Delaware court reverses closely watched DFC Global appraisal ruling
By Tom Hals
WILMINGTON, Del. (Reuters) - The Delaware Supreme Court on Tuesday reversed a lower court ruling that payday lender DFC Global Corp [DGC.UL] was sold too cheaply in 2014, but stopped short of declaring that the deal price should be a key test of fair value of a stock in a merger.
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, a 7 percent increase.
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 declined to comment and Stuart Grant, a lawyer for the hedge funds, did not 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.
Critics of Bouchard's ruling urged the Supreme Court to use the DFC case to require the lower court to apply the deal price when the sales process was properly run, which the Supreme Court declined to do.
Shareholder attorney Mark Lebovitch of Bernstein Litowitz Berger & Grossmann said a requirement to use the deal price would have been "intellectually indefensible." But he also noted Tuesday's opinion second-guesses Bouchard's ruling throughout.
"Shareholders should be concerned that the Supreme Court is constantly making it harder for the Court of Chancery to make any ruling in favor of shareholders, even in the most modest way."
The Supreme Court also criticized Bouchard's decision to downplay the deal price because the private equity fund premised what it could pay based on its own internal rate of return.
"To be candid, we do not understand the logic of this finding," said the opinion by Chief Justice Leo Strine.
Wall Street dealmakers have warned that Bouchard's view made it difficult for private equity buyers to protect their deals from appraisal-seeking hedge funds.
(Reporting by Tom Hals in Wilmington, Delaware; editing by Grant McCool and Jonathan Oatis)