Koehler v. NetSpend Holdings, Inc.: Court of Chancery Determines that Board Employed an Unreasonable Process, but Declines to Issue Injunction
June 18, 2013
In Koehler v. NetSpend Holdings, Inc., 2013 WL 2181518 (Del. Ch. May 21, 2013), Vice Chancellor Glasscock of the Court of Chancery denied plaintiff’s motion for preliminary injunction despite finding that a majority independent and disinterested board of directors likely breached its fiduciary duties by approving a $1.4 billion merger with a third party. The Court concluded that the defendant directors did not act reasonably to maximize stockholder value by pursuing a single-bidder negotiating strategy, agreeing to certain deal protection devices, including a no-solicitation provision, and agreeing not to waive “Don’t-Ask-Don’t-Waive” standstill provisions that barred potential offers from previously interested bidders. The Court, however, determined that the balance of equities weighed against the issuance of an injunction in the instance of a premium transaction with no alternative bidder.
NetSpend was a public company that provided prepaid debit cards and financial services to consumers who do not have traditional bank accounts. Since 2007, NetSpend’s board of directors had engaged in serious negotiations toward strategic transactions, only to have them fall apart before consummation. Because these transactions caused significant disruption to NetSpend’s business, the directors were wary of engaging in an extensive process of selling the company. When Total System Services, Inc. (“Total System”) indicated its interest in acquiring the company for $14.50 per share, NetSpend’s directors communicated that the company was not for sale, and they would not entertain an offer unless Total Systems increased its offer price significantly. Although NetSpend’s board declined Total System’s request for exclusivity, the board did not reach out to any other potential acquirors. Instead, the board pushed Total System for a higher price and for a “go-shop” provision permitting the company to solicit higher bids after signing a merger agreement. But when Total System offered $16.00 per share, conditioned on deal-protection provisions including a “no-shop” provision and a 3.9 percent termination fee, the directors accepted.
Significantly, in addition to these provisions, the merger agreement prohibited NetSpend from releasing any other potential acquirer from existing standstill agreements. This provision had force because, shortly before the merger was negotiated, the NetSpend board had entered into confidentiality agreements containing standstill provisions, with “Don’t-Ask-Don’t-Waive” clauses barring requests to waive them, with two private equity firms that were interested in buying a substantial minority stake in the company. The Court found that by entering into these agreements, failing to waive their standstill provisions, and then prohibiting itself from doing so, the board “blinded itself” to any interest from the “only two entities which had recently expressed an interest in acquiring at least a large minority position in NetSpend.” Although it noted that such provisions are not per se impermissible and may be useful in certain cases, the Court was particularly troubled by the evidence that the board “did not consider, or did not understand, the import of the [Don’t-Ask-Don’t-Waive] clauses and of their importation into the Merger Agreement,” and found them to be inappropriate in the context of a single-bidder process without a market check.
In addition, the Court found that the fairness opinion on which NetSpend directors based their recommendation of the merger was, in part, “weak.” The offer price was on the low end of the range of prices that the board’s financial advisor indicated would be fair, and indeed it was below the low end of the range indicated by the advisor’s discounted cash flow analysis.
In analyzing the directors’ efforts to obtain the best price reasonably available, the Court found that they acted reasonably in opting only to negotiate with a single bidder. But the Court also found that, having made this choice, the directors had to be “particularly scrupulous” in ensuring they were well informed as to whether they had achieved the best price reasonably available for the company. In light of the no-shop provision, the “Don’t-Ask-Don’t-Waive” clauses, and the “weak” fairness opinion, the Court found that the plaintiff had shown a reasonable probability of success on the merits of her claim that the directors had not done so, and that approval of the merger was therefore a breach of fiduciary duty.
Nonetheless, because there was no alternative transaction available to the NetSpend stockholders, and consistent with other recent decisions of the Court of Chancery, the Court declined to enjoin the stockholder vote on the transaction.
Following oral argument on plaintiff’s motion for preliminary injunction, Total System consented to NetSpend’s waiver of the “Don’t-Ask-Don’t-Waive” standstill provisions, and the defendants notified the two potential private equity buyers. Neither expressed any interest in a transaction involving NetSpend. Eight days after the Court issued its decision, the parties announced that they had agreed to settle the action in exchange for a delay in the stockholder vote and a weakening of certain deal-protection provisions in the merger agreement, including the termination fee and Total System’s right to match a superior proposal.