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DFC Global Corp. v. Muirfield Value Partners, L.P.

Supreme Court of Delaware

August 1, 2017

DFC GLOBAL CORPORATION, Respondent Below, Appellant/Cross-Appellee,

          Submitted: June 7, 2017

         Court Below: Court of Chancery of the State of Delaware C.A. No. 10107

         Upon appeal from the Court of Chancery. REVERSED and REMANDED.

          Raymond J. DiCamillo, Esquire, Matthew D. Perri, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Meryl L. Young, Esquire, Colin B. Davis, Esquire, GIBSON, DUNN & CRUTCHER LLP, Irvine, California; Joshua S. Lipshutz, Esquire, (argued), GIBSON, DUNN & CRUTCHER LLP, Washington, D.C., Attorneys for Respondent Below, Appellant/Cross-Appellee, DFC Global Corporation.

          Stuart M. Grant, Esquire, (argued), Kimberly A. Evans, Esquire, Vivek Upadhya, Esquire, GRANT & EISENHOFER P.A., Wilmington, Delaware, Attorneys for Petitioners Below, Appellees/Cross-Appellants, Muirfield Value Partners, L.P., Oasis Investments II Master Fund Ltd., Candlewood Special Situations Master Fund, Ltd., CWD OC 522 Master Fund LTD., and Randolph Watkins Slifka.

          Theodore A. Kittila, Esquire, GREENHILL LAW GROUP, LLC, Wilmington, Delaware; Daniel M. Sullivan, Esquire, Sarah M. Sternlieb, Esquire, HOLWELL SHUSTER & GOLDBERG, LLP, New York, New York, Attorneys for Amici Curiae Law and Corporate Finance Professors arguing in favor of the presumption the Respondent favors.

          Samuel T. Hirzel, II, Esquire, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Lawrence M. Rolnick, Esquire, Steven M. Hecht, Esquire, LOWENSTEIN SANDLER LLP, New York, New York; Mark Lebovitch, Esquire, Jeroen Van Kwawegen, Esquire, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York, Attorneys for Amici Curiae Law, Economics and Corporate Finance Professors arguing against the presumption the Respondent favors.

          Before STRINE, Chief Justice; VALIHURA, VAUGHN, and SEITZ, Justices; LEGROW, Judge, [*] constituting the Court en Banc.

          STRINE, Chief Justice

         In this appraisal proceeding involving a publicly traded payday lending firm purchased by a private equity firm, 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."[1] As this Court previously held in Golden Telecom, Inc. v. Global GT LP, [2] that language is broad, and until the General Assembly wishes to narrow the prism through which the Court of Chancery looks at appraisal value in specific classes of mergers, this Court must give deference to the Court of Chancery if its determination of fair value has a reasonable basis in the record and in accepted financial principles relevant to determining the value of corporations and their stock.

         On the record before us, however, the respondent has made two convincing case-specific arguments why the Court of Chancery's determination of fair value cannot be sustained on appeal. For starters, the respondent notes that the Court of Chancery found that: i) the transaction resulted from a robust market search that lasted approximately two years in which financial and strategic buyers had an open opportunity to buy without inhibition of deal protections; ii) the company was purchased by a third party in an arm's length sale; and iii) there was no hint of self-interest that compromised the market check.[3] Although there is no presumption in favor of the deal price, under the conditions found by the Court of Chancery, economic principles suggest that the best evidence of fair value was the deal price, as it resulted from an open process, informed by robust public information, and easy access to deeper, non-public information, in which many parties with an incentive to make a profit had a chance to bid. But, despite its own findings about the adequacy of the market check, the Court of Chancery determined it would not give more than one-third weight to the deal price for two reasons.

         The first reason was that there were regulatory developments relevant to the company being appraised and, therefore, the market's assessment of the company's value was not as reliable as under ordinary conditions. The respondent argues that this finding was not rationally supported by the record. We agree. The record below shows that the company's stock price often moved over the years, and that those movements were affected by the potential that the company's industry-payday lending and other forms of alternative consumer financial services-would be subject to tighter regulation. The Court of Chancery did not cite, and we are unaware of, any academic or empirical basis to conclude that market players like the many who were focused on this company's value would not have examined the potential for regulatory action and factored it in their assessments of the company's value. Like any factor relevant to a company's future performance, the market's collective judgment of the effect of regulatory risk may turn out to be wrong, but established corporate finance theories suggest that the collective judgment of the many is more likely to be accurate than any individual's guess. When the collective judgment involved, as it did here, not just the views of company stockholders, but also those of potential buyers of the entire company and those of the company's debtholders with a self-interest in evaluating the regulatory risks facing the company, there is more, not less, reason to give weight to the market's view of an important factor.

         The Court of Chancery also found that it would not give dispositive weight to the deal price because the prevailing buyer was a financial buyer that "focused its attention on achieving a certain internal rate of return and on reaching a deal within its financing constraints, rather than on [the company's] fair value."[4] To be candid, we do not understand the logic of this finding. Any rational purchaser of a business should have a targeted rate of return that justifies the substantial risks and costs of buying a business. That is true for both strategic and financial buyers. It is, of course, natural for all buyers to consider how likely a company's cash flows are to deliver sufficient value to pay back the company's creditors and provide a return on equity that justifies the high costs and risks of an acquisition. But, the fact that a financial buyer may demand a certain rate of return on its investment in exchange for undertaking the risk of an acquisition does not mean that the price it is willing to pay is not a meaningful indication of fair value. That is especially true here, where the financial buyer was subjected to a competitive process of bidding, the company tried but was unable to refinance its public debt in the period leading up to the transaction, and the company had its existing debt placed on negative credit watch within one week of the transaction being announced. The "private equity carve out" that the Court of Chancery seemed to recognize, in which the deal price resulting in a transaction won by a private equity buyer is not a reliable indication of fair value, is not one grounded in economic literature or this record. For these reasons, we remand to the Court of Chancery to reconsider the weight it gave to the deal price in its valuation analysis.

