United States: Delaware Supreme Court Provides Guidance on Factors to Consider in Appraisal Valuation Procedure in Context of DFC Global Appraisal Action

In DFC Global Corp. v. Muirfield Value Partners, L.P.,1 the Delaware Supreme Court reversed and remanded the Court of Chancery's appraisal decision relating to the 2014 acquisition of DFC Global Corporation, an international non-bank provider of alternative financial services (a "payday lender"), by a private equity buyer, Lone Star. Although the Supreme Court declined to adopt a presumption in favor of the transaction price established through a robust, arm's-length sales process as the best measure of fair value, it nonetheless found that the Court of Chancery abused its discretion in failing to accord the transaction price greater weight under the circumstances of the case. The decision is significant because it addresses, among other things, the weight that the Court of Chancery should give to transaction price in determining fair value, whether the transaction price resulting from a transaction in which the winning bidder was a private equity buyer whose pricing analysis reflected its desire to achieve a targeted rate of return can be a reliable indicator of fair value, and the need for the Court of Chancery's fair value determination to be grounded on the facts in the record and accepted financial principles.

Despite DFC's urging, the Supreme Court declined to adopt a presumption in favor of the transaction price as the best measure of fair value in appraisal cases in which the transaction was the product of a robust market check, even in circumstances where there was a rich information base and a welcoming environment for potential buyers. Adhering to its 2010 Golden Telecom decision,2 the Supreme Court reaffirmed its view that "[r]equiring the Court of Chancery to defer – conclusively or presumptively – to the merger price, even in the face of a pristine, unchallenged transactional process, would contravene the unambiguous language of the [appraisal] statute" and would "inappropriately shift the responsibility to determine 'fair value' from the court to the private parties." In light of the fact that the Delaware appraisal statute gives the Court of Chancery broad discretion to independently determine the fair value of a company's shares, considering "all relevant factors," the Supreme Court declined to essentially rewrite the statute and create a presumption in favor of the transaction price, but invited the Delaware General Assembly to do so. 

The Supreme Court did, however, endorse the use of the transaction price in determining the fair value of DFC. The Supreme Court explained that its "refusal to craft a statutory presumption in favor of the deal price when certain conditions pertain does not in any way signal [the Court's] ignorance to the economic reality that the sale value resulting from a robust market check will often be the most reliable evidence of fair value, and that second-guessing the value arrived upon by the collective views of many sophisticated parties with a real stake in the matter is hazardous." The Supreme Court also noted several objective factors that supported the fairness of the transaction price for DFC, including the failure of other buyers to pursue the company when they had an opportunity to do so, the unwillingness of lenders to support a transaction, a rating agency's assignment of a negative credit watch on the company's long-term debt, and the company's failure to meet its own projections. The Supreme Court also reiterated that Delaware case law under the appraisal statute values the company on a stand-alone basis, and excludes any value that might be attributed to a synergy premium that a buyer might pay to gain control of the company.

In the opinion below, the Court of Chancery had found that the sales process was robust and conflict-free, but afforded equal weight to each of three valuation metrics: the transaction price of $9.50 per share, its own discounted cash flow (DCF) valuation of $13.07 per share, and its comparable companies valuation of $8.07 per share, arriving at a valuation of $10.21 per share, representing a 7.5% premium over the transaction price. The Supreme Court found that the two reasons why the Court of Chancery accorded one-third weight to the transaction price were unsupported by the record. First, the Supreme Court rejected the conclusion that regulatory uncertainty facing DFC undermined the reliability of the transaction price, observing that the record demonstrated that prospective buyers as well as the equity and debt markets had factored regulatory risk into the market price for DFC's shares. Second, the Supreme Court held that the "private equity carve out" that the Court of Chancery seemed to recognize was "not one grounded in economic literature" or the record, noting that "all disciplined buyers, both strategic and financial, have internal rates of return" and that a buyer's focus on its own internal rate of return "has no rational connection to whether the price it pays as a result of a competitive process is a fair one." Thus, the Supreme Court did not view the transaction price produced where the winning bidder was a private equity buyer as an unreliable indication of fair value simply as a result of the private equity buyer's focus on its own internal rate of return. Notably, this view is consistent with the Court of Chancery's recent PetSmart appraisal decision3 and departs from certain other appraisal cases, including Dell,4 which is currently on appeal to the Supreme Court.

Finally, the Supreme Court criticized the Court of Chancery for failing to explain the basis for assigning one-third weight to each valuation metric, a decision that was in tension with the Court of Chancery's own findings about the robustness of the market check. The Supreme Court emphasized that while the Court of Chancery has broad discretion in determining fair value, it must explain "with reference to the economic facts before it and corporate finance principles, why it is according a certain weight to a certain indicator of fair value." 

Despite the fact that the Delaware Supreme Court declined to adopt a bright-line rule requiring deference to the transaction price, its reversal of the Court of Chancery's appraisal decision reaffirms the Delaware courts' general view that the transaction price resulting from a robust, conflict-free, and arm's-length sales process will often be the most reliable evidence of fair value of a company's shares. The pending appeal in the Dell appraisal action is likely to provide additional guidance on this topic, in the context of a determination of fair value in a management-led buyout.


1 DFC Global Corp. v. Muirfield Value Partners, L.P., No. 518, 2016 (Del. Aug. 1, 2017).

2 Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214 (Del. 2010).

3 In re Appraisal of PetSmart, Inc., C.A. No. 10782-VCS (Del. Ch. May 26, 2017).

4 In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions