Instructure Deal Faces Revolt From Third of Investors

(Bloomberg) -- A sizable block of investors in Instructure Inc. plan to vote against its $2 billion takeover by Thoma Bravo over concerns about the sale process and price of the transaction despite no other buyers emerging since the deal was announced.

Investors representing a third of the common shares in the education software company are likely to vote against the deal, according to public statements and interviews with Bloomberg News. That creates a substantial hurdle for Instructure to close the deal, which requires approval from a simple majority of shareholders in a vote scheduled on Feb. 13.

The dissenters may hold outsize influence because not every shareholder tends to vote at such meetings. That said, votes haven’t been cast yet and investors may choose to support the deal.

At least four stockholders -- Praesidium Investment Management, Rivulet Capital, Lateef Investment Management and Oberndorf Enterprises -- have written letters to the board expressing concerns about the sales process and possible conflicts of interest in the deal. Several other investors expressed their dissatisfaction with the deal to Bloomberg on the condition of remaining anonymous because their corporate policies prevent them from discussing their views with the media.

“The number of large, long-term, diligent shareholders which have expressed opposition to the proposed merger speaks for itself,” said Oberndorf Chairman William Oberndorf, whose firm owns a 3.8% stake in Instructure. “The management and the board have lost the trust of shareholders and now face the prospect of a failed shareholder vote.”

This is just the second time in his 40-year investing career that he has written a letter to express concerns about a management team or board for what he said was a failure of their fiduciary duties.

Thoma Bravo agreed to acquire Instructure for $47.60 a share in cash last month. The stock fell 1% to $47.67 at 3:55 p.m. in New York trading Thursday, giving the Salt Lake City-based company a market value of about $1.8 billion.

The deal came after roughly 11 months of talks and followed a strategic review in which 40 parties were contacted and 19 confidentiality agreements were signed, according to regulatory filings. Instructure said in a statement Thursday it had also reached out to 24 potential buyers during the so-called “go-shop” period that expired Wednesday night.

“The expiration of the go-shop period marks the conclusion of a methodical, thoughtful process,” a representative for Instructure said in an emailed statement. “The Instructure board of directors unanimously believes this transaction provides significant, compelling and certain value to all Instructure shareholders.”

Dissenting shareholders have said they were concerned that only 20 days passed between the company announcing a strategic review and reaching a deal with Thoma Bravo. That period ran over the U.S. Thanksgiving holiday and several investors have raised concerns that the process may have been rushed and, as a result, are unsure whether the best outcome was achieved. Some have said they would prefer the company to remain public so they can participate in the upside of a restructuring, or that management should be swapped out and a proper process run.

A number of expressions of interests were made valuing the company between $45 and $51.50 per share on Oct. 31, before several parties dropped out of the process or revised their bids, according to filings.

Both sides will now argue their case to fellow shareholders and proxy advisory firms Institutional Shareholder Services Inc. and Glass Lewis & Co., which will offer their recommendations ahead of a shareholder meeting next month.

Sufficient Time

Praesidium said in a letter to the company’s board last month that it believed, based on the regulatory filings, the process was rushed, with some large potential buyers brought into the process just days before the deal was announced. It argued they wouldn’t have had sufficient time to put together competing bids.

Three private equity firms and one industry participant signed confidentiality agreements between Nov. 25 and Dec. 2, just days before the deal was announced, the filing shows. At that point, Instructure was in late-stage discussions with Thoma Bravo and another unnamed firm.

“We have many reasons to believe the board did not undertake a full and fair sales process to ensure that shareholders receive maximum value for their investment,“ Praesidium Managing Partners Kevin Oram and Peter Uddo said in the letter. “We believe the process was rushed, lacks transparency and is potentially riddled with conflicts of interest, among other concerns.”

Some shareholders said the $29.3 million termination fee and the threat of Thoma Bravo topping any counter bids would have discouraged potential rival suitors during the go-shop.

Other investors have claimed management may have put its interest first during the sale. Instructure Chief Executive Officer Dan Goldsmith and two other top executives stand to reap more than $25 million from stock awards granted shortly after talks with potential buyers commenced in January, according to regulatory filings.

Quoc Tran, Lateef Investment Management’s chief investment officer, said in a Dec. 4 letter to the company that he has had concerns about its governance, including the hiring of Goldsmith’s sister as chief strategic officer in May. Tran also took issue with Goldsmith’s management of the company, including its money-losing Bridge business.

“Dan Goldsmith staying on as CEO seems like a conflict of interest where he’s putting his own interests ahead of shareholders,“ Tran said. “We don’t think Dan has done a good job with Bridge and this deal rewards him rather than hold him accountable.”

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