and (3) Michael Dell’s value to Dell. problems endemic to MBOs resulted in a disincentive to competition and a final deal price that was also below fair value. rather. THE PRE-SIGNING PHASE: LBO PRICING MODEL.50 per share applying the committee advisor’s own projections of Dell. including a DCF range of $12 to $16.” The Court noted that one of the special committee’s financial advisors at the inception of the process valued Dell as a going concern at between $20 and $27 but projected that a financial buyer would only be willing to pay approximately $14 per share to achieve a 20% five-year IRR hurdle. the sponsors’ “relative willingness to sacrifice potential IRR.” In arriving at this conclusion. The Court also found persuasive the “compelling” evidence of a valuation gap between the market’s perception and Dell’s operative reality. The Court stated that the market’s emphasis on short-termism did not take into account the $14 billion . VALUATION GAP. AND LACK OF COMPETITION DID NOT PRODUCE FAIR VALUE The Dell Court began its analysis by noting that because the Dell special committee only engaged in the pre-signing phase with financial sponsors. According to the Court. the Court appears to have discounted the Dell special committee financial advisors’ DCF valuation ranges.according to the Court. A. because the LBO pricing model solves backwards from a desired internal rate of return and the limit on the amount of leverage the target can support to finance the deal. that were provided prior to entering into the transaction. the Dell special committee “as a practical matter negotiated without determining the value of its best alternative to a negotiated acquisition.

the Court emphasized that the pre-signing process lacked real competition insofar as the Dell special committee did not contact any strategic buyers. The Court opined that even though it was empowered to say no. and therefore the original merger price was not a reliable indicator of fair value. essentially negotiated only with a single bidder–-the management buyout group. B. the Dell special committee lacked the threat of an alternative deal. only engaged with two financial sponsors initially and. noting that even the special committee’s financial advisors had commented that the market was in a “wait and see mode. the original merger price also undermined the reliability of the final merger price. after one dropped out of the process. the Court noted. Recognizing that the optimal time to take a company private is after it has made significant investments but before those have been reflected in its stock price. the Dell special committee and its advisors used Dell’s market price as a key input of its going concern value and an anchor for price negotiations. The Court cited to the Delaware Supreme Court’s guidance in Glassman v. the Court noted. Lastly. Unocal Exploration Corp. Moreover.” Despite its awareness of the valuation gap and the depressed Dell stock price.in acquisitions that Dell had effected over the prior three years to transform the company that had not yet generated results. the Court stated that the “anti-bubble” both facilitated the MBO and undermined the reliability of the deal price. that because the original merger price served as the basis for the go-shop post-signing. that opportunistic timing should be addressed by the appraisal proceeding. THE GO-SHOP PERIOD: LACK OF PRE-SIGNING COMPETITION AND THE BARRIERS TO OUTBIDDING MANAGEMENT DID NOT PRODUCE FAIR VALUE .

Noting that the Dell special committee sought to address the asymmetry by providing extensive due diligence and making Mr. even though he had committed to the Dell special committee to explore working with other bidders in good faith. the record indicated. More significant for the Court. The Court stated that the emergence of the higher financial sponsor bids only indicated that the original merger price was not fair. the Court concluded that the asymmetry “endemic to MBO go-shops” created a “powerful disincentive” to competition. he had done so and the two post-signing bidders did not regard him as essential to their bids. rendering “questionable” whether a bidder would perceive a pathway to success through the go-shop. however.Although the go-shop period produced higher bids that forced the buy-out group to increase their offer by 2%. the . Dell’s value to Dell created an impediment to competitive bidding. Dell personally available. the Dell Court concluded that it did not establish that the Dell stockholders received fair value. C. the Court turned to the DCF analysis of both sides’ experts. was the fact that incumbent management is perceived in the goshop context to have an informational advantage. based primarily on the different projected cash flows they used. the Court concluded that Mr. THE DCF ANALYSIS AS EVIDENCE OF FAIR VALUE Having concluded that Dell failed to establish by a preponderance of the evidence that the outcome of the sale process offered the most reliable evidence of fair value. which generated values that differed by 126%.12 Moreover. the Court stated that the size and complexity of Dell may have affected the utility of the go-shop in determining fair value. Concluding that there were two reliable forecasts from the Company’s expert. While conceding that the 45-day go-shop with a single match right and a low break fee was unlikely to deter higher bids. even using LBO-pricing.

Delaware – Same. Only shareholder of the subsidiary will vote. b) Yes. using its own determinations of the correct inputs for each of the DCF valuation factors. b) No. if the triangular merger involves a dilutive share issuance of 20%. there are no appraisal rights for a triangular merger. Triangular Merger – a) Yes. c) Voting rights yes.000 new shares to be issued correspond to more than 20% of the voting power. Delaware – No need to vote. Reverse Triangular Merger – Same as the forward triangular merger Statutory Share Exchange – Sale of Assets – . 2 . LA France – PROBLEM I Voting Rights Statutory Merger – a) Yes. she is entitled to have the shares bought at a price that is according to the market.62. The 400. As for appraisal rights. it must be voted by LaFrance. for the same reason above. concluded that the fair price of a share of Dell’s stock was $17.Court.

LaFrance shareholders are not entitled to appraisal rights under MCBA c) Only for voting she might succede in blocking Delaware – LaFrance shareholders do not have voting or appraisal rights for buying the assets.a) Yes. 3 – Delaware usually does not apply a de facto merger doctrine. it must be voted by LaFrance. unless a corporation misinterpret or misapplies sale of assets statutes. and the general business operation. (2) cessation of the ordinary business and dissolution of the predecessor as soon as practically and legally possible. aspects. as long as four factors are existent : 1) continuity of ownership [or continuity of shareholders]. physical location. if the bought of assets for shares involves a dilutive share issuance of 20%. and (4) a continuity of [enterprise. . including] management. (3) assumption by the successor of liabilities ordinarily necessary for uninterrupted continuation of the business of the predecessor. b) No. Other jurisdictions generally recognized the de facto merger doctrine. personnel.