Clients sometime ask me why so many investors and business owners choose to incorporate in Delaware.
The answer is straightforward. It’s a result of the Delaware General Corporate Law and interpretations of that law by the Delaware Supreme Court and the Delaware Court of Chancery. Although it’s a small State, Delaware has set a legal framework that is pro-management, practical and extensively studied and litigated.
All of these factors lead to a body of law that is very predictable in most cases. The case of Dell, Inc. v Magnetar Global, et al., decided December 14, 2017 makes the point. This was a long-running case involving the “going private” transaction in 2013 by Michael Dell, founder, and affiliates of a private equity firm.
Holders of a substantial amount of stock objected to the price paid by the Michael Dell group and demanded payment of the “fair value” of their shares. Their demand was significantly more than the deal price, even though the Dell-led group offered a 37% premium to the 90-day pre-announcement stock price. The Delaware Chancery Court decided to give no weight to the price negotiated by the Company and the buy-out group in the face of competing offers and a falling price for the Company’s stock in the market.
It preferred it’s own discounted case flow analysis.
The Delaware Supreme Court rebuffed this attempt at substituting the Chancery Court’s views for a market-based test. The Supreme Court found that the evidence introduced at the Chancery Court actually showed an efficient market for Dell stock. So, the analysis imposed by Chancery was dismissed and the case was sent back to that court for an analysis of “fair value” consistent with the principles the Supreme Court laid down in its opinion.
I see it as a victory of market-based analysis over theoretical valuation imposed by a court after the fact.
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