For the third time in less than a month, EMC is feeling the wrath of disgruntled shareholders in connection with its proposed acquisition by privately held Dell Inc.
The three new actions are the latest in a string of related lawsuits. At least 11 suits were previously filed in connection with Round Rock, Texas-based Dell's planned private equity-backed $67 billion acquisition of the Hopkinton, Mass.-based information technology company.
All of them allege EMC is shortchanging investors. Arguing that the merger agreement was adopted in violation of the fiduciary duties of EMC's board of directors, they are turning to the courts for injunctive relief to enjoin the merger, as well as other remedies.
The most recent suits specifically claim EMC filed a misleading preliminary proxy statement with the US Securities and Exchange Commission (SEC) in an attempt to gain shareholder support.
A Complicated Deal
EMC is a “federation” of tech companies, specifically EMC II, Pivotal, RSA, VCE, Virtustream and VMware. Some, like VMware, are publicly traded on their own. Others, like Pivotal, will likely be spun off as public companies after the merger.
Last October, EMC entered into an agreement to merge with Dell. The deal, according to Dell Chairman and CEO Michael Dell, will create "an enterprise technology powerhouse."
But within a month of the merger announcement, company shareholders had filed 11 lawsuits challenging it. Eight of the suits were filed in the Business Litigation Session of the Suffolk County Superior Court in Massachusetts, one was filed in the Middlesex County Superior Court in Massachusetts, and two were filed in the United States District Court for the District of Massachusetts.
A judge granted EMC's motion to consolidate all of the lawsuits in Massachusetts with and into the first-filed of those actions, which was filed on behalf of the pension fund for IBEW Local No. 129.
EMC concedes in SEC filings that "the outcome of these lawsuits is uncertain, and additional lawsuits may be brought or additional claims advanced concerning the merger."
But it doesn't seem to be tempering the enthusiasm of Michael Dell or EMC senior leaders like Howard Elias, president and chief operating officer, Global Enterprise Services.
In an open letter last month to customers of VCE, one of the EMC federation companies, Dell said he expects the transaction to close "sometime later this year after satisfaction of customary closing conditions such as shareholder and regulatory review and approval."
Elias, in a conversation with EMC employees, said the merger brings together complementary technologies and products. "We talked about the franchise pole positions that we have in storage and servers and virtualization and in client, augmented by great positions in security and digital transformation and cloud. This is an unbeatable combination and one of the best complementary combinations in the industry," he said.
But to paraphrase Shakespeare, the course of mega-corporate mergers rarely runs smooth. And as 2016 dawned, so followed three new merger-related lawsuits:
The New York City-based Grant Law Firm, in an amended class action complaint on behalf of all public EMC stockholders, claimed this week that the proxy statement EMC filed omits material information about its cash flows, revenue, gross profit, operating income, net income and earnings per share. It also questions the validity of two investment advisory reports, calling them "misleading" and charging they also omit material facts.
Late last month, the Booth Family Trust, an EMC shareholder, sued EMC and Dell over allegations that EMC distributed to investors a misleading preliminary proxy “in an attempt to secure shareholder support for the inadequate proposed transaction,” in violation of the Securities and Exchange Act. The trust argued that the proxy statement lacked information that investors need to make an informed vote on the deal and asked to halt the acquisition until they’re given it.
Just two weeks earlier, former EMC consultant Jerry Pancake filed suit in the US District Court in Massachusetts alleging the proposed Merger "is the result of an unfair and flawed process by the Board of Directors of EMC, does not represent maximization of shareholder value, and will be proposed to the EMC shareholders pursuant to a proxy which is materially deficient and thus misleading."
Hard to Track
Under the terms of the merger agreement, Dell agreed to pay EMC shareholders about $33 a share. But the way the deal is structured is creating some unhappy investors.
Dell is paying EMC shareholders $24.05 a share plus the value of 0.111 share in stock that tracks against the price of EMC’s publicly traded cloud and virtualization software subsidiary VMware. That tracking stock was valued around $9.10 in October when the deal was announced.
But as the price of VMware drops, this tracking stock — common stock issued by a parent company that tracks the performance of a particular division without having claim on the assets of the division or the parent company — also drops in value. And drop it has. VMware stock is trading around $44.20 now, down from $82.09 when investors first became aware of the deal.
Many money managers and brokers — as well as some shareholders — now argue the tracking stock is worth nothing and is essentially worthless.
It was a scenario all too clear to IBEW Local No. 129, which alleged in that first lawsuit filed in the wake of the merger announcement that EMC’s board failed its fiduciary duties to shareholders with regards to its proposed sale. In the suit, the pension fund complained that the tracking stock was “impossible to value” in advance.
EMC declined CMSWire's requests for comment. “We never comment on pending litigation as a matter of policy.”
But last week, during a third quarter earnings call, EMC CEO Joe Tucci noted, “There's a lot of noise in the system and there are a lot of people with a lot of opinions and a lot of them are not based on fact.”
He described the merger as a "game changer," noting that the companies "combined assets are better positioned to navigate the major changes" in the industry.
"Customers have been overwhelmingly positive about this combination.They see that we will be a strategic partner with more heft and breadth with leading technologies that are critical to their success; technologies around digital transformation, software-defined data centers, hybrid cloud, converged infrastructure, mobile and security and very importantly, the people of EMC and Dell are embracing the combination.
"They understand that together we are better positioned in the market and that this will create new and more opportunities for them over the long run," he concluded, adding that "progress on closing the transaction remains on track under the original terms and timeline."