The Supreme Court heard argument yesterday from DFC Global and its dissenting stockholders. The court has not yet ruled, and nobody can predict how it will decide the case; the following questions and observations are just some of the points that different members of the full five-justice panel raised during argument:
- The court asked DFC Global why they did not introduce an economics expert to corroborate the reliability of the merger price as the measure of the company’s fair value; the Chief Justice said that by not doing so, they didn’t offer much help to the Chancellor in his evaluation of the merger price and the process of wading through the respective valuation experts’ reports.
- The court observed that DFC’s own expert gave 50% weight to the merger price, so it asked why the Chancellor’s one-third weighting of merger price isn’t entitled to deference.
- The court observed that the statutory requirement that the chancery court consider “all relevant factors” in determining fair value is pretty “squishy,” suggesting that the trial court has the discretion to decide which factors to examine and what weight to give them.
- The court asked both sides to describe the relationship between working capital and perpetuity growth rates and whether the calculation of the growth rate is necessarily based on working capital assumptions; e., does a higher level of working capital inevitably mean that a higher growth rate must be used?
- The court observed that the appraisal statute requires the courts to focus on the fair value of the shares and that the pre-existing, unaffected market price would be highly informative of the stock’s fair value, but the jurisdictional definition of fair value looks beyond just the shares to the value of the company as a going concern.
- One of the justices was “troubled” by the Chancellor’s equal weighting of the three chosen valuation sources – merger price, comparable companies analysis, and DFC – insofar as the support for such equal weighting seemed lacking in the record.
- The court asked the stockholders why their valuation expert didn’t open up his own private equity shop if he really believed in the valuation delta between merger price and his own valuation, which came out nearly two times higher than the merger price.
- The court further asked why none of the 40 people apparently contacted during the sale process bid higher, given that valuation gap; are the markets really that broken?
- The court observed that on average, M&A buyers lose out and tend to overpay.
You can see the complete oral argument here (under the June 7, 2017, listing; DFC Global Corp. v. Muirfield Value Partners).
We will post again when the court issues its decision.
**As previously noted, this law firm was counsel of record on one of the amici briefs filed in this case.