Michael Dell recently succeeded in taking Dell Inc., the computer company he founded in 1984, private in a $25 billion dollar buyout. The transaction was consummated following months of drama involving Dell himself, veteran investor Carl Icahn (who tried to derail the deal) and a number of other institutional shareholders. But a starring role in the drama was played by the special committee of Dell’s board of directors, formed to evaluate Dell’s initial offer and all subsequent offers. The committee was critical to Dell’s defeat of Icahn’s legal challenge to the buyout. The role of that special committee, and the ways in which the committee was effective in protecting the transaction from legal attack, are worth further consideration.
The special committee has become a standard feature of going-private transactions because it meets several requirements imposed on corporate boards by corporate law, particularly as interpreted by the influential Delaware courts. Dell Inc., like many large corporations, is incorporated in Delaware, and the struggle to control the company was fought in part in Delaware courthouses. A fundamental principle of Delaware corporate law is that corporate directors owe fiduciary duties to their corporation, including the duties of care and loyalty. They discharge those duties by remaining informed about the corporation and its affairs and acting in a way that they in good faith believe to be in the corporation’s best interest. Provided that they fulfill their fiduciary duties, directors are protected by the business judgment rule. The business judgment rule shields them from liability for their decisions, even if those decisions turn out to be wrong, and further provides that courts will not second-guess those decisions.