         The next issue in the respondent's appeal involves the Court of Chancery's discounted cash flow analysis. When the respondent pointed out in a reargument motion that the Chancellor's discounted cash flow model included working capital figures that differed from those the Chancellor expressly adopted in his post-trial opinion, the Chancellor corrected his clerical error. This would have resulted in the discounted cash flow model yielding a fair value figure lower than the deal price. But, instead of stopping there, at the prompting of the petitioners, the Court of Chancery then substantially increased its perpetuity growth rate from 3.1% to 4.0%, which resulted in the Court of Chancery reaching a fair value akin to its original estimate of the company's value. But, no adequate basis in the record supports this major change in growth rate. During the two decades before the merger leading to this appraisal, the company experienced rapid growth. The growth of the payday lending industry and its effect on poor borrowers during this period was a large driver of the regulatory reforms that the company faced, reforms that would require the company to write more loans to make the same profits as in the past. As it was, the record suggested that the management projections used in the Court of Chancery's original discounted cash flow model were optimistic and designed to encourage bidders to pay a high price. Those projections hockey stick up at the last two years, and therefore more working capital was required to sustain those increases, and that doesn't even account for the likelihood that regulatory changes required more loans (i.e., working capital) to make the same profits as in the past. During the sales process, the company had to revise its aggressive projections downward, as it was not keeping pace with them. Even after revising them downward, the company fell short of meeting them weeks after the transaction closed. Given the nature of the projection's outyears, the fact that the industry had already gone through a period of above-market growth, and the lack of any basis to conclude that the company would sustain high growth beyond the projection period, the record does not sustain the Court of Chancery's decision to substantially increase the company's perpetuity growth rate in its discounted cash flow model after reargument.

         On cross-appeal, the petitioners argue that the Court of Chancery abused its discretion by giving weight to its comparable companies analysis, and that the only correct weighting of relevant factors would have given primary, if not sole, weight to the discounted cash flow model. We disagree. The comparable companies analysis used by the Chancellor was supported by the record; this was a rare instance where both experts agreed on the comparable companies the Court of Chancery used and so did several market analysts and others following the company. Thus, giving weight to a comparable companies analysis was within the Chancellor's discretion.

         Finally, the Court of Chancery's decision to give one-third weight each to the deal price, the discounted cash flow valuation, and the comparable companies valuation was not explained. Given the Court of Chancery's findings about the robustness of the market check and the substantial public information available about the company, we cannot discern the basis for this allocation. On remand, if the Court of Chancery chooses to use a weighting of different valuation methodologies to reach its fair value determination, the court must explain its weighting in a manner supported by the record before it.

         For these reasons, we reverse and remand the Court of Chancery's ruling. On remand, the Chancellor should reassess the weight he chooses to afford various factors potentially relevant to fair value, and he may conclude that his findings regarding the competitive process leading to the transaction, when considered in light of other relevant factors, such as the views of the debt markets regarding the company's expected performance and the failure of the company to meet its revised projections, suggest that the deal price was the most reliable indication of fair value.


         A. DFC

         i. DFC's Growth

         DFC Global Corporation ("DFC") provides alternative consumer financial services, predominately payday loans. The 2014 transaction giving rise to this appraisal action resulted in DFC being taken private by Lone Star, a private equity firm.

         DFC was formed in 1990. Its operations then were entirely in the United States. Since then, it has made more than 100 acquisitions to grow the business worldwide.[5] By the time of the sale giving rise to this appraisal (i.e., the "merger" or "transaction"), DFC operated in ten countries with more than 1, 500 locations, in addition to having a substantial internet lending business. But, the bulk of DFC's revenues came from three main markets: the United Kingdom (47%), Canada (31%), and the U.S. (12%).[6] In the U.S., at the time of the merger, DFC operated 292 stores in 14 states, especially California, Louisiana, and Arizona, and provided loans to enlisted military personnel.[7]

         DFC entered Canada in 1996 and had 489 stores there as of the merger. DFC had grown rapidly in Canada, reaching 214 stores by 2004, [8] and, by the time of the merger, DFC could say that it was the "largest alternative financial services retail store network in Canada based upon revenues and profitability."[9]

         Particularly relevant for this appraisal, DFC entered the U.K. market in 1999 and embarked on an ambitious expansion. Six years after DFC entered that market, in 2005, it had 152 stores. By 2009, only four years later, it almost doubled its footprint in the U.K. to 330 stores.[10] And, as of the merger, DFC had nearly doubled its stores in the U.K. again, reaching 601 locations.[11]

         The rapid growth of DFC's business can be seen in its overall revenues. In 2004, its last fiscal year before becoming a public company, DFC had total revenues of $270.6 million.[12] As of 2013, the last fiscal year before the merger, its total revenues had increased to $1.12 billion, [13] or 314% higher. And, this masked even stronger growth in certain segments, such as the U.K. market, which experienced some years with over 60% year-over-year growth.[14] DFC's rapid growth can be seen in its strong year-over-year revenue growth post-initial public offering:

         DFC Total Revenue ($, in millions)[15]




















$1, 061.7

1, 122.3

YOY Growth











         DFC's strong growth exemplifies the payday loan industry's material growth in the past two decades.[16] Not only did the industry's traditional storefront payday lending grow, but the industry's online market also experienced "rapid" growth.[17]

         ii. DFC's Equity

         DFC's shares were traded on the NASDAQ exchange from 2005 until the merger. Throughout its history as a public company, the record suggests DFC never had a controlling stockholder, it had a deep public float of 39.6 million shares, and, it had an average daily trading volume just short of one million shares.[18] DFC's share price moved sharply in reaction to information about the company's performance, the industry, and the overall economy, as the following chart, prepared by the petitioners' expert, illustrates. The chart shows that regulatory action at different times and by different regulators elicited differing responses by the market.

