Corporate practitioners have been closely following developments in Delaware's shareholder appraisal litigation. Much of the interest concerns the court's “fair value” determination and the risk that an acquiring company will have to pay appraisal petitioners more than the merger deal price, even in an arms-length transaction resulting from a robust market search. In a much-anticipated decision, the Delaware Supreme Court reversed the trial court's fair value determination in DFC Global v. Muirfield Value Partners, No. 518, 2016 (en banc Aug. 1). The court's opinion provides valuable guidance about the relative importance of the deal price in the court's adjudication of the “fair value” of a petitioner's shares.

BACKGROUND

DFC Global was a payday loan company that was acquired and taken private in 2014 by Lone Star, a private equity firm. Formed in 1990 with operations solely in the United States, DFC grew rapidly through acquisitions to become a worldwide business operating in 10 countries with more than 1,500 locations. It also had an internet lending business. It became a public company in 2004, and in the next 10 years grew its revenue from $270 million to $1.12 billion. Its shares traded on the NASDAQ exchange, and it had a deep public float.

Facing headwinds from increasingly stringent industry regulations in Canada, the U.K. and the United States, DFC engaged a financial advisory firm in 2012 to help sell the company. Between 2012 and 2014, the advisor reached out to 35 financial sponsors and three strategic buyers. Eventually three interested parties emerged and engaged in due diligence. During the diligence period, DFC lowered its earnings projections and the bidders lowered their bids or dropped out. In April 2014, the board approved a merger with Lone Star at $9.50 per share.

The DFC dissenting stockholders who petitioned for appraisal relied on a discounted cash flow model to argue that DFC's fair value was $17.90 per share. DFC on the other hand contended at trial that the fair value was $7.94 per share based on equally weighting a discounted cash flow valuation of $7.81 and a comparable companies analysis of $8.07. DFC also argued that the deal price of $9.50 was a reliable indication of fair value.