Document: Koehler v. NetSpend Holdings, Inc., C.A. No. 8373-VCG (Del. Ch. May 21, 2013)
The Delaware Court of Chancery found that the plaintiffs demonstrated a reasonable likelihood of success on the merits of their claim that the single-bidder sales process undertaken by the board of directors of NetSpend Holdings, Inc. (“NetSpend”), in connection with the sale of NetSpend to Total Systems Services Inc. (“TSS”), constituted a breach of the board’s fiduciary obligations under Revlon. However, because no other potential bidders emerged post-signing and the issuance of an injunction might result in NetSpend’s stockholders losing a chance to receive a substantial premium for their shares, the Court denied plaintiffs’ motion for a preliminary injunction.
In February 2013, NetSpend and TSS entered into a merger agreement providing for TSS’s acquisition of NetSpend for $16 per share in cash. This price represented a 26% premium to the then trading price of NetSpend’s stock. JLL Partners Inc. (“JLL”) and Oak Management Corp., NetSpend’s two largest stockholders, committed to vote forty percent (40%) of NetSpend’s outstanding stock in favor of the merger pursuant to a voting agreement with TSS. The merger agreement contained a 3.9% termination fee, a no-shop provision with a fiduciary-out and a superior proposal termination right. However, the merger agreement did not contain a go-shop provision despite NetSpend’s decision to forego a pre-signing market check. NetSpend’s management believed that a market canvas would undermine the company’s continued efforts to convince the market that NetSpend was thriving despite several failed attempts to sell the company in 2007 and 2009. NetSpend’s management also believed that forcing TSS to bid against itself would increase stockholder value. In addition to the deal protection terms in the merger agreement, existing standstill agreements with two private equity firms, which contained don’t-ask-don’t-waive (“DADW”) clauses, presented barriers to a third-party bidder. NetSpend had entered into the standstill agreements in 2012, at the request of JLL, which was then attempting to find a buyer for its minority stake in NetSpend. In this injunction action, plaintiffs alleged that the NetSpend board breached its fiduciary duties of loyalty and care under Revlon, as well as its disclosure obligations. The Court briefly addressed the issue of the disclosure obligations and determined that the plaintiffs failed to meet their burden of proving a likelihood of success on the merits. However, with respect to plaintiffs’ Revlon claims, the Court found that, based on the totality of the circumstances, the board’s decision to pursue a single bidder strategy was not reasonable. In reaching its decision, the Court focused on the deal protection terms in the merger agreement (and, in particular, the absence of a go-shop provision), the existence of DADW clauses in the standstill agreements and the board’s reliance on a weak fairness opinion from Bank of America (“BoA”). With respect to BoA’s fairness opinion, the Court found that: (1) the $16 transaction price was 20% lower than the bottom range of values implied by BoA’s discounted cash flow analysis, (2) BoA’s comparable company analysis compared NetSpend to companies which were dissimilar to NetSpend, and (3) the comparable transactions analysis used old data. With respect to the DADW clauses in the standstill agreements, the Court faulted the NetSpend board for not revisiting the clauses once it entered into negotiations with TSS.