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Teamsters Local 210 Affiliated Pension Trust Fund v. Neustar, Inc.

United States District Court, E.D. Virginia, Alexandria Division

February 19, 2019

TEAMSTERS LOCAL 210 AFFILIATED PENSION TRUST FUND, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
NEUSTAR, INC., et al., Defendants.


          Anthony J. Trenga United States District Judge

         In this securities class action brought pursuant to Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, Plaintiffs allege that Defendants-Neustar, Inc. and members of its senior management-published a false and misleading statement in violation of Section 14(a) when a proxy solicitation stated an estimated date that proved incorrect with respect to when Neustar would transfer its duties as lead administrator of the No. Portability Administration Center ("NPAC") to another vendor, while not also disclosing information that raised concerns about the accuracy of that estimated date. Defendants have filed a Motion to Dismiss Amended Complaint [Doc. No. 32] (the "Motion") for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons discussed below, the Motion is GRANTED.

         I. BACKGROUND

         Defendant Neustar is a government contractor that served as the Local No. Portability Administrator ("LNPA") pursuant to the No. Portability Administration Center Contract awarded to it by the Federal Communications Commission ("FCC") ("NPAC Contract"). [Doc. 29 at ¶ 4]. As the LNPA, Neustar operated the No. Portability Administration Center, which allows telephone customers across the country to keep their phone No. when they switch telephone service providers. Id. The NPAC Contract represented more than $500 million in revenue, more than half of Neustar's business income. Id. at ¶ 66. On March 26, 2015, the FCC decided to award the NPAC Contract to Telcordia instead of Neustar, with Neustar retaining administration of the NPAC during the transition from Neustar to Telcordia. Id. at ¶ 7.

         In June 2016, Neustar hired J.P. Morgan as its financial advisor and announced that it would separate into two public companies. Id. at ¶ 67. Thereafter, seven potential suitors approached Neustar's senior management to discuss the possibility of a merger. Id. at ¶ 68. After receiving several offers, management chose to continue negotiations with the company known as Golden Gate, which had also approached management about the possibility of a sale transaction. Neustar Management's decision to proceed with Golden Gate was based largely on an evaluation of Golden Gate's offer in comparison to the other interested parties' offers in light of an estimated transition date for the NPAC Contract of September 30, 2018 and the calculations of Neustar's value based on that estimated date. Id. at ¶¶ 70-85. Group ABC, another potential acquirer, had sent an indication of interest stating that its offer would have included "a combination of cash and a contingent value right ("CVR") with respect to the NPAC Contract for a period of up to three years following the closing." Id. at ¶ 69. A CVR, which was not included in Golden Gate's offer, "is a derivative security or contract right that provides payments to holders upon the occurrence of specified contingencies." Id.

         On December 13, 2016, J.P. Morgan delivered its fairness opinion on Golden Gate's offer to the Board, which approved the offer and executed the Merger Agreement. Id. at ¶ 93. J.P. Morgan's fairness opinion, which was essential to the Board's decision to approve the Merger Agreement, "relied on certain internal financial analyses and forecasts prepared by Neustar management," including a calculated net present value of the cash flows from the NPAC Contract, which in turn relied on the assumption that the transition of the NPAC Contract to Telcordia would occur on or around the estimated transition date of September 30, 2018. Id. at ¶¶ 94-95.

         Following Board approval, Neustar's management then presented the merger to the company's shareholders, who approved the Merger Agreement on March 14, 2017. Id. at ¶ 97. On February 3, 2017, before the shareholder vote, the Board issued a Proxy Statement to the shareholders. Id. at ¶ 124. The Proxy Statement referenced repeatedly the estimated transition date of September 30, 2018 and its importance in management's ultimate decision to accept Golden Gate's merger proposal. Specifically, it stated:

On December 4, 2016, our board held a telephonic meeting at which members of management and representatives of J.P. Morgan and Goodwin were present. At this meeting, the board discussed the revised proposal received from Party A, noting that, while Party A had increased the closing cash payment to $28.50 per share, Party A had not made any changes to increase the potential value of the CVR component of the consideration. The board also discussed potential payout scenarios for the CVR with J.P. Morgan on a risk-adjusted basis and taking into account management's estimates of future cash flows generated by the NPAC business and the time value of money. The board noted that, based on J.P. Morgan's analysis, one would have to assume a 63% probability of receiving the full CVR payments for an extended period from October 1, 2018 to June 30, 2021, to equal the $33.50 proposal made by Golden Gate and GIC SI. Based on these discussions, and considering management's current expectation of transition services under the NPAC Contract terminating around September 30, 2018, the CVR period not commencing until October 1, 2018, and the uncertainty surrounding our ongoing litigation regarding the FCC order at that time, the board concluded that the certainty of stockholder value of the proposal submitted by Golden Gate and GIC SI continued to be superior to Party A's revised proposal.

