By Cydney Posner
There has been a small flurry of press in connection with the litigation arising out of the BofA acquisition of Merrill Lynch that occurred in the midst of the 2008 financial crisis. In 2010, BofA settled with the SEC over charges of fraud and misleading disclosures in it merger proxy statement. The amount of the settlement ($150M) was reached after Judge Rakoff rejected the initial, even smaller, settlement. (See my article of 2/5/10.) But the private bar has also been active in this matter, and recent court filings in the private shareholder litigation have created a small buzz.
You might recall that BofA had, in its press release announcing the deal and in various presentations, indicated that the acquisition of Merrill would be 3% dilutive in 2009 and either breakeven or accretive to earnings in 2010. Over the months prior to the shareholders' meeting, BofA learned that Merrill's losses would be devastating, likely to be 13% dilutive. Nevertheless, no disclosure of the losses was made prior to the shareholders' vote to approve the deal. As reflected in the plaintiffs' recent court filing in the shareholder litigation, BofA's then CEO claimed that he did not disclose the losses because he was advised by widely respected outside counsel that it was not necessary. The filing also revealed that, in response to a question regarding the potential dilutive effect of the merger posed at the shareholders' meeting, the CEO essentially reaffirmed the prior guidance: "We have said as I recall in the [September 15] presentation that we will have dilution in the first year, break-even in the second; and then accretion in the third." (Interestingly, a quick scan of BofA's proxy statement reveals that the only forecasts of accretion (that I was able to find) are framed as historical statements and not made directly by BofA. For example, the financial advisors described their forecasts of accretion as part of the description of the analyses of their respective opinions presented to the boards, with Merrill's advisor, its very own Merrill Lynch, Pierce, Fenner & Smith Incorporated, forecasting accretion to earnings in both 2009 and 2010. In the section of the proxy regarding the BofA board's reasons for approving the transaction, the proxy describes as one of the factors considered by the board the "combined net income forecasts for Bank of America and Merrill Lynch made by various third-party brokerage firms and published as consensus estimates by First Call would result in the combination being 3.0% dilutive in 2009 and breakeven in 2010.")
Reporting on developments in the private litigation, Gretchen Morgenson in the New York Times highlights the juicier revelations in the court documents. This piece in Pro Publica includes several excerpts from the court documents, providing a flavor of the internal discussion over the disclosure issue (at least from the plaintiffs' perspective). The case certainly raises interesting issues about whether there is a duty to update or correct in this instance and whether the CEO's statements, while perhaps a technically correct reprise of what had been said in the past, were a current reaffirmation of highly inaccurate information. There has also been quite a bit of speculation about what advice outside counsel had given to BofA and the merits of that alleged advice (see, in particular, this piece in Law360). These issues will be discussed at the next public companies meeting on Tuesday, so don't miss it.