Holman Jenkins’ column in The Wall Street Journal on the proposed management buyout of Dell shareholders is an excellent example of ignoring the forest to fixate on a single tree—price—when considering a management-led leveraged buyout of a public company.
Founder Michael Dell and the investment firm Silver Lake are offering $13.65 a share for the company, a bit more than half its peak price in 2008.
Shareholders complain about what they see as a lowball bid, and Jenkins presents Dell as man unswayed by “moral intimidation” who bravely refuses to raise his offer.
“Why should he?” Jenkins wrote, adding that Michael Dell “offered a lot more than anyone else has lately for his company’s shares.”
Actually, not that much more. And buyers were paying $14.32 a share the day before the column—or 5 percent more than Dell’s offer, a fact Jenkins did not mention.
But the real problem is that, adopting the Chicago School line, he talks about price as if that were the only issue.
What Jenkins glosses over is that Dell is not just another bidder, but chairman and CEO of the company. As such, he has fiduciary duty—a legal obligation of trust—to all investors, big, small, and medium.
For one thing, Michael Dell-led Dell Inc. rejected a request by one agent for minority for shareholders to see information showing the basis for the $13.65 offer, the Washington Post reported (a disclosure: Gary Lutin, who runs the Shareholder Forum, is a CJR funder), but agreed to show it to a large investor, according to Bloomberg. How is that fair?
Jenkins, though, doesn’t offer a fare-thee-well to fiduciary duty, as though price alone were the issue and as though Dell were just some third party.
In any column by a financial journalist, especially one who writes for The Wall Street Journal, eyebrows should go up when basic tenets of business law are cast aside to further a specious moral argument.
When corporate insiders seek to buy out the existing shareholders, as in the Dell proposal to take the publicly traded company private, the directors are required to accept the highest and best offer. So far no one has offered more, as Jenkins emphasizes, but that does not excuse his ignoring the well-established legal duties in a buyout for companies to strenuously seek to do better.
Rather than being a moral obligation, as Jenkins writes, the duty to seek the highest and best price in a buyout by management is a legal one. The point of the obligation is to protect investors against fraud.
Imagine a company whose stock trades for $10 a share, but which the insiders know (or even just have good reason to believe) is worth $30 a share. By offering $15 the directors would simultaneously offer what looks like a windfall to minority shareholders and rob those unknowing shareholders of $15 per share.
But for this anti-fraud rule, insiders could rip off the other shareholders. This is not an academic concern. The courts are littered with litigation over this very issue going back to before anyone now writing about the subject in newspapers was born.
The corollary situation, where insiders spin off a company after saddling it with liabilities, is the subject of a rounded and insightful column by Steven M. Davidoff, a professor business law, in the DealBook section of The New York Times today.
Read first Davidoff, then Jenkins, and decide for yourself.
Journalists who want a quick primer on the legal duties of corporate directors can read The Myth of Shareholder Value, a short book by Professor Lynn Stout, a pro-market Republican who teaches business law at Cornell University, or watch my video interview of Stout here:
All financial journalists should also not just read, but study, the insightful book that first laid out the corporate governance issues presented by the differing economic interests of top executives and shareholders. The Modern Corporation and Private Property by Adolph Berle and Gardiner Means remains the seminal book on the issue 81 years after it was published.