Tuesday, August 25, 2009

UPDATE: BofA offers a defense in its most recent brief regarding Merrill bonuses

I have blawgged before (here and here) of the continued conflict over the BofA acquisition of Merrill, and the fallout over what was known and disclosed prior to the merger regarding the Merrill bonuses. Earlier this month, Judge Rakoff in the S.D.N.Y. refused to approve an SEC brokered settlement on the matter, and required counsel for both BofA and the SEC to produce briefs detailing the lawyers involvement in how the merger occurred and how the bonuses were determined and disclosed. AmLawLitigationDaily reported yesterday that both sides produced their briefs. While the SEC’s brief includes some of the details Rakoff specifically requested, the brief is necessarily limited by BofA’s refusal to waive attorney-client privilege during the SEC investigation. BofA’s brief, while although privy to the totality of the details Rakoff solicited, instead took the opportunity before the Judge to make a plea that BofA has no liability in the matter of Merrill bonuses.

SEC Brief Highlight: BofA in fact greenlighted some bonuses, and asked that its consent be sought for additional payments. This agreement was not disclosed in BofA’s proxy statement last fall, however, but was contained in a “disclosure” schedule that was not released to BofA shareholders prior to the merger vote. (Emphasis in original). This “disclosure” schedule was prepared by outside counsel. Further, outside counsel is credited with the preparation of the proxy statement. The proxy statement in fact contained a provision that indicated, contradictorily, that Merrill in fact could not and would not pay any bonuses without BofA’s consent.

BofA Brief Highlight
: The proxy statement was in fact not false, and the bonuses were part of the “total mix” of information publicly available to shareholders via a series of financial statements and media reporting. Further, merger agreements commonly “include confidential disclosure schedules that qualify their terms,” and qualifying language in the proxy statements frequently warn shareholders not to rely on disclosed terms as “factual representations regarding the parties.”

The SEC and BofA have two weeks to respond to the other’s brief, at the conclusion of which the Court will have the opportunity to comment.

After the jump, alleged contradictory language in the “disclosure” schedule and proxy statement, as presented by the SEC.

The "disclosure" schedule reads:

5.2(b)(iii), 5.2(c)(i), and 5.2(c)(ii) – Variable Incentive Compensation Program (“VICP”) in respect of 2008 (including without limitation any guaranteed VICP awards for 2008 or any other pro rata or other 2008 VICP awards payable, paid or provided to terminating or former employees) may be awarded at levels that (i) do not exceed $5.8 billion in aggregate value (inclusive of cash bonuses and the grant date value of long-term incentive awards) … and (ii) do not result in 2008 VICP-related expense exceeding $4.5 billion … Sixty percent of the overall 2008 VICP shall be awarded as a current cash bonus and forty percent of the overall 2008 VICP shall be awarded as a long-term incentive award either in the form of equity or long-term cash awards. The form (i.e., equity v. long-term cash) and terms and conditions of the long-term incentive awards shall be determined by [Merrill] in consultation with [Bank of America] … The allocation of the 2008 VICP among eligible employees shall be determined by [Merrill] in consultation with [Bank of America].
"Disclosure" Schedule to Agreement and Plan of Merger, dated 09/15/2008, Government Exhibit A, at 14.

The Proxy Statement contains language such as:
5.2 Company Forbearances. During the period from the date of this Agreement to the Effective Time [the closing of the merger], except as set forth in this Section 5.2 of the Company Disclosure Schedule or except as expressly contemplated or permitted by this Agreement, [Merrill Lynch] shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of [Bank of America]:


(c) except as required under applicable law or the terms of any [Merrill Lynch] Benefit Plan existing as of the date hereof, (i) increase in any manner the compensation or benefits of any of the current or former directors, officers or employees of [Merrill Lynch] or its Subsidiaries (collectively, “Employees”), (ii) pay any amounts to Employees not required by any current plan or agreement (other than base salary in the ordinary course of business), …
Bank of America Corp., Joint Definitive Proxy Statement (Schedule 14A) (“Proxy Statement”), filed 11/03/2008, Defendant Exhibit B, Appendix A, at A-31 – A-32.

The SEC concedes, however, that Merrill’s agreement to not pay bonuses without BofA’s consent may be excepted under the following language:

Merrill Lynch further agreed that, with certain exceptions or except with Bank of America’s prior written consent (which consent will not be unreasonably withheld or delayed with respect to certain of the actions described below), Merrill Lynch will not, and will not permit any of its subsidiaries to, among other things, undertake the following extraordinary actions … except as required under applicable law or the terms of any Merrill Lynch benefit plan, (i) increase the compensation or benefits of any current or former directors, officers, or employees; (ii) pay any current or former directors, officers or employees any amounts not required by existing plans or agreements …
Proxy Statement at 83 – 84.

BofA maintains and concurs that the Proxy Statement and Merger Agreement make these exceptions clear, as well as qualifying the language to clearly communicate that it does not represent “any other factual information regarding Merrill Lynch.” (Emphasis in original).

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