Dell, Icahn Battle Over Voting Rules in Struggle for Company

The CEO wants to change how non-voting shares are counted, while Carl Icahn says Michael Dell is trying to slant the rules in his favor.

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.