On January 22, 2009, Chimicles & Tikellis LLP filed a shareholder lawsuit derivatively on behalf of Bank of America Corporation (“Bank of America” or the “Company”), in the Court of Chancery of the State of Delaware. The lawsuit alleges wrongdoing, including breaches of fiduciary duty, by Bank of America current and former directors in connection with Bank of America’s January 2009 acquisition of Merrill Lynch & Co., Inc. (“Merrill”). On January 29, 2009, the Court appointed Chimicles & Tikellis LLP as Co-Lead Counsel in the action. To view a copy of the Verified Consolidated Amended Derivative Complaint, click here.
On October 12, 2009, the Court denied the Defendants’ motions to dismiss their action in their entirety and directed the parties to commence discovery. Thereafter, C&T and other Co-Lead Counsel engaged in extensive discovery, including the review of approximately 3,000,000 pages of documents and deposing 48 witnesses, and motions to compel discovery which led to production of over 370,000 pages of additional documents. Trial is scheduled to commence in the Court of Chancery on October 22, 2012.
Current Status of Litigation
As discussed below, as a result of a settlement in principle reflected in a Memorandum of Understanding among the parties in In re: Bank of America Corp. Securities, Derivative and Employee Retirement Income Security Act (ERISA) Litigation, C.A. No. 09-2058 (PKC) (S.D.N.Y.), which also includes derivative fiduciary duty claims relating to the acquisition, proceedings in the Court of Chancery have been stayed pending the New York Court’s consideration of a proposed settlement. The Court of Chancery, however, ordered that if the settlement went away, the trial date in Delaware would stand and all Defendants would proceed to trial at that time. To view the ruling by the Court of Chancery, click here. Co-Lead Counsel in the Delaware action strongly opposed the terms of the settlement and intend to vigorously assert that opposition in the New York Court.
Recent Litigation Events
On December 19, 2011, Co-Lead Counsel in the Delaware litigation filed a motion to compel discovery from Defendants. The following are excerpts from the publicly filed version of the Opening Brief In Support of Plaintiffs’ Motion to Compel:
“Plaintiffs seek an Order to compel Defendants, including the Nominal Defendant Bank of America Corporation (“BOA”) on behalf of itself and on behalf of all persons on whose behalf it collected and produced documents and communications to Plaintiffs in this action (including Wachtell, Lipton, Rosen & Katz (“WLRK”)), to produce in unredacted form all documents and communications previously withheld or redacted concerning the following:
(i) the Schedule 14A filed on November 3, 2008;
(ii) the Form S-4 filed on October 2, 2011, and amended on October 22, 2008, and October 29, 2008, by BOA in connection with the merger with Merrill Lynch & Co. (“MER”) (collectively, the “Proxy Statement”); and
(iii) Bankers’ fairness opinion presentation and fairness opinion letters, including all documents concerning communications between or among BOA and WLRK concerning these documents.
Additionally, Plaintiffs seek to compel Defendants to provide and/or permit testimony on these subjects in this matter. The Bankers’ analyses and opinions, as well as copies of written fairness opinions by each of JCF and FPK, were disclosed to BOA stockholders in the Proxy Statement in connection with the BOA stockholder vote, and are therefore clearly relevant to Plaintiffs’ outstanding document requests.
As discussed further herein, documents produced by the Bankers indicate that in preparing to file the Proxy Statement, WLRK (on behalf of BOA) struck the following portion of the FPK fairness opinion letter to be disclosed to the SEC and stockholders.”
“In response to Plaintiffs’ many broadly-based document requests in this action, neither Defendants nor WLRK produced the FPK fairness opinion letter that included the removed language or any communications relating to removal of the language from the FPK opinion letter, until November 25, 2011, and only in response to Plaintiffs’ demand for production based on documents that had been produced by the Bankers.”
(Id. at pg. 3). The publicly filed version of the Brief can be viewed in its entirety here.
Following the completion of briefing, the Court held a hearing on January 23, 2012 and ruled in Plaintiffs’ favor. The complete hearing transcript can be viewed here.
Following the Court’s January 23 Order, the Defendants produced an additional 370,000 pages of documents. Co-Lead Counsel concluded that the additional production did not resolve the outstanding discovery issues. On March 26, 2012, Co-Lead Counsel filed a Supplemental Motion to Compel.
On April 6, 2012, the parties served their respective expert reports. The report of Co-Lead Plaintiffs’ expert shows damages to the Company in the billions of dollars.
While Plaintiffs’ Supplemental Motion to Compel was pending and before briefing was complete, on April 12, 2012, Defendants and the New York Derivative Plaintiffs in In re: Bank of America Corp. Securities, Derivative and Employee Retirement Income Security Act (ERISA) Litigation, C.A. No. 09-2058 (PKC) (S.D.N.Y.), a federal securities derivative action which also included fiduciary duty claims relating to the Merrill acquisition, filed with the New York Federal Court and publicly announced a Memorandum of Understanding which contemplated a proposed settlement and release of all of the derivative claims relating to the Merrill acquisition, including the claims in the Delaware action, in exchange for a mere $20 million and certain corporate governance changes.
