DFC Global Corp. v. Muirfield Value Partners, L.P.

Supreme Court of Delaware · 2017 · Corporations

CorporationsAppraisalFair ValueMergers and Acquisitionsappraisalfair valuedeal pricediscounted cash flow

Facts

DFC was a publicly traded payday lending company sold to Lone Star, a private equity firm, for $9.50 per share after a roughly two-year sales process in which financial and strategic buyers had opportunities to bid and no self-interest was found to taint the process. DFC operated in a heavily regulated industry and faced increasing regulatory pressure, especially in the U.K., as well as high leverage, failed refinancing efforts, downgraded projections, and subsequent failure to meet those revised projections. In the appraisal proceeding, the Court of Chancery found the market check robust but still gave only one-third weight to the deal price, citing regulatory uncertainty and Lone Star’s status as a financial buyer. After discovering a clerical error in its DCF model on reargument, the court corrected working capital inputs but then raised the perpetuity growth rate from 3.1% to 4.0%, preserving a higher appraisal award.

Issue

Whether Delaware appraisal law requires or permits a judicial presumption that deal price is the best evidence of fair value when a merger results from an arm’s-length sale process with a robust market check. Also, whether the Court of Chancery abused its discretion in discounting the deal price, revising the DCF perpetuity growth rate upward on reargument, using comparable companies analysis, and assigning equal weight to three valuation metrics without adequate explanation.

Rule

Under 8 Del. C. § 262(h), the Court of Chancery must independently determine fair value by taking into account all relevant factors, and Delaware courts may not create a judicial presumption that deal price is the exclusive, best, or primary evidence of fair value. Although deal price often may be the most reliable evidence of fair value when produced by a robust, conflict-free market process, any weighting of valuation methodologies must be supported by the record and explained with reference to economic facts and accepted corporate finance principles.

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Blue Harbor Fitness, a Delaware corporation headquartered in Phoenix, is sold for $28 per share after an 18-month process in which its board's banker contacted numerous strategic and financial buyers, several signed confidentiality agreements, and bidders received extensive nonpublic data. In the ensuing appraisal action, the trial judge announces that because the process was arm's length and conflict-free, the merger price is presumptively the best evidence of fair value unless the petitioners rebut it by clear evidence.

How should a reviewing court evaluate the judge's approach?

Explanation. The governing rule is that under 8 Del. C. § 262(h), the court must independently determine fair value by taking into account all relevant factors. The Supreme Court rejected a judicially created presumption that deal price is the exclusive, best, or primary evidence of fair value, even when the transaction followed a robust, conflict-free process. Deal price may be highly persuasive on such facts, but not presumptively controlling. (Derived from DFC Global Corp. v. Muirfield Value Partners, L.P. (2017).)