MBNA and the Merger with Bank of America: Shareholders Sue a "Sweetheart" Deal

In the case Lemon Bay Partners v. Hammonds, No. 07-0562 (D. Del. Sept. 18, 2007), "longtime" shareholders of MBNA Corporation filed a complaint against former officers and directors of the company and the company’s successor, Bank of America Corporation, alleging that the Board of Directors “rubber stamped” a merger deal between MBNA and BAC. According to the complaint, the Board approved this deal despite the fact that MBNA’s CEO reached the agreement during a two-hour dinner meeting, which included provisions that were fraught with self-interest. See Complaint, Para. 3 ("The actual transaction between MBNA and BAC was negotiated between Defendant Hammonds and defendant Kenneth D. Lewis (BAC's President and CEO) over a two hour dinner at an exclusive club in Wilmington Delaware.").

As the complaint asserts, the company was run by a "closely knit group of officers and directors" and that the board lacked independence. "As a result of the intertwined relationships and consequent lack of independence on the MBNA Board, MBNA's executives had become accustomed to receiving excessive compensation." Para. 59.

Plaintiffs contend that Hammonds was searching for an acquirer of MBNA that would, among other things, provide him with an "executive position" in the new company, offer positions to his "close friends," broad indemnification for liability in a securities law suit, and guarantee that existing options would vest. See para. 76. The complaint asserts that at about the same time Hammonds was quoted in Business Week as stating that MBNA had "no 'For Sale' sign" on its headquarters, officials in the company were approaching BAC about a possible transaction. See Para. 79. As the complaint described: "The MBNA Board also stood mute when Hammonds artificially depressed the stock's price by falsely denying that MBNA was for sale, while simultaneously working feverishly to attract a bidder that was to his liking." Para. 81

Moreover, BAC received an option to acquire 249.8 million shares of common stock "at a low price" in what the complaint described as a "show stopper" designed "to prevent the emergence of any potential new bidder." Para. 79.

The complaint alleges violations of Rule 10b-5. In addition, plaintiffs alleged breaches of fiduciary duty, relying on a number of theories. They allege breaches related to insider sales, the failure to ensure entire fairness, and bad faith. In addition, the plaintiffs assert that the directors breached their “Revlon Duties.” These duties require a board to auction its company fairly and to maximize its shareholders’ value when it is on the verge of selling the company. First, the Board approved the merger despite knowing that Hammonds had depressed the companies stock value by denying the company was for sale. Second, the company agreed to “no-shop” and “show-stopper” provisions, which hindered MBNA’s ability to receive third party offers. Lastly, the directors did not allow enough time to properly auction the company; as the merger was completed in less than a month, not nearly enough time to effectively facilitate offers from other potential buyers.

The primary materials on this case can be found at the DU Corporate Governance website.