On April 23, Defendants filed a Motion for Summary Judgment. Plaintiffs’ opposition was to be filed on May 18, 2012.
The Co-Lead Counsel in the Delaware action strongly opposed and continued to oppose the proposed settlement as grossly inadequate and the product of a “reverse auction” settlement in which Defendants agreed to a settlement with the far less aggressively litigating New York Derivative Plaintiffs who were willing to settle quickly on terms favorable to Defendants while the Plaintiffs in the Delaware litigation were unwilling to do so. Co-Lead Counsel requested the Court of Chancery to enjoin the Nominal Defendant, Bank of America, from finalizing such a settlement without approval of the Delaware Court and the showing required under Delaware law by Zapata v. Maldonado Corp., 430 A.2d 779 (Del. 1981).
Co-Lead Counsel in the derivative action, including Chimicles & Tikellis, asserted that the proposed settlement terms grossly undervalued the valuable derivative claims relating to the Merrill acquisition which were supported by strong evidence developed in the Delaware litigation. The following is an excerpt from the public version of the Corrected Reply Brief In Support of Plaintiffs’ Motion For Injunctive Relief and Expedited Proceedings:
“While the New York Derivative Plaintiffs failed to depose a single one of BOA’s Merger Financial Advisors, the Delaware Derivative Plaintiffs conducted extensive discovery of BOA’s Merger Financial Advisors. Discovery taken of BOA’s Merger Financial Advisors by the Delaware Derivative Plaintiffs led to the filing a motion to compel in this Court, which resulted in the Delaware Derivative Plaintiffs uncovering the fact that BOA directed its attorneys at Wachtell Lipton Rosen & Katz (“WLRK”) to threaten Fox Pitt Kelton Cochran Coronia Waller (“FPK”) (one of BOA’s Merger Financial Advisors) , to materially alter its fairness opinion included in the Merger Proxy by deleting the cautionary language set forth in footnote 20 below, which had initially been demanded by FPK, and which would have informed BOA shareholders as to the serious reservations FPK had about its fairness opinion.”
“The Delaware Derivative Plaintiffs also uncovered and developed compelling evidence that Mr. Lewis knew that the Merger Proxy included false and misleading information by the time of the stockholder vote.”
“Remarkably, these updated accretion/dilution numbers were included in drafts of BOA’s CFO’s Board update the day before the stockholder vote – but were never disclosed to BOA’s stockholders so that they could consider this clearly material information when they voted their Proxies. Mr. Belk’s revised December 4, 2008, accretion/dilution projections stood in stark contrast to the materially false and misleading accretion/dilution information provided to BOA’s stockholders on p. 68 of the Merger Proxy which stated in relevant part, ‘each of FPK and J.C. Flowers determined that the merger would be 2.5% dilutive to Bank of America’s consensus analyst estimated EPS in 2009, 0.3% accretive to Bank of America’s consensus analyst estimated EPS in 2010, and increasingly accretive to Bank of America’s consensus analyst estimated EPS in subsequent years’”
(Corrected Reply Brief In Support of Plaintiffs’ Motion For Injunctive Relief and Expedited Proceedings at pgs. 13-17). The brief is available in its entirety here. Defendants opposed the motion and sought a stay of the Delaware litigation based on the proposed settlement.
On May 4, 2012, the Court of Chancery denied the injunction and granted a stay based on the stated expectation that the Delaware Plaintiff would have the right fully to be heard concerning the merits of the settlement in the New York Court. The Court of Chancery, however, ordered that if the settlement went away in New York, the trial date in Delaware would stand and all Defendants will proceed to trial. To view the ruling in its entirety, click here.
The Delaware Lead Plaintiff also petitioned to intervene in the New York Action to replace the New York Plaintiffs and their counsel. On May 14, 2012, the New York Court denied the intervention (Order available here), noting that the Delaware Lead Plaintiff’s positions were best left to consideration in due course in the settlement approval process. The New York Court recognized that “Shareholders and the Court should closely scrutinize a proposed derivative settlement, because ‘in seeking court approval of their settlement proposal, plaintiffs’ attorneys and defendants’ interests coalesce and mutual interest may result in mutual indulgence.’”
On October 27, 2012, Co-Lead Counsel filed an Objection to Final Approval of Proposed Settlement of the Consolidated Derivative Action (the “Objection”). The Objection detailed the numerous reasons why the settlement should be rejected. The following excerpts from the Objection detail why the New York Plaintiffs lacked the ability to assess the risk of maintaining the action when they agreed to the settlement:
The record, however, shows that the Consolidated Derivative Plaintiffs did not conduct any meaningful discovery in this case, and instead were content to rely on the discovery conducted in connection with governmental investigations into the circumstances surrounding the Merger. Schwartz Decl. ¶¶ 11-12. This fact is made clear by the artful dodge employed by the Consolidated Derivative Plaintiffs at pages 17-18 of their Memorandum of Law in an attempt to avoid having to directly inform the Court that they failed to conduct even a single deposition in the Consolidated Derivative Action.
