Bank of America Corporation (BAC) 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.
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 basis.
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. (JPM) and Wells Fargo & Company (WFC) – 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.
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