[This] will likely result in the bank handing over troves of documents -- including emails and memos between BofA and its outside law firms -- to the federal, state and congressional officials who are investigating the Merrill purchase, according to people familiar with the matter. ... Bank executives, including Mr. Lewis, have said repeatedly that they followed the advice of lawyers in making decisions on what to disclose to shareholders and at the same time asserting the bank did nothing wrong.BofA's lead outside counsel on the Merrill deal, Ed Herlihy of Wachtell, is a superb lawyer—a brand-name M&A lawyer, to be sure. But boy has he had a rough financial crisis. First Herlihy was JPMorgan's lead counsel on the Bear Stearns merger. The original merger agreement in that deal, of course, included the famously botched guarantee provision, which almost torpedoed the whole deal and forced JPMorgan to raise their offer from $2 to $10 per share. Then he led the team that advised the Treasury in structuring the Fannie/Freddie conservatorship, which has been criticized quite a bit in the markets. And now the BofA-Merrill deal. It turns out that the BofA-Merrill bonus case centers on the decision of the banks' law firms, Wachtell (for BofA) and Shearman & Sterling (for Merrill), on what to disclose to shareholders in the merger agreement and proxy statement, and what to include in the confidential disclosure schedule. (The merger agreement provided that Merrill wouldn't pay bonuses prior to the closing, except as set forth in the disclosure schedule; Merrill's $5.8bn bonus pool was included in the disclosure schedule. I agree with The Deal Professor that the SEC's argument is pretty weak. Like it or not, BofA likely did nothing wrong in this case.) I doubt Herlihy was personally involved in the bonus-disclosure decision, as broad negative covenants are standard in merger agreements, and disclosure schedules typically aren't prepared by senior M&A partners like Herlihy. And Herlihy has had some notable wins in the financial crisis too, such as the Morgan Stanley/Mitsubishi UFJ deal and Wells Fargo's acquisition of Wachovia. But still, BofA's disclosures are likely to include lots of communications between Herlihy and BofA directors, and much of it undoubtedly occurred under incredible time-pressure, which increases the odds that something embarrassing will be revealed exponentially. For my money, the most interesting disclosure would be Wachtell's advice to the BofA board in December that it had legal grounds to invoke the material adverse change (MAC) clause and walk away from the Merrill deal. Like the Am Law Daily says, it's about to get uncomfortable over at Wachtell, Lipton.
Monday, October 12, 2009