Delaware court reverses closely watched DFC Global appraisal ruling

Reuters News
Posted: Aug 01, 2017 1:32 PM

By Tom Hals

WILMINGTON, Del. (Reuters) - The Delaware Supreme Court reversed on Tuesday a lower court ruling that payday lender DFC Global Corp was sold too cheaply in 2014 and criticized the finding that private equity buyers do not necessarily pay fair value in merger deals.

The ruling stems from a so-called appraisal action, which has become a popular strategy for hedge funds to try to squeeze more cash from a merger deal, over the sale of DFC Global to Lone Star Funds for $9.50 per share, or about $1.3 billion.

While the deal was approved by DFC shareholders, the funds went to court. Last year, a Delaware judge determined that the fair value of their 4.6 million DFC shares was $10.21 each.

The Delaware Supreme Court sent the case back to the Court of Chancery and directed Chancellor Andre Bouchard to reassess his finding and explain why he did not accept the deal price as fair value.

Lone Start Funds and Stuart Grant, a lawyer for the hedge funds, did not immediately respond to a request for comment.

Bouchard ruled last year that while the sale process "appeared to be robust," which usually protects against appraisal lawsuits, fair value was higher than the deal price because the business was in a temporary trough.

He also gave less weight to the deal price because the private equity fund premised the price on its own internal rate of return.

A similar ruling last year involving the 2013 buyout of Dell Inc prompted Wall Street dealmakers to warn that deals involving private equity buyers would be constant targets for appraisal cases.

The Supreme Court said a private equity buyer's expectations for its return does prevent it from paying fair value.

"To be candid, we do not understand the logic of this finding," said the opinion by Chief Justice Leo Strine.

Brooklyn Law School professor Minor Myers said the ruling indicated that properly run merger deals would be protected from appraisal cases, even those involving private equity.

"The identity of the buyer doesn't matter, it's the character of the sales process," he said.

Advocates of reining in appraisal cases had urged the Supreme Court to use the DFC case to create a presumption that the deal price is the best evidence of fair value when a sale was properly run.

But the Supreme Court resisted, saying it would difficult to outline the conditions when the court should accept the deal price.

(Reporting by Tom Hals in Wilmington, Delaware; editing by Grant McCool)