An investment firm announced that it will pay approximately $194 million to compensate certain clients for a proxy voting error made in connection with the leveraged buyout of a computer technology company in 2013. On May 11, 2016, the Delaware Court of Chancery determined that due to a proxy voting error, voting instructions for the shares of a firm's clients were submitted as "for" the merger instead of "against." Consequently, the Delaware Court of Chancery ruled that the error rendered shares voted on behalf of the adviser's clients ineligible for fair value compensation. Subsequently, the same court ruled that the computer technology company's fair value per share was 28% higher than the amount provided originally in the merger consideration. Following the second ruling, the investment firm decided to compensate its clients for the difference.
At the time of the buyout, the firm explained, its investment team "held a strong view" that the merger consideration offered by the computer technology "significantly undervalued" the company itself. For that reason, the team filed a petition with the Delaware Court of Chancery to seek a fair value appraisal.
Commentary
For the second time in twelve months, an investment entity suffered a major loss due to a procedural mistake in connection with a challenge to a merger price valuation. (See "Dell Shareholders Lose Appraisal Rights due to Technical Issues with the Transaction (with McDonnell Comment and Lofchie YouTube Selection).") Given the amount of money that could be lost, and the two recent cases that serve as warnings, advisers and funds should be sure to nail down the particulars of their process for dealing with merger challenges and other significant proxies, as well investors' rights.
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