DFC Global Corp. v. Muirfield Value Partners, L.P., 2017 Del. LEXIS 324 (Aug. 1, 2017) (DFC Global II)
The Delaware Supreme Court recently overturned a 2016 ruling by the Delaware Court of Chancery that arrived at fair value by weighting the results of three valuation techniques equally. Chief Justice Strine, who once headed the Chancery, found this approach was not justifiable here and used the occasion to provide valuation advice to his successor, Chancellor Bouchard, who oversaw the appraisal proceeding.
The contested merger involved a global payday lending company that struggled with regulatory uncertainty in key markets and sold itself to a private equity firm. The Chancellor found the sales process was robust and conflict-free. However, he declined to use the deal price as the sole indicator of fair value. Two aspects of the process gave him hesitation, he explained. One, the company “appeared to be in a trough, with future performance depending on the outcome of regulatory decision-making that was largely out of the company’s control.” Further, because the acquiring entity was a financial sponsor, it “focused its attention on achieving a certain internal rate of return and on reaching a deal within its financing constraints, rather than on [the company’s] fair value.” None of the traditional valuation methods—deal price, discounted cash flow analysis, and comparable company analysis—was by itself able to produce fair value. However, fair value was achievable by combining the results of the various analyses, the Chancellor concluded.
In reviewing the case, Justice Strine let shine through his profound valuation expertise and found the Chancery’s reasons “for giving the weight it did to the deal price were not supported by the record.” The Chancery’s DCF analysis was troubling, Justice Strine found. He suggested this was a situation in which the lower court should have relied on the deal price. The Chief Justice decided to comment on an issue that he said came up in many appraisal cases. Judges at the Chancery, he noted, often are faced with briefs and expert reports experienced litigators prepared “in concert with men and women of valuation science that often come to ridiculously varying positions.” Judges then feel tempted to turn their valuation decision “into a more improvisational variation of the old Delaware Block Method,” in which the court considers every valuation method the experts propose and gives the outcomes equal weight. “When life is sloppy and unpredictable, the visual appeal of a mathematical formula to create an impression of precision is understandable,” Justice Strine said. But that’s not how it works, he added. Rather, an appraisal must be based on the record of the particular case. It was not in this case,Justice Strine concluded.
Find out more about the Supreme Court opinion here.