When Bank of America’s former general counsel, Tim Mayopoulos, was asked about the bank’s decision not to disclose losses or bonus levels at Merrill Lynch prior to the shareholder vote on the acquisition, he said he had spoken with Wachtell, Lipton, Rosen & Katz about the matter. So will Wachtell fall under scrutiny for advising its client to avoid disclosure?
Generally, it’s very hard for regulators to go after law firms or individual lawyers for the advice they give their clients. Except in extraordinary circumstances–such as outright advocacy of law breaking–the advice is protected and only the clients can be held be responsible for actions deemed to be violations after the fact. If the lawyers are going to be punished for their advice, it usuallly is because the client sues for malpractice.
But perhaps things aren’t as clear cut as that in this case. Zero Hedge points out that in SEC’s response to Judge Rakoff, the Commission points out that Wachtell Lipton has published a well-known paper which emphasises the point that companies should not hide material information in proxy filings of merger documents.
It was an issue that emerged in the context of the Titan Corporation. It is standard practice in most merger agreements that both parties make blanket representations and warranties that are then limited or even retracted by information on a disclosure schedule annexed to the agreement. For instance, a company might say it faces no material litigation but then add that the exceptions to this are listed on the disclosure schedule. For a long time, companies were including the merger agreement in proxy statements but leaving out the disclosure statements.
The Wachtell paper pointed out that the SEC was turning against this practice when the merger agreement contained statements that would be misleading without the disclosure schedule. In the case of Titan, the company failed to include a its proxy a disclosure schedule that would have revealed that it had faced a Foreign Corrupt Practice Act charge.
In the Bank of America-Merrill merger, Bank of America did not include in its proxy statement a disclosure schedule that would have let shareholders know about the bonuses that would be paid to Merrill executives.
So is Wachtell screwed? ZeroHedge concludes that this might be a way to divert attention away from Ken Lewis and the executives at Bank of America. “The upside: with this minor scapegoat, Ken goes away scott-free, just as the overlords had promised,” ZeroHedge writes.
But we wouldn’t be too quick to say that Wachtell faces serious trouble over the advice it most likely gave Bank of America. The bank has argued that the bonus and loss information weren’t material to the deal. If the bank is right, not disclosing the schedules didn’t contradict Wachtell’s paper, which only advised against excluding material information.
As is so often the case, this all comes down to a technical legal question of whether or not the bonuses were material.