Legal news site Law360 ran this analysis [$$$] of Aruba, focusing on whether the decision should be seen as a fight between valuation methodologies, or between two courts trying to fulfill their respective roles. The Chancery Court, left to apply the Delaware Supreme Court’s precedent to complex fact situations and manage cases from their infancy through decision, may be struggling with the Dell and DFC decisions. The Supreme Court, perhaps reconsidering some of the positions it held as law in Dell and DFC, is left to ‘police’ the lower court as that court struggles to apply sometimes conflicting rules and views.

As the diverse reactions to Aruba consider, no doubt scholars will analyze the decision (and decisions still to come) as part of both the evolution of appraisal law, but also in how lower courts and higher courts interact.

Professor Robert Reder and Vanderbilt JD candidate Blake Woodward have published a piece in the Vanderbilt Law Review En Banc reviewing the Delaware Supreme Court’s DFC decision and the intricacies of Chancellor Strine’s 85 page opinion. We’ve posted extensively about DFC throughout its history.  The authors of the current piece point out that DFC can be partially read as a requirement for clearer explanations by the trial court of their reasoning with respect to valuation.  The authors summarize DFC’s import when it comes to encouraging explanation by lower courts as: “when the Chancery Court is faced with a choice between the deal price and a discounted cash flow analysis as the basis for a fair value determination, a sliding metric balancing the quality of the sales process with the reliability of the projections utilized in the discounted cash flow analysis ought to be employed.”

This sliding mechanism – involving a review of the sales process that then feeds into how much weight the court gives the deal price – fits well with recent research that shows appraisal is “more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism” – i.e., the kind of cases where the ‘slide’ is against a reasonably fair process.

As we have posted before, the Delaware Supreme Court rendered its much-awaited ruling in the DFC Global case on August 1. Here’s a more detailed breakdown of the key elements of that ruling.

I. No Judicial Presumption Imposing Mandatory Merger Price Ruling

The Court started off its opinion by rejecting DFC Global’s request to establish “by judicial gloss” a presumption that fair value would be tethered to merger price in certain cases involving an arm’s-length M&A transaction. The Court said that it would “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.’” The Court adhered to its 2010 ruling in Golden Telecom in finding the statute’s “all relevant factors” inquiry to be broad, and reaffirmed the chancery court’s discretion to undertake that inquiry until such time as the Delaware legislature may choose to revise the statute in this regard (we are not aware of any such legislative activity currently underway).

Continue Reading Breaking Down the Delaware Supreme Court’s DFC Global Decision**

Today the Delaware Supreme Court reversed and remanded the appraisal decision of the Chancery Court in the highly watched DFC Global case.  A more detailed post will follow, but we wanted to flag the ruling in the meantime.

The court declined DFC Global’s request to impose a presumption by “judicial gloss” that would peg fair value at the merger price in cases involving arm’s-length mergers.  The court found that such an approach would have no basis in the statutory text, which gives the Chancery Court discretion to determine fair value by taking into account “all relevant factors.”

The court did accept two other “case-specific” arguments by DFC Global.  First, the Supreme Court directed that on remand (i.e., when the trial court gets the case back from the Supreme Court), the Chancery Court — which in its valuation analysis had given equal weight to each of (i) the deal price, (ii) its DFC analysis, and (iii) a comparable companies analysis — should reconsider the weight it gave to the deal price in finding fair value based on certain factors in this case.  Second, the Supreme Court found that there was not adequate basis in the record in this case to support the Chancery Court’s increase in the perpetuity growth rate it assumed for DFC Global from 3.1% to 4.0% when it corrected an error that had been raised during reargument.

In addition, the Supreme Court denied the cross-appeal, by which the stockholders argued that the DCF analysis be given primary, if not sole, weight in the valuation analysis. The court found that giving weight to the comparable companies analysis in this case was within the Chancellor’s discretion.

We will continue to monitor the proceedings to follow in the Chancery Court.

**As previously noted, this law firm was counsel of record on one of the amici briefs filed in this case.

Professors Korsmo and Myers, whom we have blogged about before, have a new post on CLS Blue Sky Blog, titled “A Reality Check on the Appeals of the DFC Global Appraisal Case.”  The Professors argue that the DFC Global appeal, which we’ve been covering, presents an attempt by deal advisors “to alter Delaware’s appraisal jurisprudence[,]” seeking to “undermine appraisal rights and shield opportunistic transactions from judicial scrutiny.”  Urging the Supreme Court not to “tie the Court of Chancery’s hands in future cases” – the Professors cite recent research showing that appraisal petitions are “more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism.”

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.

Further to our recent post about the newest amicus brief offered up to the Delaware Supreme Court — arguing against the adoption of a merger price rule in appraisal cases — the Business Law Prof Blog posted this balanced assessment of the competing amici  briefs and highlighted their key takeaways.  Quoting in turn to the Chancery Daily newsletter, the post thus characterizes the amicus matchup: “By WWE standards it may be a cage match of flyweight proportions, but by Delaware corporate law standards, a can of cerebral whoopass is now deemed open.”

We have posted before about the amicus brief that a collection of law professors has asked to put before the Delaware Supreme Court as it hears the DFC Global appeal.  On Friday, the Supreme Court granted their request and will consider their submission advocating that the chancery courts should defer to the merger price when reached as a result of a robust, pristine M&A auction.  This ruling was made despite the opposition voiced by the DFC Global stockholders defending the lower court’s decision to award them a premium to the merger price.  The Court found that the professors may be able to provide it with some “unique supplemental assistance” in this case, which involved a question of “general public importance.”