Dell Buyers Said to Swallow Stricter Terms to Sway Shareholders

Michael Dell and Silver Lake Management LLC agreed to restrictions including a higher reverse breakup fee and limits on the ability to match bids for Dell Inc., striving to create a deal that would withstand shareholder scrutiny, said people familiar with the matter.

Dell agreed to the $24.4 billion leveraged buyout yesterday. Under the terms, the Silver Lake-led group would pay $750 million, more than normal, if it tried to walk away from the deal, while a rival suitor would pay less than usual to lure Dell away from Silver Lake, said the people, who asked not to be named because the talks were private.

The agreement also allows Dell and its special committee of the board to sue the Silver Lake-led group for so-called specific performance if it tried to withdraw, said the people. That would allow Round Rock, Texas-based Dell to seek an injunction in court forcing the group to complete the deal if the financing is available and other conditions are met, they said. That right is rare, and not generally available on other large LBOs, said these people.

“They are trying to protect the shareholders,” said Antony Page, a law professor at Indiana University’s Robert H. McKinney School of Law. “It’s a recognition that if the buyer breaches contract, then the shareholders are hurt more than the company. The hope is that this will require the buyer to go through with the deal and the shareholders will get their premium.”

Good-Faith Efforts

Michael Dell, as part of the talks, agreed with the board in August to work in good faith with whatever private-equity firm made the best offer, said these people. That condition remains and he is required to consider in good faith any other bid that might top Silver Lake’s, said these people.

David Frink, a spokesman for Dell, declined to comment on the terms. A representative at Silver Lake didn’t return a call seeking comment.

That agreement doesn’t force him to vote in support of another deal; the idea is that any other party that wants to make an offer can step into Silver Lake’s role, the people said.

The Silver Lake-led group also has limited matching rights, said these people, meaning it can only match one offer from another potential buyer. If that group makes a second bid or another suitor arrives, the Silver Lake group can’t match those terms, these people said.

Another protection put in place is so-called majority-of-the-minority voting rights, said these people, meaning the deal must be approved by a majority of shareholders excluding Michael Dell. There will be two votes on the deal by investors, one with Michael Dell and his 14 percent stake and one without, said these people. Both votes must affirm the deal.

Other Suitors

Dell also offered the company’s existing shareholders 45 days to solicit a rival bid instead of the customary 30 days, and would charge a new bidder less than the usual termination, according to the company. The breakup fee of $180 million is less than 1 percent of the value of the deal; typically it’s 2 percent to 3 percent.

Even so, “it’s unlikely someone else will show up,” said Steven Kaplan, finance professor at University of Chicago’s Booth School of Business. “The shareholders will have to decide if it’s enough of a premium. In a management-led buyout, calculating the premium is always dicey.”

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