In this memorandum opinion, the Court of Chancery declined to enjoin Total System Services’ (“TSYS”) acquisition of NetSpend Holdings, Inc. (“NetSpend”) because, even though the Court concluded that the NetSpend board (the “Board”) likely did not conduct a reasonable value-maximizing sales process under Revlon, the balance of the equities weighed against the imposition of such relief because an injunction could risk the stockholders’ opportunity to receive a substantial premium over the market price for their shares.
In late August and early September 2012, NetSpend’s largest stockholder, JLL Partners Inc. (“JLL”), advised the Board that it was interested in selling all or a significant portion of its 31% stake in NetSpend. Fearing that the sale of JLL’s holdings on the open market would depress NetSpend’s stock price, the Board engaged with two private equity firms. Private Equity A and Private Equity B, who were interested in buying JLL’s bloc of stock, executed confidentiality agreements that contained standstill sections with “don’t-ask-don’t-waive” provisions, and these standstill agreements did not terminate upon the announcement of another transaction.
TSYS subsequently approached NetSpend and expressed an interest in acquiring NetSpend. NetSpend initially indicated that the company was not for sale; however, TSYS continued to express interest, and the Board authorized NetSpend’s management to meet with TSYS. In late November, Private Equity A indicated that it was interested in purchasing JLL’s stake in NetSpend for $12 per share. On December 3, 2012, TSYS expressed an interest in conducting an all-cash tender offer for 100% of NetSpend’s shares for $14.50 per share. Given the higher offer available from TSYS, JLL indicated that it was no longer interested in selling its shares to Private Equity A, and NetSpend terminated its discussions with the private equity firms. The standstill agreements remained in place.
The Board decided not to seek out other bidders, believing that exclusively negotiating with TSYS was the best strategy to maximize shareholder value. Over the next two months, NetSpend and TSYS negotiated and exchanged several counterproposals. NetSpend pushed TSYS for a go-shop provision in the merger agreement, but TSYS was unwilling to accept a proposal that included such a provision, and NetSpend ultimately agreed to a customary no-shop provision with a fiduciary out termination right and a 3.9% termination fee in exchange for a higher merger price of $16.00 per share.
The parties executed the merger agreement and related agreements on February 19, 2013 (the “Merger Agreement”), and announced the Merger Agreement the same day. NetSpend’s financial advisor, Bank of America, advised the Board and provided an opinion (the “Fairness Opinion”) stating that the transaction was fair based on several analyses, including a discounted cash flow (“DCF”) analysis, a comparable companies analysis, and a comparable transactions analysis. The DCF analysis suggested a valuation in the range of $19.22 to $25.52 per share. The Merger Agreement prevented NetSpend from waiving any standstill agreements to which NetSpend was a party without TSYS’s consent, including the standstill agreements with Private Equity A and Private Equity B. Following the announcement of the Merger Agreement, NetSpend did not receive any competing offers.
The plaintiff stockholder moved to preliminarily enjoin the acquisition, scheduled to close on May 31, 2013, alleging that the proxy statement contained inadequate disclosures and that the directors breached their fiduciary duties to maximize value under Revlon. The Court determined that the disclosure claims were without merit. The Court also determined that the Board’s decision to engage in a single-bidder process was reasonable, but noted that where a board decides to forgo a market check it must be “particularly scrupulous” in ensuring a process to adequately inform itself that it has maximized stockholder value. The Court held that on a preliminary record the process employed by the Board did not meet this standard for several reasons.
First, the Court determined that the Board relied on a “weak” fairness opinion. The Court explained that, in the absence of a market check, the Fairness Opinion was critical in providing the Board with adequate knowledge that the merger price was the best the Board could reasonably obtain. The Court determined, however, that the Fairness Opinion was “weak” because the DCF valuations were 20% higher than the merger price and the comparative companies and transactions analyses was uninformative because most of the “comparable” companies and transactions were not similar to NetSpend or the proposed acquisition.
In addition, the Court held that it was unreasonable for the Board to agree that it would not waive the standstill sections of the confidentiality agreements with Private Equity A and Private Equity B without TSYS’s consent. As the Court explained, Private Equity A and Private Equity B were the only two entities that had recently expressed an interest in acquiring at least a large minority position in NetSpend, and the Merger Agreement locked in the standstill agreements such that the Board “blinded itself” to any potential interest from Private Equity A and Private Equity B. The Court was especially troubled by the fact that the Board was unaware of or did not consider and understand the implications of the don’t-ask-don’t-waive provisions, and did not appreciate the provisions’ preclusive effect on bids from potentially interested parties.
Finally, the Court noted that the parties anticipated a short period of time between signing the Merger Agreement and the deal’s consummation, and that this anticipated time was likely too short for unsolicited bidders to come forward to make an offer for NetSpend. The alleged failure to provide sufficient time for a suitor to appear through a de facto market check distinguished the case from other cases in which the Court of Chancery found reasonable a sales process in which a board declined to test its estimate of the company’s value against the market. Accordingly, the Court determined that the sales process, reviewed as a whole, was unreasonable because the Board failed to adequately inform itself of whether $16.00 per share was the highest price it could reasonably attain for stockholder, and held that the NetSpend directors would likely fail to meet their burden at trial of proving that they acted reasonably to maximize share price.
While the Court found that the plaintiff had demonstrated a sufficient likelihood of success on the merits of her Revlon claim, the Court nevertheless declined to enjoin the merger because no other bidders for NetSpend had emerged. Of particular note, the company waived the don’t-ask-don’t-waive provisions, allowing Private Equity A and Private Equity B to come forward, but neither had done so. Because there was no higher bidder available or reasonably expected, the Court held that an injunction could unduly risk the stockholders’ ability to realize a premium for their shares and, therefore, the balancing of the equities weighed against the issuance of an injunction. In addition, the Court indicated that damages would not be available to plaintiff at trial because the breaches of the directors’ Revlon duties in this case were breaches of the duty of care, for which the directors were exculpated by the NetSpend charter’s Section 102(b)(7) clause.
The full opinion is available here.