From: "Saved by Windows Internet Explorer 8" Subject: Threats And Secret Promises: Bank Of America's Merger With Merrill Lynch : North Carolina Business Litigation Report Date: Thu, 26 Aug 2010 21:04:40 -0700 MIME-Version: 1.0 Content-Type: multipart/related; type="text/html"; boundary="----=_NextPart_000_0000_01CB4562.4CEA34C0" X-MimeOLE: Produced By Microsoft MimeOLE V6.1.7600.16543 This is a multi-part message in MIME format. ------=_NextPart_000_0000_01CB4562.4CEA34C0 Content-Type: text/html; charset="utf-8" Content-Transfer-Encoding: quoted-printable Content-Location: http://www.ncbusinesslitigationreport.com/2009/04/articles/fiduciary-duty/threats-and-secret-promises-bank-of-americas-merger-with-merrill-lynch/ =EF=BB=BF
Ken Lewis, Bank of America=E2=80=99s CEO, has =
testified under oath=20
to threats by former Secretary of the Treasury Hank Paulson to remove =
the Bank=E2=80=99s=20
Board of Directors and its management if the Bank didn't close its deal =
to=20
acquire Merrill Lynch, and secret promises to support the Bank with =
federal=20
funds if it did close the transaction.
Those statements are contained in Lewis=E2=80=99=20 deposition, portions of which were released yesterday by New York's = Attorney=20 General.
Lewis testified that the financial deterioration of Merrill in the = fourth=20 quarter of 2008 was "staggering," Dep. 13, and the = acquisition was=20 turning out to be "a $15 billion hole" for the Bank. Dep. 60. = Lewis=20 told Paulson that the Bank "was strongly considering" invoking the = Material=20 Adverse Change provision (the "MAC") in the Merger=20 Agreement with Merrill. Dep. 34, 58. The action of "calling a = MAC"=20 would have permitted Bank of America to terminate the Merrill = transaction or at=20 least to negotiate a better deal. Paulson didn't like that idea, = and asked=20 Lewis to temporarily "stand down." Dep. 42.
The Threat And The "Undisclosable" Promise Of Federal=20 Funds
Lewis followed with a personal call to Paulson (who was out riding = his bike=20 at the time) and told Paulson, again, that the Bank was considering the=20 invocation of the MAC. According to Lewis' testimony, Paulson = responded=20 that the government "does not feel it's in your best interest for you to = call a=20 MAC" and that if the Bank did so or maybe even intended to do so, that = the=20 Treasury Department "would remove the board and management" of Bank = of=20 America. Dep. 52.
Paulson, testified Lewis, promised government support for the growing = burden=20 of the acquisition, but was unwilling to put that promise in = writing. He=20 said to Lewis that a written commitment for federal funds "would be a=20 disclosable event and we [the Treasury] do not want a disclosable = event." =20 Dep. 80.
Lewis Reports To The BofA Board On The Threat And The=20 Promise
Lewis reported to the Bank's board, shown=20 in the minutes of the December 22, 2008 meeting, that if the Bank were "to invoke the = material=20 adverse change clause in the merger agreement with Merrill Lynch and = fail to=20 close the transaction, the Treasury and Fed would remove the Board and=20 management of the" Bank. He also reported on the = verbal=20 assurances provided by Paulson and also by Fed Chair Ben Bernanke.
In a bit of corporate minutekeeping that will undoubtedly become = pivotal in=20 the flood of = shareholder=20 suits already filed over this merger and those yet to come, the = December 22=20 minutes say that "the Board concurred it would reach a decision that it = deemed=20 in the best interest of the Corporation and its shareholders without = regard to=20 this representation by the federal regulators." In other words, = the Board=20 minutes says the Board wasn't influenced at all by Paulson's = threat. (How,=20 well, fiduciary-like of them.)
Lewis Still Wants To "Call A MAC," But Reports To The = Board On=20 "Detailed" -- But Secret -- Assurances From Federal = Regulators
Merrill's condition worsened over the eight days before the next Bank = board=20 meeting. The minutes=20 of that December 30th meeting show that Lewis reported he had told = federal=20 regulators "were it not for the = serious=20 concerns regarding the status of the United States financial services = system and=20 the adverse consequences of that situation to the Corporation = articulated by the=20 federal regulators, the Corporation would, in light of the deterioration = of the=20 operating results and capital position of Merrill Lynch, assert the = material=20 adverse change clause in its merger agreement with Merrill Lynch and = would seek=20 to renegotiate the transaction."
Lews reported at that meeting that he had "obtained detailed oral = assurances=20 from the federal regulators with regard to their commitment and has = documented=20 those assurances with e-mails and detailed notes of management's = conversations=20 with the federal regulators." Those e-mails and notes = haven=E2=80=99t yet been=20 made publicly available, but they will certainly provide interesting = reading=20 when they are.
The Treasury Comes Through, Post-Closing, With Billions Of = Dollars=20 Of Funds
The Merrill transaction closed two=20 days after the December 30th board meeting, on January 1, = 2009. The=20 oral promises made by Paulson and the "federal regulators" weren't = disclosed in=20 connection with the transaction.
But about two weeks after the closing, the Treasury showered Bank of = America=20 with an=20 additional $20 billion in TARP funds and a $118 billion "backstop" on = the assets=20 acquired from Merrill. That's more than enough to fill a "$15 = million=20 hole," as long as you aren't still digging.
There's already a shareholder derivative action pending in the North = Carolina=20 Business Court over the Bank of America/Merrill Lynch merger, Cunniff=20 v. Lewis.
The photo is from Rainforest=20 Action Network's photostream.