SEC charges Bank of America with misleading shareholders about Merrill bonuses

By Cydney Posner

The SEC today charged Bank of America with misleading shareholders about billions of dollars in bonuses that were being paid to Merrill Lynch executives at the time of its acquisition of Merrill. Bank of America agreed to settle the SEC's charges and pay a penalty of $33 million. Similar to the case involving Titan Corporation a few years back, this case involves representations made in a merger agreement attached as an appendix to a merger proxy statement and the company's description of those provisions in the proxy statement itself. In the present case, the SEC alleges that in the merger proxy materials, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America's consent. The SEC states that, in fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008. According to the SEC's complaint, the proxy statement was materially false and misleading because of the failure to disclose the existence of the agreement allowing Merrill to pay billions of dollars in bonuses for 2008.

The complaint states that the merger agreement contained a "Company Forbearances" provision, which stated that, except as set forth in the Company Disclosure Schedule, Merrill would not, without the prior written consent of Bank of America, take specified actions, including that it would not "pay any amounts to [directors, officers or employees] not required by any current plan or agreement (other than base salary in the ordinary course of business)." Similarly, the text of the proxy statement, in a section describing the principal terms of the merger agreement, describes this provision, but qualifies it only by a reference to "certain exceptions." The schedule refers, among other things, to incentive compensation that  "may be awarded at levels that (i) do not exceed $5.8 billion in aggregate value…." While the merger agreement was included as an appendix to the proxy statement, the disclosure schedule was not included nor was the specific exception related to the $5.8 billion in bonuses disclosed.

The SEC's complaint contends that the statements in and about the merger agreement "were a representation by Bank of America that, under the terms of the merger agreement, Merrill was only permitted to make 'required' payments to its employees, such as salary and benefits, and was prohibited from paying discretionary year-end bonuses when, in fact, Bank of America had expressly authorized Merrill, as set forth in the undisclosed Schedule, to pay up to $5.8 billion in discretionary year-end bonuses --a fact that a shareholder could not have known from reading the joint proxy statement or any other public source."  In addition, the statements created the misimpression that Bank of America had not already given its written consent to the payment of discretionary year-end bonuses at Merrill.  Moreover, the $5.8 billion in discretionary bonuses  constituted nearly 12 percent of the $50 billion that Bank of America had agreed to pay to acquire Merrill. Further, "neither Bank of America nor Merrill made any disclosures to their shareholders prior to the shareholder meetings concerning the firms' agreement that Merrill could pay up to $5.8 billion, or the revised plans to pay $3.6 billion, in discretionary year-end bonuses before the merger closed."

As a reminder, while Item 601 of Reg S-K allows schedules to merger agreements to be omitted from filing and disclosure, that is not the case if the schedules contain information material to an investment decision that is not otherwise disclosed in the agreement or the disclosure document. Whether merely filing the schedule without further disclosure in the proxy would have saved the day in this case is unclear.  However, as companies invariably prefer not to file and open to the public and the competition all the detail contained in disclosure schedules, any omitted schedules must be reviewed with an eye toward determining and disclosing in the proxy statement and perhaps in the agreement itself any material exceptions contained in the schedule.

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