Chancery’s unusual recipe for achieving fair value

BVWireIssue #167-4
August 24, 2016

How do you generate a reliable indicator of value in a world of uncertainty? In a recent statutory appraisal action, the Delaware Court of Chancery decided to blend the results of three “imperfect techniques.”

Sold in a hazy climate: The subject was a payday lending company that was headquartered in the United States but operated in 10 countries. Around the time of the transaction, the company experienced two pressure points: potentially tighter restrictions from regulatory authorities, especially in the U.S. and the United Kingdom, and competition. Concerns over regulatory change, management succession, and the company’s high leverage led to a sale to a private equity buyer for $9.50 per share. The transaction triggered a fair value petition from dissenting shareholders, which the court’s chief judge, Chancellor Bouchard, handled.

Three valuation techniques were in play: the discounted cash flow analysis, the multiples-based comparable company analysis, and the transaction price. The court said all methods suffered from limitations related to not knowing how, if at all, the company would weather the shifting regulatory landscape in key markets. At the same time, there was no doubt that all methods provided “meaningful insight” into the company’s value. No one technique produced a superior result. But, by giving equal weight to the results from the three different analyses, the court was satisfied it achieved fair value. The price was $10.21 per share, the court concluded.

The case is In re DFC Global Corp., 2016 Del. Ch. LEXIS 103 (July 8, 2016). A digest of the case and the court’s opinion will be available soon at BVLaw.

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