Dell Inc founder Michael Dell raised his $24.4 billion bid by less than 1 percent just hours before it was to be put to a vote, tacking on a controversial demand to change voting rules to make it easier for him to buy and take the No. 3 personal computer maker private.
A special board committee on Wednesday was reviewing the CEO's sweetened $13.75 offer and requirement that a majority of votes cast be enough to seal the deal, an easier threshold for him to meet.
But the committee wants at least $14 per share to even consider that change in voting terms, a person familiar with the matter said. And Silver Lake, which is backing Michael Dell's now roughly $24.6 billion bid, will not back an increase to $14, said a second person familiar with the matter.
The vote on the buyout was postponed for a second time, to next Friday, to give investors yet another week to consider. The first vote had been slated for July 18.
Michael Dell's unusual demand sparked outrage among major investors and is likely to incite aggressive legal challenges, law experts say. His offer now requires a majority of all shareholders' votes, a difficult bar to meet because about a quarter of shares have not been voted either way, which then count as votes against him.
Activist investor Carl Icahn, who has amassed an 8.7 percent stake in Dell and is leading a charge with Southeastern against the buyout with an offer of his own, tweeted on Wednesday that "all would be swell at Dell if Michael and the board bid farewell."
"The latest change is a "transparent attempt to force their freeze-out transaction across the finish line despite the vote of its stockholders," Icahn said in a subsequent statement.
The sweetened offer, which Michael Dell and Silver Lake called their best and final proposal, comes after the group refused for months to consider a raised bid despite growing opposition from Icahn and other shareholders.
Richard Pzena, founder and co-chief investment officer of Pzena Investment Management, which owned 0.73 percent of Dell's outstanding shares at the end of March, called the proposed change in shareholder voting rule "outrageous".
"Certainly the 10 cents wouldn't sway anybody so they have to change the rules, and if the special committee goes along with this, it would be a travesty," Pzena said.
A THORNY ISSUE
Experts say the CEO's attempt to change the voting rules is legal but almost certain to get challenged in court, where there's been little precedent.
While trying to change voting provisions with a raised bid is uncommon, similar tactics have been employed by other companies in the past when investor support was lacking.
OSI Restaurant Partners Inc., owner of the Outback Steakhouse chain, was bought by Bain Capital Partners and few of the OSI management in 2007 after the group bumped up their offer price and changed the voting requirements. That case, which is not directly comparable because it involved excluding the founder's and management's shares from the vote, was challenged in Florida and Delaware courts and dismissed.
But Brian Quinn, a professor at Boston College Law School who runs the M&A Law Prof Blog, said that Michael Dell and Silver Lake may face a higher burden of proof in court.
"When the lawsuits, of which there are many, proceed the board won't get the protection of business judgment but will have to prove fairness," he said.
Fairness puts the burden on the board to prove the price and process were fair. Business judgment is much more management friendly and puts the burden on plaintiffs to prove there were conflicts of interest or lack of good faith.
"That's a big wrinkle," he said.
Dell shares closed up nearly 3 percent at $12.91 on Wednesday.
"According to our latest tally, approximately 27 percent of the unaffiliated shares have not yet been voted. The presumption that these shares should be treated as if they had voted against the transaction is patently unfair," Michael Dell and Silver Lake said.
The votes that have come in so far are split evenly between yes and no, according to people familiar with the matter. That means those who abstain from voting can determine the outcome.
The buyout group believes it can get the votes to pass the deal if Dell will count just the shares that have been voted. The provision of counting non-votes as a "no" was accepted reluctantly by the bidders as it sets a very high threshold to meet, according to one of the sources.
Another investor said the new offer is not really a bump.
"This is not about how to win the deal, this is about how Michael Dell exits the process," said the Dell investor, who requested anonymity. "They're really putting the screws on the special committee but I don't see how the special committee can accept the conditions."