In an Appraisal Action, Chancery Court Uses Its “Significant Discretion” to Determine that Stock Sold Was Undervalued by Approximately 7%
By Christopher Tillson and B. Ashby Hardesty, Jr.
On July 8, 2016, Chancellor Bouchard issued a memorandum opinion in In re Appraisal of DFC Global Corp., C.A. No. 10107-CB (Del. Ch. July 8, 2016), finding that shares held by former stockholders of DFC Global Corporation (“DFC”) sold to Lone Star Fund VIII (U.S.), L.P. (“Lone Star”), a private equity buyer, for $9.50 per share were undervalued. Chancellor Bouchard determined this through an examination of multiple valuation methods — comparable company and transaction analyses, discounted cash flow analyses, and the transaction price — and ultimately concluded that an equal blend of the three was the most reliable determinate of the shares’ fair value. In doing so, Chancellor Bouchard calculated that the fair market value of the DFC shares was $10.21 per share.
In April 2012, DFC, facing increased regulatory scrutiny both in the United States and abroad, high corporate leverage, and questions regarding management succession, retained third-party representation to investigate the sale of itself to a financial sponsor. After several false starts with potential buyers, on February 28, 2014, Lone Star offered to buy DFC for $11.00 per share. This figure was revised to $9.50 per share after DFC disclosed downward revisions to its financial projections, among other factors. DFC accepted Lone Star’s offer, and the transaction closed on June 13, 2014. Between June 18 and October 1, 2014, five stockholders filed separate petitions for appraisal under Section 262 of the Delaware General Corporation Law. After consolidating these petitions and holding a short trial, Chancellor Bouchard issued his decision.
To determine the fair market value of the shares at issue, Chancellor Bouchard considered “all relevant factors” and exercised his “significant discretion to use the valuation methods [he deemed] appropriate, including the parties’ proposed valuation frameworks or one of the Court’s own making.” First, he meticulously evaluated the valuation methods put forth by the parties and the economic variables that went into each. Noting that the “transaction…was negotiated and consummated during a period of significant company turmoil and regulatory uncertainty, [which] called into question the reliability of the transaction price as well as [DFC] management’s financial projections”, Chancellor Bouchard concluded that the most reliable determinant of fair value of the shares was not one method but “a blend of [the] three imperfect techniques.” Chancellor Bouchard then turned to determining the weight of each valuation method. He reasoned that although each method suffered from unique limitations arising from the regulatory uncertainty that the company faced — which in turn impacted its financial projections — the three methods nevertheless provided meaningful insight into DFC’s valuation. For this reason, he elected to weigh each valuation technique equally. By doing so, Chancellor Bouchard calculated that the fair market value of the DFC shares was $10.21 per share — a difference of approximately 7% from DFC’s original sale price.