Dive Brief:

• Visa’s board has approved letting shareholders vote on whether to pursue a share exchange program that would change how the card network covers billions of dollars in outstanding merchant claims against the company, according to a regulatory filing Tuesday. The program would eliminate some restrictions on stock sales by Class B shareholders, who are covering legal liabilities related to merchant class actions.
• “Visa’s current estimate of such interchange reimbursement fees as of October 1, 2023 is approximately $49.6 billion,” the filing said.
• JPMorgan Chase, Bank of America, Citibank and Wells Fargo are the principal Class B shareholders, according to the Tuesday filing, which provides a 15-page disclosure about the program. Shareholders will vote on the proposed program in January.

Dive Insight:

The company said it’s putting the proposal to a vote at this time because the bank Class B shareholders have been blocked from liquidating their stock for a longer period than the company anticipated, as the litigation has dragged on for more than a decade.

“The Class B common stock has been subject to transfer restrictions for over 15 years, substantially longer than Visa and its stockholders expected at the time of the 2008 IPO,” the company said in the preliminary proxy filing this week.

The program would give those bank shareholders the “option for near-term liquidity and potential for better regulatory capital treatment” and an “opportunity to unlock value that would represent a significant portion of aggregate tangible common equity,” Visa noted.

At the same time, the company said its other Class A and Class C shareholders would still have “economically equivalent protection” from the liabilities associated with outstanding merchant claims.

Visa has touted its progress in settling the class actions brought by millions of merchants who alleged over years that they were overcharged for credit and debit card transactions when consumers swiped their cards to pay for goods and services. The claims have accumulated over the past two decades and litigation has persisted since before the company went public in 2008, creating three classes of shares.

Visa has resolved 90% of the payment volume at issue in the multi-district litigation, paying out about $6.6 billion in settlements, the filing said. While Visa estimates the remaining claims may be settled for somewhere between $1.4 billion and $4 billion, against an escrow balance of about $1.8 billion as of Sept. 30, the extent of the company’s legal exposure is much higher.

“If there is no settlement with these merchants, the range of remaining damages exposure based upon merchant claims is approximately $25-$35 billion through calendar year 2022, prior to any trebling, undiscounted, and before any challenge to the claim is addressed by a court,” Visa said in the filing.

Visa provided those estimates in September when it disclosed that management was engaging in discussions with shareholders about the potential stock exchange offer program, including a presentation about it that month. The board hadn’t approved the program at that time, and the SEC filing Tuesday didn’t specify exactly when the board “unanimously” approved pursuing the idea. The company didn’t respond to a request for further comment.

Visa said the program would effectively free Class B shareholders to sell some or all of their shares.

“Class B common stock is subject to transfer and convertibility restrictions until all U.S. covered litigation is fully resolved,” the company noted in the September filing. Visa said at that time that there were about 245 million Class B shares outstanding worth about $96 billion as of August.

Class B shareholders would have to enter separate agreements with Visa under which they would essentially agree to shoulder their previously agreed burden for covering the cost of the litigation.

Because the exchange program would require an amendment to the company’s certificate of incorporation, Visa said it necessitates a vote of approval by a majority of each class of shareholders, plus a majority of all classes. Stockholders will be able to vote on the proposal at the annual meeting on Jan. 23.

Visa built in an avenue for a second chance at winning shareholder approval if it doesn’t succeed at first. Another stockholder proposal in the preliminary proxy would let the company reconvene at a later date, or multiple later dates, if it doesn’t get enough votes for pursuing the program at the annual meeting. Still, it must win shareholder support for that proposal as well.

The four Class B bank shareholders didn’t immediately respond to a request for comment.