Delaware Appraisal at a Crossroads?

The Delaware Supreme Court heard argument recently in the appraisal proceeding arising out of the 2014 acquisition of DFC Global Corporation by Lone Star, a private equity firm. The Court of Chancery had found that the statutory “fair value” of DFC was higher than the deal price, based on a tripartite equal weighting of the transaction price, a DCF valuation, and a comparable company analysis which the court called “a blend of three imperfect techniques.” One key element of the appeal is the proper role of deal price in fair value determinations. The Court of Chancery noting that the sale process was lengthy, involved financial and strategic buyers, and resulted in an arm’s-length sale with no conflicts determined that the deal price was “one measure” of value. But the court gave the deal price limited weight. It found that the sale process coincided with the company’s being subject to “turbulent regulatory waters” that rendered uncertain its future profitability and even viability; the court suggested that the PE buyer may have understood those uncertainties better than other bidders, and been focused as a financial sponsor on achieving a required internal rate of return consistent with its financing constraints, rather than DFC’s fair value.

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