With the rise of appraisal arbitrage, an increasing number of appraisal petitions and an increase in the size of appraisal classes, corporate practitioners have closely followed recent appraisal decisions in the Delaware Court of Chancery. In cases involving third-party arm’s-length transactions and robust bidding, several more recent decisions established a level of predictability to the valuation analysis, looking to the negotiated merger price as the best evidence of the fair value that appraisal claimants are entitled to receive. In those cases the court rejected expert valuations of higher or lower amounts based on discounted cash flow and other expert financial analyses. The Court of Chancery’s recent decision in In re Appraisal of DFC Global, C.A. No. 10107-CB (July 8), will likely create new uncertainty about the reliability of the market to establish fair value in an appraisal.
In DFC Global the court found the transaction price was not the best evidence of fair value notwithstanding a robust two-year sale process. It ruled that the “merger price is reliable only when the market conditions leading to the transaction are conducive to achieving a fair price.” Finding that the transaction was negotiated during a period of significant company turmoil and regulatory uncertainty, the court questioned the reliability of the transaction price and management’s financial projections. Giving equal weight to three “imperfect” techniques—the court’s own modification of the competing DCF analyses ($13.07/share), a comparable companies multiple analysis ($8.07/share), and the merger price ($9.50/share)—the court concluded that Global’s fair value for appraisal purposes was $10.21/share.
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