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By Yin Wilczek
A ruling that Malvern, Pa.-based payday lender DFC Global Corp. was undervalued when acquired in 2014 by private equity firm Lone Star Fund, was reversed by the full Delaware Supreme Court Aug. 1.
Under Delaware law, shareholders that choose not to participate in a merger can file appraisal actions asking the Delaware Chancery Court to assess a “fair value” for their shares. This is the first appraisal case heard by the state’s high court since 2015 ( DFC Glob. Corp. v. Muirfield Value Partners LP , 2017 BL 266479, Del. en banc, No. 518, 2016, 8/1/17 ).
The chancery court held in July 2016 that DFC Global’s transaction price wasn’t the best indicator of fair value because the deal was struck “during a period of significant company turmoil and regulatory uncertainty.”
Reversing and remanding, the supreme court said the chancery court’s finding “was not rationally supported by the record.”
The supreme court directed chancery court judge Andre G. Bouchard, on remand, to “reassess the weight he chooses to afford various factors potentially relevant to fair value.”
After doing so, Bouchard “may conclude that his findings regarding the competitive process leading to the transaction, when considered in light of other relevant factors, such as the views of the debt markets regarding the company’s expected performance and the failure of the company to meet its revised projections, suggest that the deal price was the most reliable indication of fair value,” the state high court said.
Counsel for the parties didn’t immediately respond to requests for comment.
The decision wasn’t a surprise, said Lawrence Hamermesh, a professor at Widener University’s Delaware Law School. The interesting part was the supreme court’s direction that where the sales process was robust and there were no conflicts of interest, “the deal price is the starting point and ought to be given very high weight,” he told Bloomberg BNA. Going forward, the chancery court will look to deal price in appraisal cases “more consistently.”
Hamermesh also suggested that as a result of the ruling, the quality of the sales process and the existence of conflicts will be litigated in appraisal cases instead of fiduciary-duty cases. “So appraisal in some ways may become even more important as a check on opportunistic acquisitions, but will be less used” simply because appraisal arbitragers won’t make much if the chancery court consistently finds the deal price to be the fair value of the company, he said.
Over the last five years, there has been an increase in appraisal actions, according to Bloomberg Law data. There were 77 appraisal lawsuits filed in 2016 challenging 48 deals, compared to 51 lawsuits in 2015 challenging 33 deals.
The supreme court’s ruling in DFC Global comes shortly after the chancery court July 21 concluded, in a separate case, that Clearwire Corp. stockholders got more than the fair value for their shares when Sprint Nextel Corp. acquired a 100 percent ownership of the broadband communications company in 2013.
In the DFC case, shareholders that collectively owned over 4.6 million shares claimed the company was sold at a discount for $9.50 per share. The chancery court, in its July 2016 decision, found that the fair value of the company at the time the transaction closed was $10.21 per share.
DFC appealed, arguing that the chancery court’s decision would undermine confidence in Delaware appraisal actions.
Academics have filed amicus briefs in the appeal on whether the state high court should adopt a categorical rule requiring the chancery court to defer to the transaction price when a deal is the product of arm’s-length negotiations.
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