         (Image Omitted)[19]

         iii. DFC's Debt

         DFC was a highly leveraged company. Its capital structure was comprised of about $1.1 billion of debt as compared to a $367.4 million equity market capitalization, [20] resulting in a debt-to-equity ratio of 300% and a debt-to-total-capitalization ratio of 75%.[21] DFC's high leverage "was viewed negatively by both equity and debt analysts, "[22] and, as of all relevant periods, it maintained a non-investment grade credit rating.[23] Indeed, at the beginning of 2014, one equity analyst noted that revenue declines in DFC's U.K. operation could have negative effects on DFC's ability to both secure new loans and meet the covenants on existing loans.[24]And, later in 2014, Standard & Poor's ("S&P"), a credit rating agency, placed DFC on its Creditwatch Negative list based in large part on "weaker-than-expected financial performance, underpinned by new lending guidelines in the U.K."[25] Later, S&P warned that "[g]iven the extent of the regulatory risk [DFC] is exposed to, we don't foresee an upgrade within the next 12 months."[26]

         iv. Regulatory Headwinds

         In the years leading up to the merger, DFC faced heightened regulatory scrutiny. In Canada, DFC confronted a new regulatory environment beginning in 2007 when the provinces in which it operated started regulating it, rather than the central government.[27]

         In the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the Consumer Financial Protection Bureau, which was given regulatory, supervisory, and enforcement powers over DFC.[28] At least one industry observer described these changes in the U.S. as "[s]weeping."[29] The Consumer Financial Protection Bureau completed an on-site review of DFC in 2013 and found that DFC was in violation of the Consumer Financial Protection Act. As a result, DFC had to amend its U.S. practices.

         In DFC's most important market-the U.K.-the Office of Fair Trading, DFC's primary regulator there, issued new rules in 2012 for payday lenders restricting their use of continuous payment authority, a method for lenders to automatically collect loan balances from borrowers' checking accounts to withdraw money very quickly after the money is deposited. In spring 2013, the Office of Fair Trading identified a number of deficiencies in DFC's businesses, requiring changes. Then, in the fall of 2013, the Financial Conduct Authority, which replaced the Office of Fair Trading as DFC's primary U.K. regulator, identified new regulations that it would issue in 2014. One of those new regulations tightened affordability assessments and another restricted rollovers where borrowers defer loan repayments by paying additional interest and fees. Before this regulation, DFC had not limited the number of rollovers its businesses would extend to borrowers, but, after this regulation, DFC would be limited to two rollovers per loan. This was likely to hurt DFC's U.K. business because rollovers allowed payday lenders to charge additional, higher rates of interest and fees and to keep borrowers paying those rates for extended periods of time. Indeed, as a member of DFC's management team before the merger put it, "at one point in time you [could] roll a customer over forever and never have them pay back the loan but just monthly fees."[30] Thus, a rollover is essentially an extension of loan terms such that the borrower pays extra fees and interest and in exchange doesn't have to pay back the loan as quickly as initially required.[31] Rollovers are lucrative. When the U.S. Consumer Financial Protection Bureau examined them, it found that "most payday loans are made to borrowers who renew enough times that they end up paying more in fees than the original loan amount."[32]

         Finally, there would be a new cap put in place limiting borrowers' total cost of credit. In February 2014, the Office of Fair Trading warned DFC that it might not be able to meet the Financial Conduct Authority regulations and so, in March and April of that year, DFC had to take additional steps to make sure it could comply. The new U.K. regulations were likely to have a negative effect on DFC's profitability: "As we [DFC's management and board] began to better understand the impact of some of the changes we'd have to make in the U.K., including limiting rollovers, limiting [continuous payment authority], and all the rest, we recognized that that was going to have a negative impact on [DFC's] earnings . . . ."[33]

         B. The Sale Process

         Facing headwinds at least as prevalent as the tailwinds that had propelled its rapid expansion, [34] DFC engaged Houlihan Lokey Capital Inc., in the spring of 2012, to look into selling the company. Houlihan contacted six private equity sponsors and eventually had discussions with J.C. Flowers & Co. LLC and another sponsor, as well as an interested third party that Houlihan had not contacted. These three potential buyers conducted due diligence, but in August one of the three lost interest, and, in October, J.C. Flowers and the other potential buyer also lost interest. Over the next year, Houlihan reached out to thirty-five more financial sponsors and three strategic buyers.

         In autumn 2013, DFC attempted to refinance roughly $600 million in Senior Notes. But, the offering was terminated because of insufficient investor interest.[35]If DFC had wanted to go ahead with the refinancing, it would have needed to increase the bonds' coupon rate.[36] Analysts pointed to the S&P credit rating agency's downgrade of DFC from B to B after the refinancing was announced and "market uncertainty around payday lending" as two factors that contributed to the termination.[37] To be clearer about what this means, despite the lucrative fees that investment bankers make from refinancing a large tranche of public company debt and syndicating a new issue, Wall Street could not do that for DFC unless DFC was going to compensate new debtholders with a higher interest rate reflecting DFC's uncertain financial condition.

         In September 2013, DFC renewed discussions with J.C. Flowers and began discussions with Crestview Partners about a joint transaction. In October, Lone Star expressed interest in DFC. In November, DFC gave the three interested parties financial projections prepared by DFC's management that estimated fiscal year 2014 adjusted EBITDA to be $219.3 million.[38] On December 12, DFC learned that Crestview was no longer interested in pursuing a transaction. On the same day, Lone Star made a non-binding indication of interest in acquiring DFC for $12.16 per share. On December 17, J.C. Flowers made a non-binding indication of interest at $13.50 per share.

         On February 14, 2014, DFC's board approved revised management projections, which were shared with J.C. Flowers and Lone Star. These projections lowered DFC's projected fiscal year 2014 adjusted EBITDA to $182.5 million, a 16.8% decrease from the November projections.[39] On February 28, Lone Star offered to buy DFC for $11.00 per share and requested a 45-day exclusivity period. Lone Star's offer was lower than its previous indication of interest because of U.K. regulatory changes, the threat of increased U.S. regulatory scrutiny, downward revisions in the company projections, reduced availability of acquisition financing, stock price volatility, and weak value in the Canadian dollar.[40] On March 3, J.C. Flowers informed DFC that it was no longer interested in pursuing a transaction because "it could not get comfortable with the Company's regulatory exposure in the U.K."[41] On March 11, DFC entered into an exclusivity agreement with Lone Star.

