In two recent decisions out of the Delaware Court of Chancery – In re: Appraisal of DFC Global Corp., C.A. No. 10107-CB ("DFC Global") and In re: Appraisal of Dell Inc., C.A. No. 9322-VCL ("Dell") – Chancellor Bouchard and Vice Chancellor Laster, respectively, held that the transaction price was not the most significant indicator of fair value of stock and instead valued the stock at a premium. Dell was published first on May 31, 2016, and DFC Global came soon thereafter on July 8, 2016. Dell has already received significant attention, and DFC Global may too, primarily because the Court in both decisions strayed from other recent Court of Chancery appraisal decisions by rejecting the transaction price as the most reliable measure of fair value. While these opinions could suggest a change in the Court’s appraisal jurisprudence and could have substantial far-reaching implications, Dell and DFC Global may also be limited to their unique facts.
In Dell, Vice Chancellor Laster held that the fair value of the common stock of Dell, Inc. ("Dell"), was $17.62 per share, nearly a 30 percent premium above the $13.75 merger price paid to Dell stockholders in October 2013. To understand Dell, it is helpful to know some factual background. Between 2010 and 2012, Dell spent nearly $14 billion acquiring 11 businesses in an attempt to transform its business model and decrease reliance on PC sales, which were declining because of the rise of new technological devices. In January 2011, Dell management internally valued Dell at $22.49 per share (by line of business) and $27.05 per share (by business unit); however, the market price was significantly lower at $14 per share. In August 2012, Mr. Dell informed the company that he wanted to pursue a management buyout ("MBO") of Dell. In response, Dell’s Board of Directors formed a special committee (the "Dell Committee") with exclusive powers over any proposed transaction. In September 2012, the Dell Committee’s advisors provided a preliminary valuation of Dell of $20 to $27 per share and explained that stock purchasers using a leveraged buyout ("LBO") model would pay approximately $14 per share. In February 2013, the Dell Committee agreed with Silver Lake to a transaction of $13.65 per share. A 45-day go-shop period followed, and Silver Lake raised its offer to $13.75 per share. On September 12, 2013, Dell’s unaffiliated shareholders voted in favor of the transaction. The deal closed on October 29, 2013, and certain Dell shareholders sought appraisal pursuant to Section 262 of the DGCL.
In resolving the appraisal proceeding, the Court reasoned that three primary factors undermined the final merger price as evidence of fair value. First, Vice Chancellor Laster explained that the use of an LBO pricing model was an unreliable method for determining fair value. The Court contrasted an LBO model with a discounted cash flow ("DCF") analysis, which solves for the present value of a company. Instead, an LBO model only solves for an internal rate of return or for the range of prices a financial sponsor could pay and still generate outside returns. Second, Vice Chancellor Laster concluded there was a significant valuation gap between the market’s perception and Dell’s operative reality. Describing this as an "anti-bubble," the Court explained that Dell’s investors focused on Dell’s short-term results despite the fact that Dell had recently made nearly $14 billion in investments as part of its transformation strategy. Although these investments meant sacrificing short-term results, there would be long-term benefits that were not considered in determining the fair value. Third, the Court found there was a lack of meaningful price competition during the pre-signing phase because the Dell Committee did not contact any strategic buyers and negotiated only with the MBO group. Vice Chancellor Laster reasoned that Dell lacked the powerful tool of being able to invoke the threat to Silver Lake of an alternative deal. Therefore, the Court concluded that because the pre-signing phase failed to generate a price that reflected fair value, the go-shop phase was impacted and failed to induce greater competition. Instead, the go-shop phase resulted in an increase in the merger consideration by only approximately 2 percent.
In DFC Global, Chancellor Bouchard held that the fair value of the stock of DFC Global Corporation ("DFC Global") was $10.21 a share, approximately a 7 percent premium above the $9.50 deal price paid to DFC stockholders in June 2014, when the company was sold to Lone Star Fund VIII (U.S.), LLP, a private equity buyer, following a two-year-long sale process. Chancellor Bouchard noted that the Court generally defers to a transaction price as fair value when the transaction was a result of an arm’s-length process; however, the Court explained that the transaction price is "reliable only when the market conditions leading to the transaction are conducive to achieving a fair price." Instead, the DFC Global transaction occurred at a time when DFC Global was facing significant competition in each of the 10 countries where it operated and was facing regulatory uncertainty in at least the United States and the United Kingdom; therefore, Chancellor Bouchard held that the transaction price and management’s projections were unreliable.
The stockholders’ expert conducted a DCF analysis and a multiples-based comparable company analysis, but relied solely on the DCF analysis in concluding that DFC Global’s stock was valued at $17.90 per share. In contrast, DFC Global’s experts used the same two methodologies, but weighed each equally and valued the stock at $7.94 per share. Notably, Chancellor Bouchard gave a thorough overview of three common valuation methodologies – DCF analysis, multiples-based comparable company analysis, and the final transaction price. The Court explained that each methodology is "imperfect" but the value of the DFC Global deal was best determined by weighing all three methodologies equally.
Dell and DFC Global reflect the need for companies to consider various methodologies, including a DCF analysis, when considering a fair transaction price. Moreover, these opinions are a reminder of the risks associated with appraisal proceedings. Even though Vice Chancellor Laster found that there was no breach of fiduciary duties in Dell and that the Dell Committee did "many praiseworthy things" during the Dell sale process, and Chancellor Bouchard determined that DFC Global’s sale process "extended over a significant period of time and appeared to be robust," the Court in each nevertheless concluded that the transaction price was not the most reliable indicator of fair value.