T. Rowe Price Group announced that it will pay up to $194 million to compensate certain clients for a proxy voting error the firm made in connection with the 2013 leveraged buyout of Dell, Inc.
The issue stems from a procedural error impacting T. Rowe Price mutual funds, trusts, separately managed accounts, and sub-advised clients holding, in aggregate, approximately 31 million impacted shares.
According to the firm, at the time of the 2013 Dell buyout, T. Rowe Price's investment team “held a strong view that the merger consideration of $13.75 per share offered by Dell significantly undervalued the company.” Several of the investment company’s funds, trusts, and clients subsequently filed a petition with the Delaware Court of Chancery to seek a fair value appraisal for their Dell shares.
“Due to a proxy voting error, though, voting instructions for our clients' shares were ultimately submitted as ‘For’ the merger, rather than ‘Against,’” T. Rowe Price officials admit. “On May 11, 2016, the court ruled that this voting error rendered T. Rowe Price's fund, trust, and client shares ineligible to pursue fair value. On May 31, 2016, the court ruled that Dell's fair value per share was $17.62 and not $13.75, a difference of more than 28%, validating the firm's original investment thesis.”
Based on the court's May 31, 2016, ruling, T. Rowe Price will start to make payments to affected clients to compensate them for the difference in valuation, plus statutory interest, resulting from the denial of appraisal rights.
“As a result, T. Rowe Price expects to record a one-time charge of approximately $194 million in its second quarter of 2016, which is expected to reduce net income, after tax, by about $118 million—or approximately $0.46 in diluted earnings per share of common stock,” executives explain. “The company will fund the payments from available cash.”
T. Rowe Price funds and portfolios that will receive payments include the Equity Income Fund, Institutional Large-Cap Value Fund, Science & Technology Fund, Equity Income Portfolio, Equity Income Trust, U.S. Equities Trust–Large-Cap Value, and U.S. Large-Cap Value Equity Fund–SICAV.
“Since this situation began, our focus has been on securing fair value from the Dell buyout for our clients,” the firm adds. “The court's determination that the original buyout consideration offered by Dell was too low validated our original investment view. By compensating our clients based on the court's May 31, 2016, ruling, clients will come out ahead as compared with how they would have fared had they taken the merger consideration.”