Our readers in Baton Rouge may have entertained a variety of opinions about the 2008 merger between Bank of America and the struggling Merrill Lynch investment firm. The allegations set forth in a recently filed lawsuit make clear the opinions of shareholders. In what may represent a landmark case in business law, the shareholder complaint accuses the bank of concealing knowledge of projected losses and detrimental merger effects at the time that shareholders were asked to vote on approval of the acquisition.
The court filings reveal that, prior to the shareholder vote, the bank’s CEO had warning that the merger would likely result in losses far greater than projections set forth in regulatory filings. The regulatory filings suggested that the bank could expect to lose profit for a short time after the merger took effect, but that the bank would likely recover and potentially see a minor gain in fiscal year 2010.
Sworn statements submitted with the complaint indicate that bank executives learned shortly before the shareholder vote that the investment firm’s mortgage losses were likely to have a much greater negative impact than the regulatory filings disclosed. To make an informed decision on merger proposals, shareholders rely on the information provided in regulatory filings. The lawsuit accuses the bank of failing to properly disclose anticipated losses, and the shareholders seek compensation for damages resulting from dramatic stock price decreases in the wake of the merger and a subsequent federal bailout.
The law requires that companies proposing a merger make accurate financial disclosures to enable shareholders the opportunity to cast an informed vote. This case demonstrates the risks that companies face when they violate disclosure requirements. That risk may even extend to corporate executives, as the bank’s CEO is named as a personal defendant in the pending business litigation.
Source: Herald-Tribune, “Bank of America executives were warned merger would punish earnings,” Gretchen Morgenson, June 4, 2012