Delaware Supreme Court Reverses DFC Global Appraisal Decision: Court Finds That Merger Price Following Robust, Conflict-Free Sale Process is the Best Evidence of Fair Value, and Rejects "Private Equity Carve Out" Adopted by Court of Chancery

Sullivan & Cromwell LLP - August 4, 2017

In DFC Global Corp. v. Muirfield Value Partners, L.P., the Delaware Supreme Court reversed and remanded the Court of Chancery’s appraisal decision arising out of the 2014 acquisition of DFC Global by private equity firm Lone Star Funds, in which the Court of Chancery had determined that the “fair value” of DFC Global was $10.30 per share, $0.80 above the merger price.  The Court rejected competing arguments by the company and the petitioner, respectively, that an appraisal court should give exclusive or presumptive weight either to the deal price or to a discounted cash flow (“DCF”) valuation.  Instead, while confirming the Court of Chancery’s statutory discretion to take into account all relevant factors and recognizing no presumption in favor of the deal price, the Supreme Court found that economic principles suggest that the price achieved in a robust and unconflicted sale process is the best evidence of fair value.  The Supreme Court rejected the Court of Chancery’s decision to give equal weight to the merger price, DCF value and a comparable companies valuation in arriving at fair value.  Although the Court of Chancery retains discretion to employ multiple valuation methods and accord weight to each, the Supreme Court held that any weighting must be grounded on the record before the court.  The decision, while declining to adopt a bright-line rule in favor of the merger price in an appraisal proceeding, suggests that the Court of Chancery should give substantial if not exclusive weight to a deal price that follows a vigorous and conflict-free market check and in the absence of external influences, such as a controlling stockholder.