Thursday, June 11, 2009

Either outcome could have had severe consequences for BofA that Lewis had to consider in deciding whether to go through with the acquisition.

TO BE NOTED: From The Deal:

"MAC clause was not an option for Lewis
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lewis,ken125x100.jpgKen Lewis can't escape the kudzu-like clutches of Bank of America Corp.'s (NYSE:BAC) acquisition of Merrill Lynch & Co. as the House of Representatives Oversight Committee probed him Thursday on whether Ben Bernanke and Henry Paulson forced him to go through with the deal against his better judgment.

Lewis had two ways out of the deal, at least in theory. He could have claimed that Merrill had suffered a "material adverse change" that would have let BofA walk. But the parties' merger agreement provided that any disputes over the contract would be litigated under Delaware law, and in April 2008 the Delaware Court of Chancery showed it had no appetite for involving itself in such a politically charged situation. Bears Stears Cos. shareholders challenged the sale to J.P. Morgan Chase & Co. on the grounds that the deal-protection measures in the companies' revised merger agreement were illegal under Delaware law.

Vice Chancellor Donald Parsons Jr. wanted no part of the case. In a broadly written opinion, he all but said that he would not involve himself in a matter that the Treasury secretary claimed involved the stability of the U.S. financial system. By deferring to Washington, Parsons was probably trying to forestall an assault on Delaware's corporate law franchise by showing Congress that he and his fellow judges acknowledged the practical limits of state corporate law. A Delaware judge would likely have reached the same result had BofA declared an material adverse event and tried to walk from the deal.

Lewis' lawyers at Wachtell, Lipton, Rosen & Katz advised J.P. Morgan on the Bear deal and the related case, and they must have told him that given the circumstances under which BofA agreed to buy Merill, no Delaware judge would stand in the way of the deal absent extraordinary misconduct at the target.

Lewis and his board had another escape hatch: They could have recommended that their shareholders vote down the deal if they believed their fiduciary duties required them to do so. Of course, such a recommendation risked alienating Bernanke and Paulson, both of whom discouraged Lewis from trying to walk or get BofA shareholders to reject it. Either outcome could have had severe consequences for BofA that Lewis had to consider in deciding whether to go through with the acquisition.

In reality, the only practical way for Lewis to get out of buying Merrill wasn't in the merger agreement; Bernanke and Paulson would had to have approved. Without that, Lewis was stuck. - David Marcus

See related story about Lewis testimony from Dealscape
See related story about Fed e-mails from Dealscape

David Marcus is the editor of Corporate Control Alert."

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