CLIENT ALERT: DFC Global: Delaware Supreme Court Establishes Deal Price as Strong Evidence of Fair Value in Appraisal of Public Companies
In this much-anticipated appraisal decision in DFC Global Corporation v. Muirfield Value Partners, L.P., the Delaware Supreme Court reversed and remanded the Court of Chancery’s determination that the “fair value” of DFC’s stock was approximately 10% higher than the price a private equity firm paid to acquire the company in 2014. While the Court declined to adopt a bright-line rule requiring complete deference to the deal price resulting from a robust, conflict-free sale process, the Court nonetheless concluded the Court of Chancery abused its discretion in according just one-third weight to the deal price. In reversing the fair value determination, the Court discredited two of the principal factors the Court of Chancery relied upon to justify its departure from the deal price.
In its post-trial decision, the Court of Chancery found that the sale process leading up to the acquisition of DFC, which involved at least thirty-five financial sponsors and three strategic bidders, was “robust” and “arm’s-length.” Although acknowledging that it “frequently defers to a transaction price that was the product of an arm’s-length process and a robust bidding environment,” the Court of Chancery declined to do so because the transaction was “negotiated and consummated during a time of significant company turmoil and regulatory uncertainty” and Lone Star, the private equity firm that ultimately acquired DFC, “focused its attention on achieving a certain internal rate of return and on reaching a deal within its financing constraints, rather than on DFC’s fair value.” The “significant company turmoil and regulatory uncertainty,” according to the Court of Chancery, affected the reliability of management’s projections and, consequently, the discounted cash flow and comparable companies analyses. Ultimately, the Court of Chancery determined DFC’s fair value was $10.30 per share, eighty cents per share more than the deal price, based on an equal weighting of “three imperfect techniques”: a discounted cash flow analysis, a comparable company analysis and the deal price.
On appeal, DFC urged the Supreme Court to adopt a bright-line rule that the deal price is the best evidence of fair value where, as here, it is the product of a robust, conflict-free sale process. The Court, however, declined to adopt such a bright-line rule, citing its decision in Golden Telecom where the Court held that such an approach was inconsistent with the appraisal statute’s requirement that the Court of Chancery consider “all relevant factors” in determining fair value. Because that statutory language remained unchanged and the Court could not specify the particular characteristics of a sales process that should require deference in all circumstances, the Court declined to overrule Golden Telecom.
The Court concluded, however, that the Court of Chancery abused its discretion in failing to accord greater weight to the deal price in light of the lower court’s finding that the sale process was robust and conflict-free. In particular, the Court held that there was insufficient evidence in the record to support the Court of Chancery’s decision to accord the deal price just one-third weight based on regulatory uncertainty and Lone Star’s status as a financial buyer. According to the Supreme Court, there was no record evidence to suggest that the market – and market participants – could not price regulatory risk. Rather, referencing the company’s receipt of lowered bids following downward revisions to management projections, the decision of some bidders to drop out of the process, and the inability of the company to refinance certain debt, the Court held that the record established that the market was “attuned to the regulatory risks facing DFC” and factored that risk into DFC’s pricing.
Similarly, the Court concluded that the record did not support the Court of Chancery’s conclusion that the deal price did not represent fair value because, as a financial sponsor, Lone Star sought to achieve a specific rate of return on its acquisition of DFC. The Court observed that a buyer’s focus “on hitting its 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” particularly where additional factors, such as the absence of topping bidders, concerns about the company’s credit rating, and the inability of the company to meet its own projections, support the fairness of the price paid by a financial sponsor.
In the coming months, the Delaware Supreme Court, in its consideration of the Dell appeal, and the Court of Chancery, in its consideration of numerous pending appraisal matters, are likely to further refine what constitutes a robust, conflict-free sale process. But, this decision suggests that, where those preconditions are satisfied, it will be the unusual case in which the Court of Chancery does not ascribe significant, if not full, weight to the deal price in determining the fair value of a public company.