Farleigh Wada Witt Guides Credit Unions Through Visa Class B Stock Sales
May 28, 2019
Your credit union may soon be approached by investors looking to buy Visa, Inc. Class B stock which you may have received when Visa had its initial public offering 11 years ago.
This has raised questions and interest from credit unions despite the fact that these assets have no book value, meaning they are being carried at no value on credit unions’ balance sheets because they can’t be traded on the open market. There is however, an active secondary market that will buy shares at a discount. Any credit union holding these shares has the option to sell.
“Credit unions holding Visa Class B Stock have an opportunity to realize gains on a dormant asset,” said Northwest Credit Union Association Vice President of Strategic Resources, Jason Smith. “Our Strategic Link partner Farleigh Wada Witt, the premier law firm serving Northwest credit unions in all areas of financial services, has the information and expertise to guide you through the transaction.”
FWW and has already been through the sale process with numerous credit unions, Smith noted.
The law firm has provided insight for Northwest Credit Union Association members explaining how credit unions acquired the stock, the related litigation issues, and steps credit unions should follow to conduct a sale.
How Credit Unions Acquired Visa Class B Stock
Visa U.S.A. underwent a restructuring in 2007. As part of that restructuring, financial institutions that were members of Visa U.S.A. all received Class B shares of stock in Visa, Inc. Visa, Inc. also undertook a public offering, selling Class A shares and raising a substantial amount of money. Credit unions that were members of Visa U.S.A. received stock in Visa, Inc. based on their interest in Visa U.S.A. and did not pay anything for the stock.
Class B shares are restricted. Essentially, they can only be sold to other members of Visa and other companies that already hold Class B stock. This restriction will remain in place until resolution of the antitrust litigation that is pending against Visa as further discussed below. After resolution of the antitrust litigation, the Class B stock will be convertible to Class A stock.
The National Credit Union Administration and state regulators reviewed the Visa transaction documents and determined that it is permissible for credit unions to hold the stock because it is merely a byproduct of issuing Visa cards, which is a permissible activity. However, due to the transfer restrictions and limited market, credit unions have generally carried the shares at no book value.
Class B Stock is Tied to Antitrust Litigation
The Class B stock and the IPO sale, or initial public offering, of Class A stock were tied to Visa’s plans for potential resolution to the antitrust litigation on behalf of merchants claiming antitrust violations by Visa and MasterCard. Visa entered into a loss sharing agreement with its members.
The agreement provides that that funds to pay settlements of the applicable litigation will be paid first from the escrowed proceeds of the IPO, and second, by selling additional shares of Class A stock. The sale of those Class A shares would reduce the rate at which the Class B shares will be converted to Class A shares.
In addition, the Loss Sharing Agreement provides that if the sale of additional Class A shares raises insufficient funds to pay the amount of a judgment or settlement, then all of the members of Visa will contribute to the payment of the additional amount on a pro rata basis based on their percentage share of membership in Visa.
It is likely that buyers’ interest in Class B shares had picked up due to recent activity in the class action litigation. The litigation has been split into two parts: one related to money damages that Visa and Mastercard might have to pay, and the other related to potential injunctions requiring Visa and Mastercard to change their business practices.
Last August, the parties announced a tentative settlement of the money damages portion of the lawsuit, involving a payment of up to $6.26 billion. In January, the court granted a preliminary approval of the settlement, but final approval is not scheduled until November 2019.
If the settlement gains final approval, Visa will not have to issue additional Class A shares in order to make the settlement payment. This means that the conversion rate for converting the Class B shares into Class A shares would not be subject to further reduction in order to pay the settlement. That, in turn, makes it much easier for an investor to value the Class B shares based on value (and expected future value) of the Class A shares. However, irrespective of any settlement of the money judgment portion of the litigation, the transfer restrictions will remain in place until the injunction portion has also been resolved. It is unclear when that may happen.
Who Wants to Buy, and How to Sell
For most credit unions, Class B shares are not viewed as a source of liquidity, which can be more readily obtained through other sources. Rather, the Class B shares represent an opportunity to realize gain on a previously “dormant” asset held at no book value. Some types of transactions such as forward sale agreements will not necessarily achieve that goal. On the other hand, the transfer restrictions greatly limit the market for sale of Class B shares. Some banks have shown a willingness to purchase, but the more common transactions have involved other investors with a willingness to accept the risk and potential delay in cashing in on their investment.
Credit unions interested in selling Class B shares should check for competing offers. Conversations with other staff at credit unions which have sold shares (or are in the market) may also be helpful in this regard.
Once a price has been negotiated, the parties will generally enter into a purchase agreement before consummating the sale. Credit unions should carefully review purchase agreements (counsel review is recommended) to ensure that they are protected from some of the unique risks in these transactions.
The agreement should ensure that sales are final and that the credit union is not responsible for, or subject to any risk of, events that happen after the sale or the buyer’s inability to convert or transfer the shares. In addition, if there is doubt about the buyer’s eligibility to hold the shares, the credit union should be held harmless from that risk. Some purchasers also attempt to transfer risk of their own hedging activity to the credit union. Those attempts should be rejected.
When the agreement has been executed, the credit union will then execute (for most transactions) a stock transfer letter and officer’s certificate and the purchaser will execute an acknowledgment. Documentation requirements may vary depending on the purchaser.
Once the credit union has found an acceptable price and purchaser, the purchase agreement can be finalized within a few days, and the transaction can be closed shortly after.