Legal News

Is ?The Government Made Me Do It? a Valid Legal Defense?

By Amir Efrati

Merrill Lynch Chairman and CEO John Thain, left, and Bank of America Chairman and CEO Ken Lewis announce the merger, Sept. 15, 2008. (AP)

If the government wants a company not to reveal material information to its shareholders, does that make it easier or harder for investors to sue the company?

That’s the lingering question after this morning’s disclosure about the Bank of America-Merrill Lynch merger. And we may not know the answer until a court decides.

First, a little background. Bank of America shocked the investment world with its mid-January announcement that Merrill, which it had just purchased, lost $15 billion in the fourth quarter of 2008 alone. BofA’s share price plunged. Shareholders who approved the deal were furious. And plaintiffs’ lawyers sharpened their pencils and crafted these suits (here and here), claiming BofA’s executives and directors failed to disclose material information and breached their fiduciary duties by not terminating or renegotiating the merger.

This morning, the New York Attorney General made public the transcripts of depositions he took of BofA’s chairman, Ken Lewis, and former Treasury Secretary Henry Paulson regarding the merger. (Click here and here for details and excerpts.)

According to the transcripts, Lewis said Paulson told him the government would remove BofA’s board and management if it acted on its urge to back out of the merger. Lewis also said his decision not to disclose information to shareholders was based on direction from Paulson and Federal Reserve Chairman Ben Bernanke: “I was instructed that ‘We do not want a public disclosure.’ ” (A spokeswoman for Mr. Bernanke said today that the Fed didn’t advise Lewis on disclosure.)

Could these revelations offer BofA and Lewis a shield from lawsuits? One law professor, Michael Perino of St. John’s, thinks not. He says there’s nothing in the law that says defendants can withhold information from shareholders because “the government made us do it.” If “Paulson told [BofA] to obscure the information, it doesn’t create any sort of defense” to the lawsuits, he says.

Perino also said the disclosures might help litigants establish that the board members “had a motive to keep pushing through the deal,” no matter the short-term cost to shareholders. Of course, he says, the board will argue it acted in the best interest of shareholders, because if they terminated the merger and the government acted on its threat, shareholders would be harmed.

Joseph Grundfest of Stanford Law says it’s too soon to say whether the disclosures weaken Lewis’s position in the lawsuit. More facts need to emerge, including whether Lewis consulted his lawyers in not disclosing his doubts about Merrill and “what did the lawyers tell him?” he says. “If Lewis's state of mind was to obey directions from the Secretary of the Treasury and head of the Federal Reserve, who have the power to put his bank out of business and cause mass losses to his shareholders…it's entirely credible to see how Mr. Lewis could craft a defense.”

Full post as published by Law Blog - WSJ.com on April 23, 2009 (boomark / email).