         On March 26, DFC provided Lone Star with management's revised preliminary fiscal year 2014 adjusted EBITDA forecast, which had dropped by roughly $24 million since February. The next day, Lone Star offered to buy DFC for $9.50 per share. Lone Star explained this price reduction as a result of "further downward revisions in company projections, another reduction in available acquisition financing, continued regulatory changes in the U.K., and a class action suit against the company that was disclosed in an 8-K filed on March 26, 2014."[42]Lone Star gave DFC twenty-four hours to accept the offer, but later extended that deadline to April 1.

         DFC approved another set of projections at the end of March 2014 (the "March Projections") that were shared with Lone Star. These Projections included a fiscal year 2014 adjusted EBITDA forecast of $153.1 million, a 16.1% decrease from the February projections.[43] But, they remained optimistic, especially in the later years, implying 17.6% compound annual growth in operating profit over the projection period, meaningfully above DFC's historical 11.0% compound annual growth from 2008 to 2013 as a comparison of these two charts illustrates.[44]

         Key Metrics From DFC's Historical Performance ($, in millions)[45]







Total Revenue





$1, 061.7

$1, 122.3

YOY Growth







Operating Profit







YOY Growth







         Key Metrics From the March Projections ($, in millions)[46]






Total Revenue

$1, 016.4

$1, 082.1

$1, 188.4

$1, 333.4

$1, 488.8

YOY Growth






Operating Profit






YOY Growth






         On April 1, DFC's board approved the merger at $9.50 per share. The next day, DFC announced the merger and also cut its earnings outlook, reducing 2014 fiscal year adjusted EBITDA projections from $170-200 million to $151-156 million. Within one week of the merger being announced, S&P placed DFC's long-term "B" rated debt on "CreditWatch with negative implications."[47] The merger closed June 13, 2014. As it turned out, DFC missed its fiscal year 2014 targets, i.e., for the fiscal year ending June 30, 2014, established in the March Projections made less than three months before, achieving only $138.7 million in EBITDA compared to the Projections' predicted $153 million.[48] Given the sizeable gap between DFC's projected performance and the poor reality it achieved at the end of June, it seems likely as of the merger that it was known that DFC had already missed the March Projections.

         C. The Appraisal Trial

         To understand the issues on appeal, it is useful to summarize the conflicting positions of the parties that the Court of Chancery had to address in its post-trial decision.

         i. The Petitioners' Contentions

         The petitioners pressed their case with only a professional valuation expert; they did not enlist an industry expert and indeed do not seem to have provided other evidence making the case that either DFC or its industry were poised for impressive growth. The petitioners' valuation expert determined DFC's value only relying on a discounted cash flow model and used that to come to a fair value of DFC at $17.90 per share, 88% above the $9.50 per share deal price. In other words, the petitioners argue that all of the financial and strategic buyers missed the chance to top Lone Star at, say $10 per share, and still reap a huge upside of $7.90 per share in value.

         He also calculated DFC's fair value based on a comparable companies analysis using seven[49] of the peer companies that he used to calculate DFC's beta. He then calculated EBITDA multiples using the 75th percentile of the peer group, even though DFC ranked below the 50th percentile in a majority of the key metrics.[50]That approach yielded equity values for DFC ranging from $11.38 per share to $26.95 per share.[51] Had he used the 50th percentile, i.e., the median, from his own comparables sample, his calculations would have yielded equity values ranging from around $3.00 per share to around $13.00, putting the majority of his observations below the deal price.[52]

         ii. DFC's Contentions

         In contrast, DFC's expert used both a discounted cash flow model, which valued DFC at $7.81, and a comparable companies analysis, which valued DFC at $8.07 per share. He weighted each method equally and so came to a fair value of $7.94, although he also argued that the $9.50 per share deal price was a reliable indication of fair value. For the comparable companies analysis, DFC's expert used six companies that constituted a subset of the seven used by the petitioners' expert's comparable companies analysis and in calculating the beta for the petitioners' discounted cash flow model. These six companies were also regularly used by analysts, others analyzing DFC, and DFC itself as comparable for DFC.[53] Like the petitioners' expert, DFC's expert used EBITDA multiples, but, unlike the petitioners' expert, DFC's expert accepted the median values from the multiples when calculating DFC's fair value.

         DFC's expert also performed a transaction multiples-based valuation using merged and acquired companies, which yielded a fair value of $7.69 per share. But, he did not give this method any weight in his overall fair value calculation because "it is difficult to obtain accurate information regarding expected synergies in the price paid for a particular business or the inclusion of a non-compete agreement, employment contract, promises, terms, or other aspects to the transaction that would affect the actual price paid for the business."[54]

         iii. The Court of Chancery's Fair Value Analysis

         The Court of Chancery noted the "sharp divide" between the experts' estimates of fair value driven in large part by disagreements about the "proper inputs and methods" for the discounted cash flow model.[55] So, the Court of Chancery spent much of its post-trial decision resolving the disputes over the discounted cash flow model. The relatively undisputed inputs were the debt-to-capital ratio, cost of debt, risk-free rate, and equity risk premium. The Court of Chancery then examined the disputed components of the weighted average cost of capital ("WACC"), especially the calculation of DFC's beta, selected the inputs that it deemed most reasonable, and concluded that DFC's WACC was 10.72%, falling near the midpoint of the experts' competing 9.5% and 12.4% calculations.

         Then, the Court of Chancery adopted management's March Projections of working capital, despite DFC's expert's approach of independently calculating working capital as a percentage of total revenue. The Court of Chancery did so because there was "no compelling reason" to reject these Projections' estimates of working capital while also relying on the projections for other elements of the discounted cash flow model.[56] Similarly, the Court of Chancery adopted the March Projections' estimates of DFC's cash balances.

