An M&A appraisal case before the Delaware Supreme Court has drawn amicus briefs from two groups of esteemed professors — including three from Columbia Law School — with opposing views on how a company should be valued.
The case involves the sale in 2014 of payday lender DFC Global to private equity firm Lone Star Funds for $9.50 a share, or about $1.3 billion. Muirfield Value Partners and three other DFC investors argued that the price was too low and filed an appraisal action, which allows shareholders that did not vote for the buyout to ask a judge to determine the fair value of their stock.
On July 8, Delaware Chancellor Andre Bouchard ruled that the investors were due $10.21 a share, though not the $17.90 a share that they had requested. He said the sale process “appeared to be robust,” but the price was not fair value because the buyer — Lone Star — viewed DFC’s business as on the verge of an upswing and the private equity firm aimed at “achieving a certain internal rate of return and on reaching a deal within its financing constraints, rather than on DFC’s fair value.” DFC appealed the ruling — and Bouchard’s subsequent adjustments to his calculations — to the state Supreme Court.
A group of nine law and corporate finance professors urges Delaware’s top court to adopt a rule that requires the Chancery Court to defer to the transaction price when a deal results from arm’s length negotiations. Otherwise, the professors argued, “courts are left to cobble together a discounted cash flow model from the disparate proposals of the parties’ experts. Respectfully, however, judges are ill-equipped to undertake that task.” The brief is available here.
A separate group of 21 law, economics, and corporate finance professors — including Columbia Law School’s John C. Coffee, Jr., Jeff Gordon, and Eric Talley — filed on February 3 a motion to file an amicus brief that argues for maintaining the power of the Chancery Court to determine the fair value of the stock of a seller, as a going concern, using discounted cash flow or any other approach accepted by valuation professionals. The brief points out that there are already institutions in place to overturn the Chancery Court, if necessary, without a new rule on deferring to the transaction price.
The brief also says that one of the strategic effects of an appraisal right is that it can act to set a kind of reserve price in a company auction, pegged at the going concern value of the seller. Tying the appraisal value to the merger price effectively eliminates the potential beneficial value of a reserve price. The brief is available here.