DFC Global Corp. v. Muirfield Value Partners, L.P.

• Decision Date: 01 August 2017
• Docket Number: No. 518, 2016,518, 2016
• Citation: 172 A.3d 346
• Parties: DFC GLOBAL CORPORATION, Respondent Below, Appellant/Cross–Appellee, v. MUIRFIELD VALUE PARTNERS, L.P., Oasis Investments II Master Fund Ltd., Candlewood Special Situations Master Fund, Ltd., CWD OC 522 Master Fund Ltd., and Randolph Watkins Slifka, Petitioners Below, Appellees/Cross–Appellants.
• Court: Supreme Court of Delaware

172 A.3d 346

DFC GLOBAL CORPORATION, Respondent Below, Appellant/Cross–Appellee,

v.MUIRFIELD VALUE PARTNERS, L.P., Oasis Investments II Master Fund Ltd., Candlewood Special Situations Master Fund, Ltd., CWD OC 522 Master Fund Ltd., and Randolph Watkins Slifka, Petitioners Below, Appellees/Cross–Appellants.

No. 518, 2016

Supreme Court of Delaware.

Submitted: June 7, 2017

Decided: August 1, 2017

Raymond J. DiCamillo, Esquire, Matthew D. Perri, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Meryl L. Young, Esquire, Colin B. Davis, Esquire, GIBSON, DUNN & CRUTCHER LLP, Irvine, California; Joshua S. Lipshutz, Esquire, (argued), GIBSON, DUNN & CRUTCHER LLP, Washington, D.C., Attorneys for Respondent Below, Appellant/Cross–Appellee, DFC Global Corporation.

Stuart M. Grant, Esquire, (argued), Kimberly A. Evans, Esquire, Vivek Upadhya, Esquire, GRANT & EISENHOFER P.A., Wilmington, Delaware, Attorneys for Petitioners Below, Appellees/Cross–Appellants, Muirfield Value Partners, L.P., Oasis Investments II Master Fund Ltd., Candlewood Special Situations Master Fund, Ltd., CWD OC 522 Master Fund LTD., and Randolph Watkins Slifka.

Theodore A. Kittila, Esquire, GREENHILL LAW GROUP, LLC, Wilmington, Delaware; Daniel M. Sullivan, Esquire, Sarah M. Sternlieb, Esquire, HOLWELL SHUSTER & GOLDBERG, LLP, New York, New York, Attorneys for Amici Curiae Law and Corporate Finance Professors arguing in favor of the presumption the Respondent favors.

Samuel T. Hirzel, II, Esquire, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Lawrence M. Rolnick, Esquire, Steven M. Hecht, Esquire, LOWENSTEIN SANDLER LLP, New York, New York; Mark Lebovitch, Esquire, Jeroen Van Kwawegen, Esquire, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York, Attorneys for Amici Curiae Law, Economics and Corporate Finance Professors arguing against the presumption the Respondent favors.

Before STRINE, Chief Justice; VALIHURA, VAUGHN, and SEITZ, Justices; LEGROW, Judge,^* constituting the Court en Banc.

STRINE, Chief Justice:

In this appraisal proceeding involving a publicly traded payday lending firm purchased by a private equity firm, the respondent argues that we should establish, by judicial gloss, a presumption that in certain cases involving arm's-length mergers, the price of the transaction giving rise to appraisal rights is the best estimate of fair value. We decline to engage in that act of creation, which in our view has no basis in the statutory text, which gives the Court of Chancery in the first instance the discretion to "determine the fair value of the shares" by taking into account "all relevant factors."¹ As this Court previously held in Golden Telecom, Inc. v. Global GT LP,² that language is broad, and until the General Assembly wishes to narrow the prism through which the Court of Chancery looks at appraisal value in specific classes of mergers, this Court must give deference to the Court of Chancery if its determination of fair value has a reasonablebasis in the record and in accepted financial principles relevant to determining the value of corporations and their stock.

On the record before us, however, the respondent has made two convincing case-specific arguments why the Court of Chancery's determination of fair value cannot be sustained on appeal. For starters, the respondent notes that the Court of Chancery found that: i) the transaction resulted from a robust market search that lasted approximately two years in which financial and strategic buyers had an open opportunity to buy without inhibition of deal protections; ii) the company was purchased by a third party in an arm's length sale; and iii) there was no hint of self-interest that compromised the market check.³ Although there is no presumption in favor of the deal price, under the conditions found by the Court of Chancery, economic principles suggest that the best evidence of fair value was the deal price, as it resulted from an open process, informed by robust public information, and easy access to deeper, non-public information, in which many parties with an incentive to make a profit had a chance to bid. But, despite its own findings about the adequacy of the market check, the Court of Chancery determined it would not give more than one-third weight to the deal price for two reasons.