         The experts also disagreed about how to value DFC's cash flows beyond the five-year management projection period. DFC's expert used a two-stage model where the first stage was the March Projections and the second stage was a terminal value calculated using the convergence formula. The petitioners' expert used a three-stage model where the first stage was the March Projections; the second stage was a four-year period following those Projections where the growth rate decreased linearly from the 11.7% growth rate for 2018, to a perpetuity growth rate of 2.7%; and the third stage was a terminal value calculated using the Gordon Growth Model with a 2.7% perpetuity growth rate. The petitioners' expert also created an alternate two-stage model using a 3.1% perpetuity growth rate. The Court of Chancery recognized the uncertainty surrounding the Projections and expressed skepticism of the linear decrease approach because of that uncertainty, and, therefore, adopted a two-stage model.[57]

         Then, the Court of Chancery considered the appropriate perpetuity growth rate. First, the Court of Chancery noted that it "often selects a perpetuity growth rate based on a reasonable premium to inflation" and "some financial economists view the risk-free rate as the ceiling for a stable, long-term growth rate."[58] So, that created a band between the 2.31% median inflation rate compiled by the petitioners' expert and the 3.14% risk-free rate both experts agreed on. The court selected 3.1% because it was at a reasonable premium to inflation but still a tick below the ceiling, risk-free rate. Finally, the Court of Chancery made some adjustments to DFC's free cash flow to take into account stock-based compensation, which are not at issue on appeal. Using those determinations, the Court of Chancery constructed its own discounted cash flow model indicating DFC's fair value was $13.07 per share.

         The Court of Chancery next assessed the comparable companies analysis DFC's expert used in his estimate of fair value. The Court of Chancery determined that an approach using the six peer companies both experts agreed on and the median value of each fiscal year's multiple was appropriate for a comparable companies analysis and otherwise adopted DFC's expert's analysis and $8.07 per share fair value estimate as a component of the fair value calculation overall.

         Next, the Court of Chancery considered the relevance of the deal price, $9.50 per share. The Court of Chancery recognized that "[t]he merger price in an arm's- length transaction that was subjected to a robust market check is a strong indication of fair value"[59] and, here:

DFC was purchased by a third-party buyer in an arm's-length sale. The sale process leading to the Transaction lasted approximately two years and involved DFC's advisor reaching out to dozens of financial sponsors as well as several strategic buyers. The deal did not involve the potential conflicts of interest inherent in a management buyout or negotiations to retain existing management-indeed, Lone Star took the opposite approach, replacing most key executives.[60]

         But, the Court of Chancery also observed that "the market price is informative of fair value only when it is the product of not only a fair sale process, but also of a well-functioning market."[61] So, the merger provided "a reasonable level of confidence that the deal price can fairly be used as one measure of DFC's value."[62]

         Finally, the Court of Chancery considered how much weight to give the three fair value inputs it selected. It reiterated that the three inputs meriting consideration were the discounted cash flow analysis as modified by its findings, DFC's comparable companies analysis, and the deal price. The Court of Chancery observed:

Each of these valuation methods suffers from different limitations that arise out of the same source: the tumultuous environment in the time period leading up to DFC's sale. As described above, at the time of its sale, DFC was navigating turbulent regulatory waters that imposed considerable uncertainty on the company's future profitability, and even its viability. Some of its competitors faced similar challenges. The potential outcome could have been dire, leaving DFC unable to operate its fundamental businesses, or could have been very positive, leaving DFC's competitors crippled and allowing DFC to gain market dominance. Importantly, DFC was unable to chart its own course; its fate rested largely in the hands of the multiple regulatory bodies that governed it. Even by the time the transaction closed in June 2014, DFC's regulatory circumstances were still fluid.[63]

         And, that "uncertainty impacted DFC's financial projections."[64] "Consequently, although a discounted cash flow analysis may deserve significant emphasis or sole reliance in cases where the Court has more confidence in the reliability of the underlying projections than in the deal price, I do not believe it merits a disproportionate weighting in this case."[65] But:

This same uncertainty inherent in the projections underlying the discounted cash flow analysis was present in the sale process. Although the sale process extended over a significant period of time and appeared to be robust, DFC's performance also appeared to be in a trough, with future performance depending on the outcome of regulatory decision-making that was largely out of the company's control. Lone Star was aware of DFC's trough performance and uncertain outlook-these attributes were at the core of Lone Star's investment thesis to obtain assets with potential upside at a favorable price.[66]

         Furthermore, "Lone Star's status as a financial sponsor, moreover, focused its attention on achieving a certain internal rate of return and on reaching a deal within its financing constraints, rather than on DFC's fair value."[67] Finally:

The uncertainty surrounding DFC's financial projections also affects the reliability of the multiples-based valuation, because this valuation relies on two years of management's projected EBITDA. Nonetheless, the multiples-based valuation may be less prone to long-term uncertainty compared to the discounted cash flow model, because it relies only on projections through 2015 rather than 2018, and because one third of the valuation relies on historical EBITDA data.[68]

         Having expressed doubts about each fair value input, the Court of Chancery concluded that "each of them still provides meaningful insight into DFC's value, and all three of them fall within a reasonable range. In light of the uncertainties and other considerations described above, I conclude that the proper valuation of DFC is to weight each of these three metrics equally."[69] Thus, the Court of Chancery determined that the fair value of DFC was: $9.50 (deal price) $8.07 (comparable companies analysis) $13.07 discounted cash flow analysis ÷ 3 = $10.21 per share.

         D. Reargument

         After reading the post-trial decision, DFC moved for reargument because the Court of Chancery had neglected to use the working capital numbers the court had adopted in its opinion in the discounted cash flow model it used to calculate DFC's fair value. With that error corrected, and addressing certain foreign exchange adjustments, the Court of Chancery's discounted cash flow model would yield $7.70 per share[70]-a value similar to its comparable companies analysis-and, using the previous weighting the Court of Chancery adopted, a fair value of $8.42 per share.[71]

         The petitioners did not accept this simple math correction with equanimity. Instead, they raised an arguably new contention in their own response and motion for reargument, which was that the level of working capital in the March Projections implied that DFC would enjoy another period of above-market growth in the perpetuity period and therefore that the Chancellor's selected permanent growth rate of 3.1% was too low.[72]

         The Court of Chancery considered the motions and issued an order granting the motions in part and modifying the discounted cash flow model. In that order, the Court of Chancery acknowledged that it had mistakenly included working capital estimates based on modified working capital estimates made by DFC's expert when the Court of Chancery had intended to just use the unmodified March Projections.

