Court Rejects Challenge to JPMorgan Rescue of Bear Stearns

This post is based on a client memorandum by Marc Wolinsky, Ian Boczko, and Garrett B. Moritz of Wachtell, Lipton, Rosen & Katz. Mr. Wolinsky argued the case on behalf of JPMorgan.

In a thorough, 44-page decision, Justice Herman Cahn of the New York State Supreme
Court today granted a motion for summary judgment dismissing a shareholder challenge to the fairness of JPMorgan’s rescue of Bear Stearns. The decision is a strong endorsement of the protections that the business judgment rule affords to directors faced with the challenges posed by the ongoing credit crisis. In re Bear Stearns Litigation, No. 600780/08.

The suit grew out of the March 16, 2008, agreement under which JPMorgan agreed to acquire Bear Stearns. The deal was struck over a weekend; the timing was driven by the fact that Bear was facing a “run on the bank” and would have had to file for bankruptcy if a deal was not arranged before Asian markets opened. Over the following week, the deal was renegotiated to increase the consideration from $2 to $10 per share. As part of the revised deal, Bear agreed to sell JPMorgan 95 million shares of Bear stock, representing 39.5% of the company’s voting power. JPMorgan requested and the Bear board agreed to the stock sale to enhance the likelihood that shareholder approval would be obtained and thus assure Bear’s customers and counterparties that they could continue to do business with Bear. JPMorgan also guaranteed certain of Bear’s trading obligations in order to reassure customers and counterparties.

While NYSE Rule 312.03 would normally require shareholder approval for a sale of this magnitude, the Bear board relied on NYSE Rule 312.05 to go forward without a vote. That rule permits bypassing a vote if the company’s audit committee finds that the delay would “seriously jeopardize” the company’s financial viability. The merger agreement also included other “deal protection” measures, including an option to purchase Bear’s headquarters building.

The court rejected all of the plaintiffs’ challenges to the deal, holding that the business judgment rule applied and that, under that rule, the court could not second-guess the board:

In response to a sudden and rapidly-escalating liquidity crisis, Bear Stearns’ directors acted expeditiously to consider the company’s limited options. They attempted to salvage some $1.5 billion in shareholder value and averted a bankruptcy that may have returned nothing to the Bear Stearns’ shareholders, while wreaking havoc on the financial markets. The Court should not, and will not, second guess their decision.

The court specifically ruled that the Bear board was justified in agreeing to sell
JPMorgan the 95 million shares in order to make sure that the deal would close; according to the court, these provisions were “essential to ensure JPMorgan’s willingness to undertake what it perceived as significant risks involved in guaranteeing Bear Stearns’ obligations, and to assure customers and counterparties that the deal would go through.”

As the credit crisis continues and evolves, boards will continue to face serious challenges. The Bear Stearns opinion confirms, however, that directors that act diligently and in good faith should not have exposure for their actions.

The Court’s decision is available here.

Post a comment or leave a trackback: Trackback URL.

One Trackback

  1. […] a December 5, 2008 post on the Harvard Law School Corporate Governance Blog (here), the attorneys that represented JP Morgan in the Bear Stearns case discuss the decision in greater […]

Post a Comment

Your email is never published nor shared. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

  • Subscribe

  • Cosponsored By:

  • Supported By:

  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Brand
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    David Fox
    Stephen Fraidin
    Byron Georgiou
    Carl Icahn
    Jack B. Jacobs
    Paula Loop
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Morton Pierce
    Barry Rosenstein
    Paul Rowe
    Rodman Ward