United States District Court, E.D. Virginia, Alexandria Division
TEAMSTERS LOCAL 210 AFFILIATED PENSION TRUST FUND, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
NEUSTAR, INC., et al., Defendants.
MEMORANDUM OPINION AND ORDER
Anthony J. Trenga United States District Judge
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.
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.
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.
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 ¶¶
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
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].
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
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.
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.Id. at ¶ 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 ...