Moreover, by literally ceding their fiduciary responsibilities to Lead Counsel in the Consolidated Securities Action by requesting and allowing Lead Counsel to conduct the examinations of all of the witnesses purportedly “examined” by the Consolidated Derivative Action, a party that is adverse to BofA, the Consolidated Derivative Plaintiffs violated the fiduciary duties that they owe to BofA.
Furthermore, by ceding this control, the Consolidated Derivative Plaintiffs effectively ensured that they would not be able to develop the evidence necessary to prove BofA’s derivative claims because the interests of the members of the Class in the Consolidated Securities Action are adverse to the interests of BofA.
(Objection at 5-7). The Objection further detailed that the New York Plaintiffs’ failure to prepare an expert report on damages prevented them from:
independently: (i) assess the risk of establishing the damages that were incurred by BofA as a result of the Director Defendants’ breaches of their fiduciary duties to BofA; and (ii) provide the Court with any estimate of the damages that were incurred by BofA as a result of such misconduct by the Director Defendants.
(Objection at 19). The Objection argued that the terms of the settlement were grossly inadequate for several reasons:
The gross inadequacy of the $20 million cash portion of the proposed Settlement is demonstrated in numerous ways:
The $20 million amounts to 0.4% of the $5 billion in damages estimated by Professor Saunders, exclusive of the $2.43 billion in damages caused to BofA relating to the Consolidated Securities Action. Indeed, BofA is now paying a third time for Merrill. Schwartz Decl. ¶ 329. Second, the $20 million amounts to 0.8% of the $2.43 billion BofA has agreed to pay to settle the Consolidated Securities Action. Third, the $20 million amounts to only 4% of the $500 million of D&O insurance coverage that remains available to satisfy BofA’s multi-billion dollar derivative claim against the Director Defendants.
(Objection at 22-23). Lastly, the Objection argued that the settlement should be rejected because it was not the result of an arm’s-length negotiating process:
The record makes it manifestly clear that the proposed Settlement is anything but the result of arm’s length negotiations by effective plaintiffs’ counsel. As a matter of fact, the record establishes that the proposed Settlement is the result of a “reverse auction” pursuant to which the Consolidated Derivative Plaintiffs were enticed with a quick, easy non-cash settlement in exchange for an expectation of a substantial fee. Schwartz Decl. ¶¶ 341-372.
As set forth below and opined in the Miller Declaration, the proposed Settlement has all the earmarks of a collusive process, presenting numerous “red flags.” Miller Decl. ¶¶ 23-32. At the outset, Counsel for the Director Defendants offered separately to each of the Delaware Plaintiff and Consolidated Derivative Plaintiffs the opportunity to negotiate a non-monetary settlement of all of the derivative claims, before deposition discovery had begun. Schwartz Decl. ¶¶ 341-343. Defendants knew that the grow groups had a chasmal difference in vigor and value requirements for a settlement. Schwartz Decl. ¶¶ 344-346. The Delaware Plaintiff’s Counsel, who had expressed a willingness to vigorously litigation the derivative fiduciary duty claims to trial, if necessary, rejected the proposition, maintained that the claims had substantial value and refused to limit a settlement demand to an amount within the $500 million of available insurance coverage and refused not to pursue out-of-pocket contributions from the Director Defendants. Schwartz Decl. ¶ 343. Defendants also were well aware of the lack of vigor being expressed by Consolidated Derivative Action Counsel, having admitted to as much before Chancellor Strine, and further were aware of the fact that the Consolidated Derivative Plaintiffs had agreed to a subordinate role in discovery vis-à-vis Lead Counsel in the Consolidated Securities Action. Schwartz Decl. ¶ 13.
With deposition discovery having not yet begun in the Consolidated Derivative Action, and trial in the Delaware Derivative Action scheduled to commence before trial in the Consolidated Actions, Consolidated Derivative Plaintiffs accepted Defendants’ offer to settle BofA’s derivative claims for a non-monetary settlement.
(Objection 38-40). The Objection and the Declaration of Michael Schwartz can be found here and here.
On January 4, 2013, Judge Castel issued an order that stated “the Court has not been persuaded of the fairness, reasonableness and adequacy of a settlement of the derivative claims against Defendant Lewis in exchange for corporate governance reforms of unquantifiable value and $20 million in cash.” Judge Castel ordered that counsel for the New York Plaintiffs, Delaware Lead Plaintiff and the Individual Defendants meet to discuss revisions of the proposed settlement.
On the eve of the settlement hearing, Co-Lead Counsel in the Delaware Action reached an agreement with Defendants and the insurance carriers to increase the cash component of the proposed settlement by $42.5 million for a total cash component of $62.5 million. At the January 11, 2013 hearing on the settlement, Defendants’ counsel informed the New York Court that the principal reason for the significant increase in the cash portion of the settlement was the efforts of the Delaware Plaintiff and her counsel. The New York Court approved the settlement.
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