Lucian A. Bebchuk & Kobi Kastiel, The Perils of Dell's Low-Voting Stock (Nov. 1, 2018).
Abstract: Dell Technologies Inc. (“Dell”) is planning a “backdoor-IPO” transaction that would bring it back to the public market with a multiclass structure. Dell’s return to the public market is expected to make it one of the ten largest multiclass companies with an aggregate capitalization substantially exceeding $50 billion. Building on our earlier work on multiclass structures, this Article identifies and analyzes three governance risks and costs that Dell’s IPO structure would create for public investors holding Dell’s low-voting stock: • Lifetime entrenchment of Michael Dell (“MD”): He would be able to retain control indefinitely even after he ceases to be a fitting leader and even if he becomes disabled or incompetent. • Small-minority controller: Although MD would initially hold a majority of the equity capital, Dell’s structure would enable him to unload most of his shares and still retain control even with a small equity stake, and his status as small-minority controller would be expected to produce substantial governance risks and costs. • Midstream changes: Dell’s governance structure would enable MD to adopt subsequent changes in governance arrangements, without any support from public investors, which would increase Dell's governance risks beyond the risks associated with a small-minority controller. Each of these governance risks can be expected to both (i) decrease the expected future value of Dell by increasing agency costs and distortions, and (ii) increase the discount to a per-share value of Dell at which low-voting shares of Dell can be expected to trade. Both types of effects would operate to reduce the value at which the low-voting shares of public investors would trade and therefore should be taken into account in assessing the risks to such investors posed by Dell’s planned structure.