On August 1, 2017, the Delaware Supreme Court issued its highly anticipated decision in the appraisal appeal, DFC Global Corp. v. Muirfield Value Partners, L.P.  The Chancery Court’s decision below had garnered substantial attention for its determination that DFC Global’s fair value was approximately 7.5% higher than the deal price, even though the court found a robust and conflict-free sale process.  On appeal from that decision, DFC Global argued that the Delaware Supreme Court should adopt a presumption in appraisal actions that the deal price in arm’s length and competitive mergers equals fair value.  The appeal drew dueling amicus briefs from two groups of prominent professors, one in favor of this presumption,[1] and one opposed to it.[2]

As has been noted elsewhere, the Delaware Supreme Court in DFC Global declined to endorse a presumption in favor of deal price, finding that such presumption had no basis in the text of the appraisal statute that directs the Chancery Court to take “all relevant factors” into account when determining fair value.  Yet while rejecting a formal presumption, the Delaware Supreme Court nevertheless explained that “economic principles” suggest that in open and arm’s length mergers such as this one, “the best evidence of fair value [i]s the deal price.”[3]  The Court also acknowledged the “economic reality” that “second-guessing the value arrived upon by the collective views of many sophisticated parties with a real stake in the matter is hazardous.”[4]

With such “economic principles” firmly in mind, the Court then evaluated the two reasons the Chancery Court gave for not deferring to the deal price below:

  • First, the Delaware Supreme Court rejected the Chancery Court’s finding that regulatory uncertainty surrounding DFC Global (and a purported “trough” in its trading price as a result) made the deal price less reliable than it otherwise would have been. The Delaware Supreme Court observed that this reasoning was inconsistent with the same “economic reality” that the market provides the best evidence of value in the face of uncertainty.
  • Second, the Delaware Supreme Court rejected the Chancery Court’s reasoning that, unlike strategic buyers, private equity buyers do not fully value their targets because they aim to achieve a required rate of return instead. The Delaware Supreme Court noted that all buyers target a return on their investment, and in any event the private equity buyer in this case outbid strategic buyers.

The Supreme Court did not go so far as telling the Court of Chancery to defer to the deal price in this case.  Rather, it instructed that on remand the Chancery Court should “reassess the weight [it] chooses to afford various factors potentially relevant to fair value” in light of the Supreme Court’s decision.[5]  The Supreme Court appeared to hint at the outcome it thought most appropriate, noting that the Chancery Court “may conclude that [its] 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.”[6]

DFC Global thus indicates the Delaware Supreme Court’s embrace of market prices as the best evidence of fair value, at least in open, competitive, and conflict-free mergers.  Even more notable is that, by rejecting the Chancery Court’s proffered reasons for not deferring to deal price (despite the deferential standard of review), the Delaware Supreme Court signaled that only compelling reasons “grounded in the record and reliable principles of corporate finance and economics” would justify departing from deal price in such cases.[7]  Whether or not labeled a formal “presumption” in favor of deal price, it now appears that the Chancellor and Vice Chancellors will have to come up with good reasons if they do not defer to the deal price in appraisal actions involving arm’s length mergers.  What those reasons might look like remains to be seen, although an early test might be the Dell appraisal case, in which the Delaware Supreme Court is set to hear oral argument in September.  There, the Chancery Court similarly found fair value to be above the deal price despite a fair sale process.  It remains to be seen whether the petitioners in that case can convince the Delaware Supreme Court that there were adequate reasons for the Chancery Court’s departure from deal price.

While only time will tell, the likely effect of DFC Global will be to discourage appraisal claims other than in cases involving a flawed sales process, a conflicted transaction (such as a controller cash-out or a management led buyout), or other unusual facts.  Likewise, the Delaware Supreme Court’s rejection of the Chancery Court’s “private equity carveout” should allow the private equity industry to breathe a sigh of relief.

[1] https://www.lowenstein.com/files/upload/Exhibits2_122116.pdf

[2] https://www.lowenstein.com/files/upload/MotiontoFileAmicuspkg.pdf

[3] DFC Global, slip op. at 2.

[4] Id. at 39.

[5] Id. at 7.

[6] Id.

[7] Id. at 50.