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Bank of America Settlement Factors

March 14, 2016

Gavel

With the global discussion of corporate governance and shareholder rights gaining momentum, it is helpful to revisit landmark cases that have been influential in shaping the dialogue. In particular, the case In re Bank of America Corp. Securities, Derivative, and ERISA Litigation, No. 09-MD-2058 (S.D.N.Y.), represents one of the most significant shareholder recovery cases to emerge from the recent financial crisis. This case serves as a backdrop for many other cases and developments in the past years. 

Acting as co-lead counsel, Kessler Topaz helped secure

  • The 8th largest monetary award obtained in a federal securities class action
  • One of the four largest recoveries ever funded by a single corporate defendant
  • The single largest recovery ever obtained for an alleged violation of Section 14(a) of the Securities Exchange Act of 1934 (protecting shareholders from misstatements made in connection with a proxy solicitation)
  • Various provisions in the settlement aimed at instituting governance reforms to help prevent future legal violations

It has been more than three years since the $2.4 billion settlement for shareholders of Bank of America Corporation (“BofA”) in relation to the 2008 BofA merger with Merrill Lynch & Co., Inc. (“Merrill”). Since that time, we are beginning to see the effects this landmark decision has brought.

Recap of Main Case Issues

On September 28, 2012, the Lead Plaintiffs announced that they reached a $2.425 billion settlement agreement with BofA in relation to the BofA/Merrill merger. The case revolved around two main issues:

  • First, shareholders were not informed of Merrill’s deteriorating financial condition prior to the merger announcement. On account of this, BofA shareholders were not aware of Merrill’s $21 billion losses during the fourth quarter of 2008 as they entered into the merger agreement.
  • Secondly, BofA shareholders were not aware of an agreement between BofA and Merrill, allowing Merrill unchecked discretion to pay up to $5.8 billion in bonuses, despite its financial performance just prior to entering into the merger.

As a result of these two issues, BofA shareholders were not able to clearly assess the impact of the merger on their BofA investments. Thus, this case underscored the need for transparency in corporate decision-making and the ability of shareholders to cast fully informed votes on matters of corporate significance.

Corporate Governance Principles in the Terms of Settlement

In re Bank of America Corp. is important because it reflects a shift from mere financial compensation to an increased focus on instituting corporate governance reform measures. For instance, the case settlement also included the following measures:

  • Reforms involving majority voting requirements for BofA directors
  • Requirements regarding mandatory disclosures to the board of directors in relation to significant corporate transactions
  • Stock ownership requirements for executives and directors
  • Independence of BofA’s board of directors’ compensation committee

These are intended to rectify and help prevent issues previously encountered in significant corporate transactions, such as the BofA/Merrill merger. Three years later, we are beginning to see the ripple effects of this shift in focus.

Continued Discussion Since the Settlement

The effects of the financial crisis are still being felt—for instance, there is still litigation coming out because of it, such as the recent Morgan Stanley settlement related to the sale of mortgage bonds. On the other hand, the BofA merger case marks a new era ushering us out of the wake of the financial crisis into a newer, more forward looking stance regarding governance policy implementation.

Renewed efforts to achieve viable governance strategies are appearing globally. Examples of these include renewed governance efforts in the East, with China and other countries exploring various new governance strategies. We are also seeing continued discussions regarding shareholder voting rights, transparency, and related issues in various conferences and forums.

Changes are also being introduced domestically, such as with a recently proposed FINRA Rule (Notice 14-52) requiring enhanced fee disclosures in fixed income investments, The proposed rule is intended to help investors understand costs and risks associated with various fixed-income securities. The proposal has generated robust discussion; the general consensus is that the proposal squares with the overarching need for transparency in transactions, but may contain some flaws and impracticalities in the scope of its implementation methods. 

Thus, some 3 years later, it is becoming clear that the BofA merger settlement was only the beginning of recovery from the financial crisis. With the corporate governance discussion underway, the next steps focus on crafting long-term governance policies that can be implemented and executed practically given the tools and resources available. Over time, the narrative can be expanded to include analysis of governance methods to determine which methods are efficient and which ones may be too restrictive.  

Issues such as governance and shareholder voting rights are crucial to the continued financial crisis recovery. If you would like to learn more about these issues, or would like to speak with an attorney, contact us at Kessler Topaz. Our team of attorneys is dedicated to obtaining both financial recourse as well as reform measures for shareholders facing challenges in important corporate decisions.