The Delaware Supreme Court recently overturned a 2016 ruling by the Delaware Court Chancery that had blended the results of three valuation techniques to arrive at fair value. Chief Justice Strine, who once headed the Chancery, wrote a harsh critique replete with lots of advice to his successor, Chancellor Bouchard, on how to do a valuation.
The contested merger involved a global payday lending company that faced regulatory uncertainty in key markets and fierce competition. A private equity firm acquired the company. The chancellor, who handled the appraisal proceeding, performed a discounted cash flow analysis and also used the outcomes of the multiples-based comparable company analysis and the transaction price in calculating fair value. He weighted the results equally.
Market beats DCF. Post-trial, the company asked the court to correct an error related to the working capital figures in the Chancellor’s DCF analysis. In response, the dissenters wanted an adjustment to the perpetuity growth rate based on their expert’s affidavit that there needed to be a “codependent … and directionally consistent relationship” between the projected working capital in the DCF and the perpetuity growth rate. The court made both adjustments and achieved a fair value that was slightly higher than the original one.
The company appealed the decision with the Delaware Supreme Court. It asked the high court to create a judicial presumption, applicable in appraisal proceedings, that provides that, when the merger that triggered the lawsuit was an arm’s-length transaction, the merger consideration was the best indicator of fair value.
The Supreme Court declined to craft a bright-line rule. But it strongly agreed with the company that the Chancery’s adjusted DCF analysis was highly problematic and that the weighting of the results of the three methods was not supported by the record of the case or by basic economic principles. “Market prices,” the Supreme Court said, “are typically viewed superior to other valuation techniques because, unlike, e.g., a single person’s discounted cash flow model, the market price should distill the collective judgment of the many based on all the publicly available information about a given company and the value of its shares.”
The Supreme Court remanded, directing the chancellor to reassess the earlier valuation.
A digest of DFC Global Corp. v. Muirfield Value Partners, L.P., 2017 Del. LEXIS 324 (Aug. 1, 2017) (DFC Global II), and the court’s opinion, will be available soon at BVLaw. A digest of the Chancery’s decision, In re DFC Global Corp., 2016 Del. Ch. LEXIS 103, as well as the court’s opinion, is already available to BVLaw subscribers.