Stockholder Established Harm but Not Equities Balance
Absent disclosure violations, the Delaware Court of Chancery is generally reluctant to enjoin a deal if there is not another bidder on the scene. Koehler v. NetSpend Holdings, C.A. No. 8373-VCG (Del. Ch. May 21, 2013), illustrates this reluctance. Even though the plaintiff established a reasonable likelihood of success on her claim that the defendants' sale process failed to produce the best price and demonstrated irreparable harm, the Court of Chancery found the balance of equities weighed against issuance of a preliminary injunction.
Plaintiff Brenda Koehler, a stockholder of defendant NetSpend Holdings Inc., sought a preliminary injunction against defendant Total System Services Inc.'s (TSYS) acquisition of NetSpend. In 2012, one of NetSpend's largest stockholders, JLL Partners Inc. (which owned approximately 31 percent of the outstanding stock), expressed interest in selling its NetSpend stock. Fearing the effect of such a sale on the open market, the NetSpend board of directors assisted JLL in finding a buyer on the private market. NetSpend's independent directors met with two private equity firms about buying JLL's stock. The private equity firms executed standstill agreements with NetSpend that precluded them from acquiring or merging with NetSpend for a certain amount of time (one year for one firm and two years for the other) and prevented them from asking NetSpend for a waiver of any of the provisions in the standstill agreements (don't-ask, don't-waive clauses).
At the same time NetSpend was exploring a sale of JLL's stock, it began discussing a potential sale of the company with TSYS. On December 3, 2012, TSYS indicated it was interested in conducting a $14.50 per share cash tender offer for NetSpend's stock. This price was higher than the $12 per share for JLL's stock that one of the private equity firms had offered. JLL indicated it was interested in the higher TSYS offer, so discussions with the private equity firms were terminated. The NetSpend board of directors obtained Bank of America Merrill Lynch to act as its financial adviser. BofA prepared a list of potential acquirers, but the NetSpend directors decided not to contact any of them because they feared such contact would lead to rumors that NetSpend was for sale. NetSpend tried to obtain a go-shop provision in the merger agreement with TSYS, but TSYS would not agree to its inclusion.
On February 19, BofA presented its fairness opinion and the NetSpend board of directors approved the transaction with TSYS. The final terms of the merger agreement with TSYS included: (1) NetSpend stockholders receiving $16 per share in cash (a 45 percent premium over the trading price one week before the deal announcement); (2) a 3.9 percent termination fee, representing approximately $53 million; (3) voting agreements with JLL and NetSpend's other largest stockholder that locked up approximately 40 percent of the stock and could only be terminated if the NetSpend board of directors terminated the merger agreement with TSYS; (4) a no-shop clause with a fiduciary out for a superior offer; and (5) a nonwaiver of any standstill agreements without TSYS's consent, which included the standstill agreements with the private equity firms. The parties intended the deal to close in April, but the time for closing extended into late May. The plaintiff argued that the NetSpend directors violated their fiduciary duties under Revlon by failing to obtain the best price reasonably attainable.
The Court of Chancery concluded that the plaintiff had established a reasonable probability of success on her claim that the NetSpend directors had not ensured a process to sufficiently inform themselves that they had obtained the best price. In reaching this conclusion, the court stated that the NetSpend board had to be "particularly scrupulous" in creating such a process because they had not conducted a pre-agreement market check and they relied on a weak fairness opinion. The court found the BofA fairness opinion weak because comparable companies used in the comparable company analysis were very different from NetSpend and the discounted cash flow (DCF) analysis suggested TSYS's offer was grossly inadequate. The $16 per share price was 20 percent below the lowest range of value suggested by the DCF analysis. The court also noted that the parties had originally anticipated a short time until closing, which meant there would be little time for another potential acquirer to appear on the scene.
In light of the lack of a pre-agreement market check, the weak fairness opinion and the originally anticipated short time until closing, the court held there was a reasonable probability that NetSpend had acted unreasonably by failing to waive the don't-ask, don't-waive clauses in the standstill agreements with the private equity firms prior to entering into the merger agreement and by agreeing to give up the right to waive those clauses in the merger agreement. The court was not troubled by the other deal-protection devices in the merger agreement. The court was troubled, however, by the don't-ask, don't-waive clauses, because it believed the NetSpend board had blinded itself to potential interest from entities that had recently expressed an interest in acquiring at least a large minority interest in NetSpend. After the preliminary injunction hearing, TSYS consented to NetSpend waiving the don't-ask, don't-waive clauses in the standstill agreements and NetSpend informed the private equity firms of the waiver. The private equity firms did not express interest in NetSpend, which affected the court's analysis of the balance of the equities. The court also found that the plaintiff had established irreparable harm. Although NetSpend stockholders had appraisal rights, the court believed the decision to seek appraisal or tender stock involved risk because there was a lack of reliable information about the value of the stock. The court also stated monetary damages would be unavailable because of a Section 102(b)(7) provision in the charter and any damages would be difficult to calculate.
Although the court found that Koehler had established a reasonable probability of success and irreparable harm, it denied preliminary injunctive relief because it concluded the balance of equities weighed against granting an injunction. The court reached this conclusion in part because there was a more extended post-agreement process than the parties had anticipated and no other bidders had appeared. The court also noted that the private equity firms had not expressed interest in NetSpend after they were informed of the waiver of the don't-ask, don't-waive clauses. Another bidder was unlikely to appear if the transaction was preliminarily enjoined for a market check. If, however, a material adverse change occurred in the interim and the deal failed, stockholders would lose the opportunity to sell their stock at a premium. Given the precedent disfavoring injunctions of premium deals in the absence of another bidder and the plaintiff's burden of persuasion, the court found the balance of equities weighed against a preliminary injunction.
As this case reflects, the Court of Chancery is reluctant to enjoin deals in the absence of another bidder. This case is also a good example of how different aspects of a transaction can combine to create problems for the board of directors. Here, the combination of the lack of a pre-agreement market check, the anticipated short post-agreement period, the weak fairness opinion and the don't-ask, don't-waive provisions led the court to conclude the plaintiff had established a reasonable probability of success on her claim the board directors had not obtained the best price reasonably available. The court might have reached a different conclusion if there had been a pre-agreement market check, a stronger fairness opinion and/or a waiver of the don't-ask, don't-waive provisions.