         The Court of Chancery then considered the petitioners' motion for reargument. In essence, the petitioners said that there needed to be a particular relationship between the level of projected working capital in the discounted cash flow model and the perpetuity growth rate. In that affidavit, the petitioners' expert argued that the permanent growth rate is a function of two elements, DFC's return on capital and DFC's reinvestment rate.[73] When someone preparing a discounted cash flow analysis selects a permanent growth rate, so the petitioners' expert's argument went, the underlying projections for those two elements have to be sufficient to sustain that growth rate.[74] As the Court of Chancery put it, "DFC's projected revenue and working capital needs have a codependent relationship, i.e., a high-level requirement for working capital, as reflected in [the management projections] necessarily corresponds with a higher projected growth rate."[75] The Court of Chancery then observed that it had selected a 3.1% perpetuity growth rate so as not to exceed the risk-free rate, but, it now realized that the risk-free rate was only the upper bound for perpetuity growth rates when companies have reached a stable stage. And, the March Projections "assume DFC will achieve fast-paced growth throughout the projection period and therefore imply a need for a perpetuity growth rate higher than the risk-free rate."[76] So, the Court of Chancery determined that it needed to adopt a perpetuity growth rate consistent with the "relatively high level of working capital built into those projections."[77] Based on the contentions in a supplemental affidavit from the petitioners' expert, [78] the Court of Chancery concluded that the March Projections would sustain an average growth rate of 3.9% and a median growth rate of 4.2%.

         The Court of Chancery adopted the petitioners' expert's suggestion that the correct sustainable growth rate is the midpoint between the average and median sustainable growth rates, i.e., the functions of reinvestment and return on invested capital, underlying the March Projections, 4.0%. This growth rate assumed that, despite the acknowledged risk of insolvency and shrinkage, DFC would, not only keep pace with the most dynamic mature industries in perpetuity, but exceed their growth by a healthy margin, given that 4.0% was fully 27% higher than the risk-free rate of 3.14%. Taking both revisions into account, the Court of Chancery adjusted its discounted cash flow model to $13.33 per share, 2% higher than its original DCF and 40% higher than the deal price, which, when given its one-third weight, resulted in a fair value of DFC at $10.30 per share, $0.09 higher than the post-trial opinion's original award.


         On appeal, the case has reflected an emphasis on one issue that was not presented fairly to the Court of Chancery. Before us, DFC's central argument is that a judicial presumption in favor of the deal price should be established in appraisal cases where the transaction was the product of certain market conditions. DFC argues that those conditions pertain to this case and the Court of Chancery erred by not giving presumptive and exclusive weight to the deal price.

         DFC also raises more case-specific issues on appeal. The first is a more constrained take on its deal price presumption argument, which involves the idea that based on the fact findings the Court of Chancery made regarding the nature of the market search, lack of conflict of interest, and other relevant economic factors bearing on the deal price, the Court of Chancery abused its discretion by only giving one-third weight to the deal price. More particularly, DFC argues that the two reasons that the Court of Chancery gave for not giving full weight to the deal price- the fact that DFC faced increasing regulatory constraints that could not be priced by equity market participants and the fact that the prevailing buyer was a private equity rather than strategic buyer-were not rationally supported by the record.

         DFC's next case-specific argument is that the Court of Chancery erred by markedly increasing the perpetuity growth rate it used in its discounted cash flow model after recognizing on reargument that it had used the wrong working capital figures in its original model. DFC contends that there was no record evidence justifying this sizable increase in the perpetuity growth rate.

         For their part, on cross-appeal, the petitioners argue that the Court of Chancery abused its discretion by according weight to a comparable companies analysis, which the petitioners contend is not a reliable indicator of fair value, and that the court should have given primary, if not exclusive, weight to its discounted cash flow model.

         Finally, DFC's overall argument raises another implied argument, which is that the Court of Chancery's decision to afford equal weight to the deal price, its discounted cash flow model, and its comparable companies analysis was arbitrary and not based on any reasoned explanation of why that weighting was appropriate.

         We deal with these issues in the order just outlined. When reviewing a decision in a statutory appraisal, we use an abuse of discretion standard and grant significant deference to the factual findings of the trial court.[79] This Court "will accept [the Court of Chancery's] findings if supported by the record . . . ."[80]


         The first issue we confront is one that did not feature in the same way before the Chancellor. On appeal, but not below, DFC argued for the creation of a judicial presumption that the deal price is the best evidence of fair value when the transaction giving rise to appraisal results from an open market check and when certain other conditions pertain. This focus has generated interest from distinguished law professors on both sides of the question, who have weighed in with dueling amicus briefs.

         But, before the Court of Chancery, DFC merely argued that the "arms-length, competitive, and fair sales process" entitled the deal price to receive "significant weight."[81] DFC made a similar argument in its post-trial brief for the Court of Chancery.[82] So, it is difficult to see how the argument that the deal price under these circumstances is entitled to a presumption of fair value was properly presented to the Court of Chancery and therefore can be argued to us now.[83] We place great value on the assessment of issues by our trial courts, and it is not only unwise, but unfair and inefficient, to litigants and the development of the law itself, to allow parties to pop up new arguments on appeal they did not fully present below. For that reason alone, we are reluctant to even consider this argument. Nonetheless, because of its relationship to more case-specific issues, we explain why, even if this were fairly presented, DFC has not persuaded us to adopt its position.



         Another key problem for DFC in presenting this argument now is that a similar argument was presented and rejected recently by this Court in Golden Telecom.[84] In Golden Telecom, the respondent company argued that this Court "should adopt a standard requiring conclusive or, in the alternative, presumptive deference to the merger price in an appraisal proceeding."[85] In rejecting that argument, this Court focused on the key language in 8 Del. C. § 262, stating that dissenting shareholders "shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described" elsewhere in the section.[86] The statute elaborates:

Through such proceeding the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors.[87]

         In particular, this Court focused on § 262's requirement that the Court of Chancery consider "all relevant factors" and that "fair value" entails "the value to the stockholder of the firm as a going concern."[88] Thus, this Court concluded:

