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Why did Dell force employees to sell shares?

February 7, 2013: 11:31 AM ET

DellDell made employees dump shares in the midst of buyout discussions.

FORTUNE -- Last October, certain Dell employees were forced to sell some of their company stock at just $9.55 per share. Now the company is being sold to founder Michael Dell for $13.65 per share. Suffice to say, there's some serious grumbling going on.

Here's what happened: More than three years ago, Dell (DELL) decided to limit the amount of company stock that could be held by employees in their 401(k)s. Basically an employee protection initiative in a post-Enron world, and in line with Department of Labor recommendations.

So in January 2010, employees received two pieces of information: (1) Beginning March 31, 2010, the max percentage they could contribute to the "Dell fund" within their 401(k) program would be 20%, and (2) At some point in 2012, a change would be made so that the total maximum Dell exposure they could have in their 401(k)s was 20%. investment.

Dell then reported a big earnings miss on May 22, 2012 – sending the stock from $15.08 to $12.49 in a single day. The following week, Dell informed employees that they would be forced to reduce their Dell exposure to the 20% level by October 19. If they did not make changes by that date, Dell would do it for them by putting those extra shares on the market. The price on October 19 was $9.55 per share. Again, for context, the buyout price was 30% higher at $13.65 per share.

To be clear, I'm not suggesting that Dell was trying to screw over its employees back when it made its original max contribution decision. In fact, it was a smart protective move.

But here's the thing: Michael Dell informed the Dell board last August that he was interested in taking the company private, after which Dell formed a special committee to examine any proposals. The board might not have known if Michael Dell could pull off a deal, but it certainly knew that any offer would certainly be at a significant premium. Same goes for Michael Dell himself, who also happens to be the company's CEO.

Yet no one apparently made any effort to postpone the October 19 deadline for employees – many of whose Dell shares were partially liquidated at what became 30% lower than the buyout price. Or, to put it in dollars, if an employee had 1,000 "extra" shares, it would work out to more than $4,000 in paper loss.

Dell spokesman Jess Blackburn provided the following statement:

The stock market can be volatile and those who invest in stocks know they assume a risk their investments might fluctuate up or down. Dell followed Dept. of Labor and investment professionals recommendations for limiting investment in a single company or industry. Based on the recommendations, the Dell benefits administrators set a limit for the Dell Stock fund of 20 percent of a total plan balance.

Dell 401k plan members had more than 2 ½ years to take action to diversify their accounts as needed to meet the change to the plan design. 401k plan members had 5 months notice of the specific date their Dell Stock fund accounts would have a one-time reallocation if they exceeded 20 percent of their total plan balance. They received multiple reminders during the 2 ½-year process about the importance of diversification of retirement savings along with information on options available to them in other 401k funds and instructions on making changes. Most employees who needed to take action did. Only 2.5 percent of the Dell 401K accounts were affected by the one-time reallocation. Administering Dell benefit programs is not a function of the Dell Board of Directors.

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Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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