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Delaware Chancery Court Grants Appraisal Rights to Shareholders in DFC Global Corporation Following Acquisition by Private Equity Fund
07/18/2016On July 8, 2016, Chancellor Andre Bouchard of the Delaware Court of Chancery granted a petition for appraisal of former stockholders of DFC Global Corporation (“DFC”) at a “fair value” of $10.21 per share, rather than the price ($9.50 per share) at which DFC was acquired by a private equity fund in June 2014. In re Appraisal of DFC Global Corp., C.A. No. 10107-CB (Del. Ch. July 8, 2016). The judicially-determined appraisal value reflects an equally weighted blend of (1) a discounted cash-flow analysis, (2) a comparable company analysis, and (3) the actual transaction price of the deal.
Delaware affords appraisal rights to shareholders that dissent from a merger under Section 262 of the Delaware General Corporation Law. The purpose of this provision is “to provide shareholders who dissent from a merger, on the basis of the inadequacy of the offering price, with a judicial determination of the fair value of their shares.” Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1142 (Del. 1989).
DFC is an alternative consumer financial services company specializing in payday lending in several countries, subject to varying regulatory oversight in each jurisdiction. According to the Court, regulatory changes and increasing consumer financial protection in the United States and the United Kingdom led to significant uncertainty with respect to future profitability. In April 2012, DFC began actively investigating the possibility of a sale transaction. Two years later, in April 2014, DFC entered into a merger agreement providing for its acquisition by a private equity fund. The transaction closed on June 13, 2014. Dissenting shareholders brought an appraisal action, arguing that the consideration in the transaction was less than the fair value of their shares. Petitioners’ expert calculated a “fair value” of $17.90 per share. DFC’s expert calculated a “fair value” of $7.94 per share.
Chancellor Bouchard explained that “[t]he merger price in an arm’s-length transaction that was subjected to a robust market check is a strong indication of fair value in an appraisal proceeding” and can frequently be accorded complete deference. Here, however, “[t]he transaction . . . was negotiated and consummated during a period of significant company turmoil and regulatory uncertainty, calling into question the reliability of the transaction price.”
The Court’s memorandum opinion sets forth in substantial detail the analyses of the parties’ experts and the Court’s determinations to adopt certain aspects of each, including in the development of the Court’s own discounted cash-flow analysis. Ultimately, the Court determined that three inputs merited consideration in the calculation of DFC’s fair value: the Court’s expert-informed discounted cash-flow analysis, the comparable company analysis of DFC’s expert, and the actual transaction price. The Court determined that these three methods resulted in “fair value” calculations of $13.07 (discounted cash-flow analysis), $8.07 (comparable company analysis) and $9.50 (transaction price) per share.
Chancellor Bouchard found that “all three metrics suffer from various limitations but . . . each of them still provides meaningful insight into DFC’s value.” In light of the uncertainties, the Court weighted each of them equally to arrive at an appraisal value of $10.21 per share.
