Yesterday, in DFC Global v. Muirfield Value Partners, the Delaware Supreme Court reversed the Chancery Court’s decision to award a premium over the merger price in an appraisal case involving an arm’s-length deal & a robust sale process. As I previously blogged, the DFC Global case attracted a lot of interest from practitioners and academics – particularly for the potential impact of the company’s argument that the merger price in an arm’s-length deal should be deemed to represent fair value.
In his opinion for the Court, Chief Justice Strine declined to establish such a presumption:
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.”
While it didn’t establish a presumption in favor of the merger price, the Court did conclude that in light of the strong & arm’s-length sale process, the reasons that Chancellor Bouchard gave for allocating only 1/3rd weight to the merger price were insufficient. Those reasons focused on regulatory risks confronting the seller during the relevant period & the fact that the purchaser was a financial buyer.
The Supreme Court also questioned the Chancellor’s approach to the DCF analysis used in his opinion.
In remanding the case to the Chancery Court, Strine noted that there was no “one size fits all” approach to appraisal:
In some cases, it may be that a single valuation metric is the most reliable evidence of fair value and that giving weight to another factor will do nothing but distort that best estimate. In other cases, it may be necessary to consider two or more factors.
The Chief Justice went on to say that what’s required is for the Chancery Court “to explain its weighting in a manner that is grounded in the record before it. That did not happen here.”
– John Jenkins