It didn’t take long for previously-privileged Bank of America (BAC) documents to be leaked.
DealBook has a small number of documents (embedded below), including talking points prepared by Wachtell for a December board meeting and a script dated December 20 for a call between “KL/HP” — which appears to mean Ken Lewis and Hank Paulson. (Amusingly, Wachtell even including the greeting in the script: “I’m sorry to call so [late/early], but I wanted to touch base.”)
As DealBook notes, the documents confirm an earlier New York Times report that said Bank of America warned the government that there appeared to be reason to enact the “material adverse change” clause — called the MAC in the documents — though Wachtell warned BofA that getting out of the deal would result in litigation that BofA could lose.
Prior to the preparation of the Board talking points that are included in Set 1 below, Wachtell sent a breakdown addressing the potential of exercising the MAC, which are included in Set 2. Wachtell said doing so would result in litigation, which was an undesirable risk because:
- No Delaware court has ever found that a MAC occurred permitting an acquiror to terminate a merger agreement.
- To meet Delaware’s “very high threshold” for invoking a MAC, BofA would need to show “unknown events” that would “substantially threaten the overall earning potential” of Merrill in “a durationally sensitive manner.”
- Wachtell walked through each of these standards, suggesting Merrill would point out that BofA was aware of the “volatility” at Merrill and “specific risks” that Merrill faced; that the losses were short-term, that a short-term earnings loss, no matter how severe, was not “durationally” significant; that not all of Merrill’s businesses were performing poorly and that it was eligible for $10 billion in TARP money.
Despite this warning about the risks of triggering the MAC, a script of a call suggests Ken Lewis should tell Hank Paulson that:
- “We are still of the view that there has been a MAC at Merrill — and everyday their numbers get worse.”
- BofA may still be willing to move forward if it receives assurance of protection.
- After laying out deal points, the script calls for Lewis to say, “It goes without saying that a very substantial purchase price reduction to the Merrill shareholders would be highly appropriate. However, we think it would be better for the system if we closed on 1/1 rather than wait the couple months or so that it would take to go back to the stockholders.
Some highlights from Ken Lewis’s talking points for a December 23 board meeting, sent at 3:40 am on December 22:
- The script calls for Lewis to tell the Board that he has received assurance from the government that BofA will receive assistance if it goes through with the deal.
- “We do not believe exercising the MAC and litigating the issue, perhaps against our regulator as conservator for Merrill or owner of Merrill would be wise for our company.”
- “We have studied the results from Merrill, the numbers are horrible…We might not be recommending a change of course from declaring a MAC in absence of the government assistance.”
The talking points appear to have been revised later that day, and do not focus on litigation issues concerning the MAC. The script calls for Lewis to tell the board:
- The government is unified in its belief the deal should be closed and suggested Board members and BofA management would be replaced if BofA invoked the MAC.
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