Section 262(h) unambiguously calls upon the Court of Chancery to perform an independent evaluation of "fair value" at the time of a transaction. It vests the Chancellor and Vice Chancellors with significant discretion to consider "all relevant factors" and determine the going concern value of the underlying company. Requiring the Court of Chancery to defer-conclusively or presumptively-to the merger price, even in the face of a pristine, unchallenged transactional process, would contravene the unambiguous language of the statute and the reasoned holdings of our precedent. It would inappropriately shift the responsibility to determine "fair value" from the court to the private parties. Also, while it is difficult for the Chancellor and Vice Chancellors to assess wildly divergent expert opinions regarding value, inflexible rules governing appraisal provide little additional benefit in determining "fair value" because of the already high costs of appraisal actions.[89]

         DFC would have us depart from the reasoning of Golden Telecom. But, we are not convinced we should do so. As Golden Telecom found, § 262(h) gives broad discretion to the Court of Chancery to determine the fair value of the company's shares, considering "all relevant factors." That statutory language was a key feature in Weinberger v. UOP, Inc.[90] Before Weinberger, the Court of Chancery had historically employed the so-called Delaware Block Method to determine the value of shares at issue in an appraisal.[91] Although "[t]he exact origin of the Delaware Block Method is a source of confusion, " there is no confusion that it was a judicial gloss on the appraisal statute, rather than something inevitably stemming from the text.[92] This Court has described the Delaware Block Method this way:

The Delaware Block Method actually is a combination of three generally accepted methods for valuation: the asset approach, the market approach, and the earnings approach. Under the Delaware Block Method, the asset, market and earnings approach are each used separately to calculate a value for the entire corporation. A percentage weight is then assigned those three valuations on the basis of each approach's significance to the nature of the subject corporation's business. The appraised value of the corporation is then determined by the weighted average of the three valuations.[93]

         One of the three approaches comprising the Delaware Block Method, the market value approach, focused on the market prices of securities when there was an active market and where no special circumstances existed to render the price unreliable.[94] This approach is encapsulated by the observation that "[w]here there is a free and active market, averaging of market prices on the last trading day before the announcement of a merger will reflect the fair market price."[95]

         By the time of Weinberger in 1983, important developments in corporate finance and economics had occurred, such as the articulation of the capital asset pricing model and the efficient market hypothesis, and concepts related to those, such as the discounted cash flow method of valuation.[96] Weinberger eliminated the Delaware Block Method as the exclusive valuation methodology for appraisal. Weinberger ascribed this result to two amendments to the appraisal statute: i) the 1976 amendment that added the concept of "fair value" to the statute for the first time;[97] and ii) the 1981 amendment that mandated the Court of Chancery "take into account all relevant factors."[98] Weinberger found that these statutory amendments demonstrated "a legislative intent to fully compensate shareholders for whatever their loss may be, subject only to the narrow limitation that one cannot take speculative effects of the merger into account."[99] Weinberger therefore held that the Delaware Block Method would no longer be the exclusive valuation method for appraisal, and instead adopted "a more liberal, less rigid and stylized, approach to the valuation process, "[100] which included "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court."[101]


         Since Weinberger, and Golden Telecom itself, the key language in § 262 that those cases focused upon has remained unaltered. But, DFC would have us put a judicial gloss on the broad "all relevant factors" language, by determining that a particular factor is more relevant than others when certain conditions pertain. We do not, however, view the statutory language as inviting us to do so. Nor are we persuaded it is advisable to do so.

         As we shall discuss, we have little quibble with the economic argument that the price of a merger that results from a robust market check, against the back drop of a rich information base and a welcoming environment for potential buyers, is probative of the company's fair value. But, not only do we see no license in the statute for creating a presumption that the resulting price in such a situation is the "exclusive, " "best, " or "primary" evidence of fair value, we do not share DFC's confidence in our ability to craft, on a general basis, the precise pre-conditions that would be necessary to invoke a presumption of that kind. We also see little need to do so, given the proven record of our Court of Chancery in exercising its discretion to give the deal price predominant, and indeed exclusive weight, when it determines, based on the precise facts before it that led to the transaction, that the deal price is the most reliable evidence of fair value.[102] For these reasons, we adhere to our prior ruling in Golden Telecom. If the General Assembly determines that a presumption of the kind sought is in order, it has proven its attentiveness to our appraisal statute and is free to create one itself.

         As our preceding discussion presages, our refusal to craft a statutory presumption in favor of the deal price when certain conditions pertain does not in any way signal our ignorance to the economic reality that the sale value resulting from a robust market check will often be the most reliable evidence of fair value, and that second-guessing the value arrived upon by the collective views of many sophisticated parties with a real stake in the matter is hazardous. In fact, the Chancellor himself, and his colleagues on the Court of Chancery, understand this, as both the decision in this case and other decisions of the Court make clear.[103]


         Having rejected DFC's argument that the Court of Chancery was required to give presumptive weight to the deal price, we thus now turn to the more record-specific argument about the role of the deal price in this case. DFC argues that in any assessment of the economic value of something-be it a company, a product, or a service-economics teaches that the most reliable evidence of value is that produced by a competitive market, so long as interested buyers are given a fair opportunity to price and bid on the something in question. This argument is sensible and in accordance with economic literature.[104] It also accords with the generally accepted view that it is unlikely that a particular party having the same information as other market participants will have a judgment about an asset's value that is likely to be more reliable than the collective judgment of value embodied in a market price.[105] This, of course, is not to say that the market price is always right, but that one should have little confidence she can be the special one able to outwit the larger universe of equally avid capitalists with an incentive to reap rewards by buying the asset if it is too cheaply priced.


         Of course, the definition of fair value used in appraisal cases is a jurisprudential concept that has certain nuances that neither an economist nor market participant would usually consider when either valuing a minority block of shares or a public company as a whole. But, those features do nothing to undermine the ability of the Court of Chancery to determine, in its discretion, that the deal price is the most reliable evidence of fair value in a certain case, and that's especially so in cases like this one where things like synergy gains or minority stockholder discounts are not contested. In fact, if one were to look at the face of our appraisal statute, a case like the one before us today might seem simple. Precisely because DFC's shares were widely traded on a public market based upon a rich information base, the "fair value of the stockholder's shares of stock"[106] held by minority stockholders like the petitioners, would, to an economist, likely be best reflected by the prices at which their shares were trading as of the merger.

