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Dell buyout seen triggering investor lawsuits over CEO’s role

Dell Inc.’s $24.4 billion leveraged buyout probably will draw criticism from some shareholders over a potential conflict of interest for founder and chief executive officer Michael S. Dell.

Because Michael Dell is part of the group taking the computer maker private, shareholders may claim he is trying to acquire the company at the lowest possible price at their expense. Companies including retailer J. Crew Group Inc. and Kinder Morgan Inc. (NYSE: KMI), a pipeline operator, were the target of shareholder lawsuits after their top executives joined with private-equity firms to buy the businesses.

“The CEO has mixed incentives,” Steven Kaplan, a professor at the University of Chicago’s Booth School of Business who studies the private equity business, said in a telephone interview.

Michael Dell and Silver Lake Management LLC said Tuesday they will pay $13.65 a share for the world’s third-bigger maker of personal computers, 25 percent more than the closing price of $10.88 on Jan. 11, the last trading day before Bloomberg News reported the discussions. Michael Dell, the largest stockholder of the Round Rock, Texas-based company with a 14 percent stake as of Sept. 30, will take back majority control.

The agreement provides for a so-called go-shop period of 45 days during which time the company will solicit other potential offers. Michael Dell recused himself from all discussions on the board of directors concerning the deal and from the vote. A special committee handled negotiations with the help of independent financial and legal advisers.

‘Low $20s’

Such steps are important to show that the board made every effort to ensure the process was fair, said Elizabeth Nowicki, a mergers and acquisitions professor at Tulane University Law School in New Orleans.

While it is too early to predict how individual shareholders will react, at least one major owner has previously said Dell (Nasdaq: DELL) is worth significantly more than its current stock price.

Southeastern Asset Management Inc., Dell’s second-largest shareholder, said at the end of the third quarter of 2012 that the company’s shares in a conservative valuation were probably worth in the “low $20s,” according to a regulatory filing.

Southeastern started buying Dell in the third quarter of 2005 and built its stake to 130.9 million shares by the middle of 2007, when the price ranged from $19.91 to $41.54 a share.

Southeastern, Franklin

Lee Harper, a Southeastern spokeswoman, declined to comment on the firm’s Dell holdings. Southeastern, which is based in Memphis, Tenn., had a 7.5 percent stake in the computer maker as of Sept. 30, according to data compiled by Bloomberg.

Other major shareholders, including T. Rowe Price Group Inc. (Nasdaq: TROW), Dodge & Cox Inc., Franklin Resources Inc. (NYSE: BEN) and Harris Associates LP, also declined to comment, according to their spokesmen.

If history is a guide, “lawyers will race each other to the courthouse,” Erik Gordon, a professor at the University of Michigan Law School, said in a telephone interview.

In November 2010, J. Crew agreed to be acquired by TPG Capital and Leonard Green & Partners LP in a deal worth about $3 billion. The retailer’s chief executive officer, Millard Drexler, negotiated with the private equity firms.

Kinder Morgan

A day later a shareholder filed a lawsuit, saying the purchase price was too low. The suit, and others that followed, accused Drexler of using his executive clout to create a sale process that excluded all potential buyers except TPG and Leonard Green, blocking other bidders from making better offers.

In September 2011, J. Crew and the two private-equity firms agreed to pay $16 million to resolve lawsuits over the deal.

Kinder Morgan, the biggest U.S. natural-gas pipeline operator by market value, in May 2006 received a $13.4 billion, or $100-a-share, buyout offer from co-founder Richard Kinder and an investor group that included Goldman Sachs Group Inc. (NYSE: GS) and Carlyle Group LP (Nasdaq: CG).

In August of that year, Kinder Morgan, based in Houston, agreed to be sold for $107.50 a share. In between, at least five lawsuits were filed, seeking a higher price.

Bookseller Barnes & Noble Inc. (NYSE: BKS) faced a different problem in August 2009 when it agreed to buy Barnes & Noble College Booksellers Inc. for $596 million from Leonard Riggio, the retailer’s chairman and founder.

‘Fishy smell’

An investor lawsuit said that the New York-based company paid too much for the business and that some board members were conflicted by long-term friendships with Riggio. In October 2010 a Delaware judge refused to dismiss the case, saying the process “gives off a fishy smell.”

Riggio in June 2012 agreed to pay $29 million to settle suits that alleged he unfairly rewarded himself and wasted company assets.

The resolutions in these cases — a payout to plaintiffs and a slightly sweetened offer to shareholders — are the most common ways such suits are resolved, according to Gordon.

For companies hoping to fend off suits, removing the CEO from the process is critical, said Gordon, because that executive would otherwise be on both sides of the negotiating table.

“You would be asking him to do something that not even the most ethical, saintly person on earth could do,” he said.

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