Bank of America Corporation
) announced the settlement of a class-action lawsuit that was filed
by its shareholders related to the acquisition of Merrill Lynch
& Co. BofA has agreed to pay a total of $2.43 billion and
organize various corporate governance changes.
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BofA bought Merrill for about $29 billion in January 2009 during
the height of the financial crisis. However, the shareholders
alleged that the company and the senior executives deceptively
misrepresented the facts by providing materially misleading
statements about the benefits from deal. This led majority of the
shareholders to approve the acquisition in December 2008.
Hence, the shareholders, who owned the BofA shares or call options
from September 2008 till January 2009, filed the litigation against
the company. The plaintiffs claimed that the consideration for the
acquisition of Merrill was in excess. Also, the lawsuit accused the
company along with some of its senior managers and directors of
deliberately concealing the amount of Merrill's losses and bonus
payouts in 2008.
Without accepting or denying any charges, BofA stated that it
decided to settle the lawsuit to remove ambiguity and expenses
related to the litigation. Further, the proposed settlement is
still subject to review by U.S. District Court for the Southern
District of New York.
Under the terms of the settlement, BofA is required to ratify or
modify its corporate governance practices by January 1, 2015 that
will include clear policies related to any bonus or extra
compensation that could impact the acquisition price. Apart from
this, other conditions include detailed disclosures related to
non-compliance of ownership guidelines, matters related to voting
in director elections and conducting 'say-on-pay' vote on an annual
As a result of the settlement of the aforesaid lawsuit and other
litigation-related matters, BofA anticipates total litigation
expenses to be $1.6 billion for the third quarter of 2012. Apart
from the above-mentioned litigation cost, BofA expects its third
quarter results to be adversely impacted by nearly $1.9 billion
(pre-tax) in negative fair value option (FVO) adjustments and debit
valuation adjustments (DVA) as well as about $800 million charge
related to changes in the U.K. corporate tax rate. All these
factors would lower the earnings by roughly 28 cents per share.
BofA continues to be tormented by the acquisitions it made during
the financial crisis. Apart from Merrill, the company had acquired
Countrywide Financial Inc. in 2008. Both these acquisitions have
been draining the company's funds through various litigations and
losses. However, now BofA is shrinking by divesting or closing
non-core operations and has also announced layoffs in almost all
its operating segments.
Further, the settlement of this latest lawsuit will deter the
companies from providing misleading financial statements while
conducting shareholders' vote for mergers and acquisitions.
For BofA, this is not the end of its litigation troubles. The
company is expected to be confronted by several other lawsuits that
have been filed against it. Moreover, many other Wall Street banks
JPMorgan Chase & Co.
Wells Fargo & Company
) - continue to face litigations related to its business practices
and other issues.
Currently, BofA retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain a long-term Neutral recommendation on the stock.