         But, in Cavalier Oil Corporation v. Harnett, [107] and other cases, [108] this Court eschewed that reading of the statute and adopted a definition of fair value that is a jurisprudential, rather than purely economic, construct. That definition requires according the petitioner in an appraisal her pro rata share of the appraised company's value as a "going concern."[109] By requiring that petitioners be afforded pro rata value, the Court required that any minority discount be ignored in coming to a fair value determination.[110] At the same time, by valuing the company on its value as a "going concern, " the Court seemed to require the excision of any value that might be attributable to expected synergies by a buyer, including that share of synergy gains left with the seller as a part of compensating it for yielding control of the company.[111] As the Court of Chancery observed in Union Illinois, [112] Cavalier Oil and its progeny seem to require the court to exclude "any value that the selling company's shareholders would receive because a buyer intends to operate the subject company, not as a stand-alone going concern, but as a part of a larger enterprise, from which synergistic gains can be extracted."[113] This mandate seemed inspired by a desire to honor the statute's command that the court "determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger, "[114] although that statutory language could be interpreted to address the narrower, if still important, policy concern that the specific buyer not end up losing its upside for purchase by having to pay out the expected gains from its own business plans for the company it bought to the petitioners. But, the broader excision of synergy gains could have also been thought of as a balance to the Court's decision to afford pro rata value to minority stockholders.

         Whatever the exact policy reason, the pro rata share of going concern value formula has been used in our state's appraisal jurisprudence for a good time now and no party to this appeal takes issue with it. But, when that formula is distilled down, the basic economic concept of fair market value remains central to our statutory concept of fair value. Basically, Cavalier Oil focuses the appraisal proceeding on the fair market value of the company being appraised, putting aside any issues relevant to the value of petitioners' share blocks and trying to exclude any portion of value that might be attributed to a synergy premium a buyer might pay to gain control. That is, in sum, our case law has been read to value the company on its stand-alone value.


         In economics, the value of something is what it will fetch in the market.[115]That is true of corporations, just as it is true of gold. Thus, an economist would find that the fair market value of a company is what it would sell for when there is a willing buyer and willing seller without any compulsion to buy. And, outside of the appraisal context, this Court has often embraced these concepts of value: "[I]n many circumstances a property interest is best valued by the amount a buyer will pay for it. . . . a well-informed, liquid trading market will provide a measure of fair value superior to any estimate the court could impose."[116]

         Because businesses like corporations are assumed to be valuable to their equity owners because of the profits they generate, [117] economics and corporate finance instruct rational participants in any sale process that they should base their bids on their assessments of the corporation's ability to generate further free cash flows, and to discount that to present value in formulating their offers.[118] Likewise, the same principles instruct stockholders who buy shares of public companies to consider the free cash flows of those companies in the form of dividends and their ability to increase them over time.[119]

         Market prices are typically viewed superior to other valuation techniques because, unlike, e.g., a single person's discounted cash flow model, the market price should distill the collective judgment of the many based on all the publicly available information about a given company and the value of its shares.[120] Indeed, the relationship between market valuation and fundamental valuation has been strong historically.[121] As one textbook puts it, "[i]n an efficient market you can trust prices, for they impound all available information about the value of each security."[122]More pithily: "For many purposes no formal theory of value is needed. We can take the market's word for it."[123] But, a single person's own estimates of the cash flows are just that, a good faith estimate by a single, reasonably informed person to predict the future. Thus, a singular discounted cash flow model is often most helpful when there isn't an observable market price.[124]

         For these reasons, corporate finance theory reflects a belief that if an asset- such as the value of a company as reflected in the trading value of its stock-can be subject to close examination and bidding by many humans with an incentive to estimate its future cash flows value, the resulting collective judgment as to value is likely to be highly informative and that, all estimators having equal access to information, the likelihood of outguessing the market over time and building a portfolio of stocks beating it is slight.[125]

         Other realities emphasize why real world transaction prices can be the most probative evidence of fair value even through appraisal's particular lens. As the preceding discussion emphasizes, fair value is just that, "fair." It does not mean the highest possible price that a company might have sold for had Warren Buffett negotiated for it on his best day and the Lenape who sold Manhattan on their worst. Rather, as the Court of Chancery has put it in another context:

A fair price does not mean the highest price financeable or the highest price that fiduciary could afford to pay. At least in the non-self-dealing context, it means a price that is one that a reasonable seller, under all of the circumstances, would regard as within a range of fair value; one that such a seller could reasonably accept.[126]

         Capitalism is rough and ready, and the purpose of an appraisal is not to make sure that the petitioners get the highest conceivable value that might have been procured had every domino fallen out of the company's way; rather, it is to make sure that they receive fair compensation for their shares in the sense that it reflects what they deserve to receive based on what would fairly be given to them in an arm's-length transaction.

         The real world evidence regarding public company M&A transactions underscores this. Various factors prevalent in our economy, which include Delaware's own legal doctrines such as sell-side voting rights, Revlon, [127] Unocal, [128]the entire fairness doctrine, and the pro rata rule in appraisals, have caused the sell-side gains for American public stockholders in M&A transactions to be robust.[129]Part of why the synergy excision issue can be important is that it is widely assumed that the sales price in many M&A deals includes a portion of the buyer's expected synergy gains, which is part of the premium the winning buyer must pay to prevail and obtain control.[130] For that reason, there is a rich literature noting that the buyers in public company acquisitions are more likely to come out a loser than the sellers, as competitive pressures often have resulted in buyers paying prices that are not justified by their ability to generate a positive return on the high costs of acquisition and of integration.[131] As one authority summarizes:

According to McKinsey research on 1, 415 acquisitions from 1997 through 2009, the combined value of the acquirer and target increased by about 4 percent on average. However, the evidence is also overwhelming that, on average, acquisitions do not create much if any value for the acquiring company's shareholders. Empirical studies, examining the reaction of capital markets to M&A announcements find that the value-weighted average deal lowers the acquirer's stock price between 1 and 3 percent. Stock returns following the acquisition are no better. Mark Mitchell and Erik Stafford have found that acquirers underperform comparable companies on shareholder returns by 5 percent during the three years following the acquisitions.[132]

         Similarly, another study summarized its findings by simply stating: "Target firm shareholders are clearly winners in ...

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