The first reason was that there were regulatory developments relevant to the company being appraised and, therefore, the market's assessment of the company's value was not as reliable as under ordinary conditions. The respondent argues that this finding was not rationally supported by the record. We agree. The record below shows that the company's stock price often moved over the years, and that those movements were affected by the potential that the company's industry—payday lending and other forms of alternative consumer financial services—would be subject to tighter regulation. The Court of Chancery did not cite, and we are unaware of, any academic or empirical basis to conclude that market players like the many who were focused on this company's value would not have examined the potential for regulatory action and factored it in their assessments of the company's value. Like any factor relevant to a company's future performance, the market's collective judgment of the effect of regulatory risk may turn out to be wrong, but established corporate finance theories suggest that the collective judgment of the many is more likely to be accurate than any individual's guess. When the collective judgment involved, as it did here, not just the views of company stockholders, but also those of potential buyers of the entire company and those of the company's debtholders with a self-interest in evaluating the regulatory risks facing the company, there is more, not less, reason to give weight to the market's view of an important factor.

The Court of Chancery also found that it would not give dispositive weight to the deal price because the prevailing buyer was a financial buyer that "focused its attention on achieving a certain internal rate of return and on reaching a deal within its financing constraints, rather than on [the company's] fair value."⁴ To be candid, we do not understand the logic of this finding. Any rational purchaser of a business should have a targeted rate of return that justifies the substantial risks and costs of buying a business. That is true for both strategic and financial buyers. It is, of course, natural for all buyers to consider how likely a company's cash flows are to deliver sufficient value to pay back the company's creditors and provide a return on equity that justifies the high costs and risks of an acquisition. But, the fact that a financial buyer may demand a certain rate of return on its investment in exchange for undertaking the risk of an acquisition does not mean that the price it is willing to pay is not a meaningful indication of fair value. That is especially true here, where the financial buyer was subjected to a competitive process of bidding, the company tried but was unable to refinance its public debt in the period leading up to the transaction, and the company had its existing debt placed on negative credit watch within one week of the transaction being announced. The "private equity carve out" that the Court of Chancery seemed to recognize, in which the deal price resulting in a transaction won by a private equity buyer is not a reliable indication of fair value, is not one grounded in economic literature or this record. For these reasons, we remand to the Court of Chancery to reconsider the weight it gave to the deal price in its valuation analysis.

The next issue in the respondent's appeal involves the Court of Chancery's discounted cash flow analysis. When the respondent pointed out in a reargument motion that the Chancellor's discounted cash flow model included working capital figures that differed from those the Chancellor expressly adopted in his post-trial opinion, the Chancellor corrected his clerical error. This would have resulted in the discounted cash flow model yielding a fair value figure lower than the deal price. But, instead of stopping there, at the prompting of the petitioners, the Court of Chancery then substantially increased its perpetuity growth rate from 3.1% to 4.0%, which resulted in the Court of Chancery reaching a fair value akin to its original estimate of the company's value. But, no adequate basis in the record supports this major change in growth rate. During the two decades before the merger leading to this appraisal, the company experienced rapid growth. The growth of the payday lending industry and its effect on poor borrowers during this period was a large driver of the regulatory reforms that the company faced, reforms that would require the company to write more loans to make the same profits as in the past. As it was, the record suggested that the management projections used in the Court of Chancery's original discounted cash flow model were optimistic and designed to encourage bidders to pay a high price. Those projections hockey stick up at the last two years, and therefore more working capital was required to sustain those increases, and that doesn't even account for the likelihood that regulatory changes required more loans (i.e., working capital) to make the same profits as in the past. During the sales process, the company had to revise its aggressive projections downward, as it was not keeping pace with them. Even after revising them downward, the company fell short of meeting them weeks after the transaction closed. Given the nature of the projection's outyears, the fact that the industry had already gone through a period of above-market growth, and the lack of any basis to conclude that the company would sustain high growth beyond the projection period, the record does not sustain the Court of Chancery's decision to substantially increase the company's perpetuity growth rate in its...