Dell, Icahn Battle Over Voting Rules in Struggle for Company

By Jeffrey Burt  |  Posted 2013-07-25

Dell, Icahn Battle Over Voting Rules in Struggle for Company

Michael Dell’s decision to raise the bid to buy his namesake company and to postpone for a second time the shareholder vote on the proposal is a clear indication that the CEO is unsure whether he has enough votes to get it passed.

Michael Dell and private equity firm Silver Lake Partners announced July 24 that they were raising their bid by 10 cents, to $13.75 a share—or about $24.6 billion—and the board of directors postponed the shareholder vote, which already had been delayed from July 18 to July 24, to Aug. 2.

However, what could have as big an impact on the outcome is Michael Dell’s proposal that the board’s special committee overseeing the issue change the way non-votes are counted. In the terms of the deal negotiated between Michael Dell, Silver Lake officials and the special committee, any outstanding shares that do not vote are counted as “no” votes.

Michael Dell needs about 42 percent of the shares to be in support of his bid to be successful. Activist investor Carl Icahn—who is leading the effort to defeat the proposal and pushing to have his own bid for the world’s third-largest PC maker approved—and other shareholders who oppose the deal reportedly make up about 20 percent of the outstanding shares.

Even with the 10-cents-per-share hike in the bid, Michael Dell and Silver Lake will need all the votes they can muster to get their offer accepted. At the least, they need to ensure that any shares not voted are not automatically given to Icahn and other opponents.

The special committee said July 24 it was evaluating the new proposal from Michael Dell, including the change in the voting rules.

Michael Dell, in letters to the special committee and to shareholders, said the deal was a fair one, and that there would be no other changes to the offer. In the letter to shareholders, the CEO, who founded the company in his college dorm room 29 years ago, said he would accept whatever decision they made.

“The decision is now yours,” he said in the letter, dated July 24. “I am at peace either way and I will honor your decision.”

However, he argued that the voting rules need to be changed to ensure that the will of the shareholders is heard.

“Currently, over 25% of the unaffiliated shares have not voted,” Michael Dell wrote. “This means that even if a majority of the unaffiliated shares that vote on the transaction want to accept our offer, the will of the majority may be defeated by the shares that do not vote. I think this is clearly unfair.”

In the letter to the special committee, he said a change in the voting rules would be “fair and reasonable,” particularly in light of his decision to raise the bid, a move that he reportedly had ruled out as late as last week.

Not surprisingly, Icahn reacted harshly to the idea of changing the voting rules. The investor, who earlier this week argued against another delay in the vote by telling the special committee that the company was not a “banana republic,” said in his own letter to the committee and shareholders that the provision in the merger agreement regarding unvoted shares was the only protection investors had in a deal slanted in Michael Dell’s and Silver Lake’s favor.

Dell, Icahn Battle Over Voting Rules in Struggle for Company

Calling the move “the latest installment of the Desperate Dell Debacle,’” Icahn accused the CEO of trying to rig the vote in his favor.

“Michael Dell/Silver Lake this morning commented that the stockholder approval requirement is ‘unfair,’” he wrote. “Are they serious? They're complaining about the fairness of the Merger Agreement that they and their lawyers negotiated and agreed to! How is it fair to change the rules at the end of the game, particularly when they and their teams of lawyers established the rules?”

Icahn urged shareholders to not only reject Michael Dell’s offer, but also to push the CEO out of the company and vote out the board of directors.

Icahn and Southeastern Asset Management, another investor that believes Michael Dell’s offer undervalues the company, have issued a counteroffer that includes buying up to 1.1 billion shares at $14 each, with the option of investors buying more shares down the road for $20. It also would keep the company public.

Michael Dell’s deal would include buying all outstanding shares and taking the company private. The company, which like other tech vendors has been hit hard by the downturn in the global PC market, is in the midst of transforming from a PC hardware maker into an enterprise IT solutions and services provider.

The original $24.4 billion bid has met with resistance since first being announced in February, with some shareholders believing the company is worth much more and that investors should be given the option of sharing in the benefits once the transformation is complete.

In his July 24 letters to shareholders, Michael Dell defended his plan.

“I believe that taking Dell private is the right thing to do for the company,” the CEO wrote. “We need to transform, and we need to do it quickly. The transformation is not without risks and challenges, and I believe that we can do what we need to do better as a private company than a public company.”

Icahn poetically took to Twitter July 24 to let his thoughts be known:

“All would be swell at Dell if Michael and the board bid farewell.”

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