Judge Says PE Firm Underpaid for DFC Global

The ruling is the second victory in as many months for shareholders who sued for an appraisal of their holdings in a takeover target.
Matthew HellerJuly 11, 2016

Shareholders have notched another victory in an appraisal lawsuit, with a Delaware judge ruling that private-equity firm Lone Star Funds acquired payday lender DFC Global too cheaply.

A majority of DFC shareholders approved the $9.50-a-share price of the merger in 2014 but Delaware Chancellor Andre Bouchard found that four investors who challenged the buyout were entitled to $10.21 per share.

Although the sale process “appeared to be robust,” the deal “was negotiated and consummated during a period of significant company turmoil and regulatory uncertainty, calling into question the reliability of the transaction price as well as management’s financial projections,” he said in his opinion.

The ruling would only benefit the investors who sought appraisal of a total of 4.6 million DFC shares, potentially providing them, Reuters reports, with about $3.3 million more than the deal price

In an appraisal suit, shareholders can ask a judge to determine the fair value of their stock. The biggest investor in the DFC case, Muirfield Value Partners, specializes in bringing such cases.

In May, another Delaware Court of Chancery judge ruled in a similar suit that Dell Corp. underpriced by 22% its $24.9 billion sale in 2013 to company founder Michael Dell and Silver Lake Partners. The DFC investors asked that their shares be valued at $17.90 — 53% above the sale price — but Bouchard awarded only a 7.5% increase.

The judge noted that at the time of the deal, DFC “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.” In addition, he said, Lone Star “focused its attention on achieving a certain internal rate of return and on reaching a deal within its financial constraints, rather than on DFC’s fair value.”

As Reuters reports, appraisal “has become a popular way for specialized investment funds to squeeze added cash out of merger deals.” Forty-three appraisal suits were brought in the Delaware court in 2015, representing a record $2.3 trillion in face value, according to The Wall Street Journal.

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