The Delaware Court of Chancery recently over-ruled the market in determining that the board of Dell Inc. sold the company for too little when taken over by a buyout group in 2013 despite there being no higher offer.  This could prove a dangerous precedent if adopted in Australia.

The significance of the decision in In re Appraisal of Dell Inc was that while the board (and its advisers) did all things necessary to sell Dell Inc. the court found that the “concept of fair value under Delaware law is not equivalent to the economic concept of fair market value” and as such Dell Inc. was sold for too little.

The line of authority coming from this case is that the directors do not simply have a fiduciary duty to find a buyer willing to pay the highest price and that the court may not consider the ‘market value’ a reliable indicator of ‘fair value’.

This case is an example of a growing area of litigation called “appraisal arbitrage” which is being pursued by hedge funds and other investors. Such cases involves a large number of shares of a target company being acquired shortly after a merger or takeover is announced with the express purpose of asserting appraisal rights in the courts.

This ruling has potentially significant ramifications for insolvency practitioners’ duty of care in exercising power of sale pursuant to s. 420 of the Corporations Act 2001.  Should this line of authority make its way across the pond, it could mean that despite insolvency professionals doing all that is reasonable to sell property at ‘market value’, that behaviour may not be seen as obtaining ‘fair value’ in the eyes of the court should a challenge be subsequently made.

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