[Doc. 34-1 at 41 (emphasis added)]. The Proxy Statement repeated this estimated transition date of September 30, 2018 on several other occasions and informed shareholders that J.P. Morgan developed its fairness analysis based in part on the September 30, 2018 estimated transition date. See, e.g., Id. at 35, 39, 41, 42, 47, 50, 52, 56. The Proxy Statement also included the following cautionary language with respect to the estimated transition Dated:

[D]ue to the uncertainty surrounding the duration of the NPAC Contract, the financial projections do not include any amounts that we may receive for providing services or transition services under the NPAC Contract after September 30, 2018. There can be no assurance that the financial results in the financial projections will be realized, or that future actual financial results will not materially vary from those estimated in the financial projections.

Id. at 55. The Proxy Statement elsewhere indicated that the referenced estimates could be materially affected by, among other things, "uncertainty regarding the amount of time that we will serve as the Local No. Portability Administrator and the outcome of our ongoing litigation with the FCC regarding the process by which the NPAC Contract was awarded to a competitor of the Company." [Doc. 34-1 at 18, 24].

         Between the issuance of the Proxy Statement and the shareholders' vote to approve the Merger Agreement, Neustar's outside legal counsel sent a report to the FCC called the No. Portability Administration Center Transition Status Report ("the Transition Report"), which was designed to apprise the FCC of the current status of the NPAC transition. [Doc. 29 at ¶ 100]. The Report was authored by three Information Technology specialists who reported to Neustar's Chief Financial Officer. Id. at ¶¶ 100, 105. Based on the claimed failure of the NAPM and the Transition Oversight Manager to share transition governance, risk, and schedule information, the authors expressed concerns with the May 2018 estimated transition date developed by the Transition Oversight Manager, an independent third party appointed by the FCC. Specifically, the Report warned that "[w]ithout significant changes to the current transition process, it [was] reasonable to conclude that the transition w[ould] not be completed until sometime in 2019." Id. at ¶ 101 (emphasis omitted)]. Based on the various problems the Report identified, its authors estimated that "a 2019 completion date appear[ed] more likely" than the May 2018 date, and that "without some fairly significant changes, even 2019 might be optimistic." Id. at ¶ 104.

         After receiving the Report, the Transition Oversight Manager, acting through NAPM (the organization that hired the Transition Oversight Manager), responded by accusing Neustar of being solely at fault for any potential delays in the transition date. Id. at ¶¶ 106-07. After Neustar continued to communicate its concerns about the status of the transition, the transition date was in fact delayed significantly, and others blamed these delays on Neustar's mismanagement, or perhaps even intentional hesitation, in managing the transition. See Id. at ¶¶ 111-23. Despite relaying to shareholders the estimated transition date of September 30, 2018, which was four months later than the Transition Oversight Manager's target transition date of May 25, 2018, the Proxy Statement did not contain any reference to the Transition Report and the warnings contained within it.

         The Neustar shareholders approved the merger on March 14, 2017. Id. at ¶ 97. On October 10, 2017, Plaintiffs filed this action and on January 19, 2018, filed an Amended Complaint. On February 2, 2018, Defendants filed the Motion. Plaintiffs contend that because material information was withheld from shareholders concerning the estimated transition date of September 30, 2018, shareholders approved the sale of the corporation to Golden Gate, at management's recommendation, based on a significantly undervalued price, which did not take into account the continued revenues Neustar would realize from the NPAC Contract as a result of the greatly delayed transition date.[1]Id. at ΒΆ 143. More specifically, Plaintiffs contend that the lack of any reference in the Proxy Statement to the Transition Report and the warnings contained in it made materially misleading: (1) J.P. Morgan's conclusion that the Merger Consideration was fair; (2) the Board's recommendation that the corporation's shareholders vote for the Transaction; (3) the Board's rejection of competing proposals to Golden Gate's that would have turned out more favorable to shareholders in light of the later transition ...

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