Merrill Bonuses Raised Issues in Merger with Bank of America

This post comes is based on an article that first appeared in the New York Law Journal.

On Jan. 1, 2009, Merrill Lynch & Co. Inc. (“Merrill”) merged with Bank of America Corporation (“BofA”). [1] At the end of 2008, prior to the close of the merger, Merrill awarded approximately $3.6 billion in bonuses to its employees. The payment of these bonuses has been the subject of numerous investigations and lawsuits. This column discusses (i) the background to the payment of these bonuses and (ii) a pending lawsuit charging BofA with not furnishing adequate information to its shareholders in connection with their vote on Dec. 5, 2008, in which they approved the merger. [2]


In the one-week period beginning Sept. 13 and ending Sept. 19, 2008, crises erupted at a number of major financial firms. The investment firm of Lehman Brothers filed for bankruptcy. The insurance conglomerate AIG received a pre-TARP bailout of $85 billion (giving the Federal Reserve a 79.9 percent stockholder position; additional amounts subsequently were provided with the total bailout amounting to approximately $170 billion). A third firm facing a financial crisis was Merrill. [3]

On Saturday, Sept. 13, 2008, Kenneth Lewis, the chief executive officer of BofA, met with John Thain, the chief executive officer of Merrill. They discussed the possible acquisition by BofA of Merrill. Merrill’s losses were turning out to be significantly greater than anticipated earlier in the year. Merrill’s losses, the deepening crisis on Wall Street and the precipitous drop in Merrill’s stock price threatened its survival.

On Sept. 15, 2008, BofA and Merrill entered into an agreement to merge (the “Merger Agreement”), subject to shareholder approval which took place on Dec. 5, 2008. Events that took place during this period and that related to year-end bonuses at Merrill included:

  • 1. BofA agreed that Merrill could pay up to a $5.8 billion cap in bonuses for 2008 pursuant to the Merrill Variable Incentive Compensation Plan (VICP). This provision was included in a schedule to the Merger Agreement, but that disclosure schedule was excluded from materials distributed with the proxy statement to shareholders. It is understood that exclusion of such a disclosure schedule from materials distributed to shareholders in connection with a vote on a merger or acquisition is customary practice and was accepted by the SEC in BofA’s case.
  • 2. The proxy statement summarizes actions that, subject to exceptions there noted, were not to be taken by Merrill. One such action was the payment of bonuses:

    [Merrill] further agreed that, with certain exceptions or except with [BofA’s] prior written consent (which consent will not be unreasonably withheld or delayed with respect to certain of the actions described below), [Merrill] will not…among other things, undertake the following extraordinary actions…

    • except as required under applicable law or the terms of any [Merrill] benefit plan…pay any current or former directors, officers or employees any amounts not required by existing plans or agreements….

    Among questions raised by this excerpt from the proxy statement are:

    • a. What is meant by the qualifying phrase “with certain exceptions”? Presumably this refers to exceptions noted in connection with Company Forbearances set forth in Section 5.2 of the Merger Agreement as discussed below.
    • b. What is meant by “except with [BofA’s] prior written consent”? This phrase implies future consent by BofA. Shareholders, however, were not advised that BofA, in connection with the Merger Agreement, already had approved up to $5.8 billion in discretionary bonuses under the Merrill VICP.

    Section 5.2 of the Merger Agreement reads, in part, as follows:

    5.2 [Merrill] Forbearances. During the period from the date of this Agreement to the Effective Time, except as set forth in this Section 5.2 of the [Merrill] Disclosure Schedule or except as expressly contemplated or permitted by this Agreement, [Merrill] shall not…without the prior written consent of [BofA]…

    This language is followed by approximately 20 actions that, with certain specified exceptions, Merrill agrees not to take without prior written consent of BofA. (These actions, including discretionary bonus payments, were summarized in the proxy statement, as noted above.) Section 5.2(c) of the Merger Agreement in referencing bonuses provides that Merrill will not:

    (c) except as required under applicable law or the terms of any Company Benefit Plan…pay any amounts to Employees not required by any current plan or agreement (other than base salary in the ordinary course of business)… [4]

  • 3. As noted above, the Company Disclosure Schedule was attached to the Merger Agreement but not included in the materials distributed to shareholders. The relevant portion of the undisclosed Company Disclosure Schedule, according to the SEC complaint in its Aug. 3 action against BofA, provides that incentive bonus amounts under the Merrill VICP “may be awarded at levels that…do not exceed $5.8 billion in aggregate value (inclusive of cash bonuses and the grant date value of long-term incentive awards)….”
  • 4. On Dec. 5, 2008, shareholders of both corporations approved the merger.
  • 5. On Dec. 17, 2008, Mr. Lewis met with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. He advised them that BofA, having discovered large additional losses at Merrill, much greater than anticipated, was considering calling off the merger pursuant to the “Material Adverse Change” (MAC) clause in the Merger Agreement. At some point, at this meeting or within a few days thereafter, Mr. Paulson apparently advised Mr. Lewis that if the merger were called off by BofA, the country’s financial system might be jeopardized and the Government might require that members of BofA’s Board and its top management be removed. Shortly thereafter, BofA decided to proceed with the merger. The information described in this paragraph 5 was not disclosed to shareholders of BofA or Merrill prior to the merger.
  • 6. On Jan. 1, 2009, the merger of Merrill and BofA took place.

SEC Litigation Against BofA

    • 1. Less than a year after the merger of BofA with Merrill, a number of investigations and litigations are pending in respect of the bonuses awarded by Merrill at the end of December 2008, just prior to the merger on Jan. 1, 2009. [5] These include a lawsuit brought by the Securities and Exchange Commission against BofA on Aug. 3, 2009, in the U.S. District Court (SDNY). [6] The complaint states that BofA had not adequately informed shareholders, prior to the Dec. 5, 2008, vote on the merger with Merrill, of the authorization by BofA of bonus amounts up to $5.8 billion.

    • 2. Also on Aug. 3, 2009, BofA consented to a proposed Final Consent Judgment pursuant to which it would pay a civil penalty in the amount of $33 million in settlement of the litigation. [7] In this proposed Final Consent Judgment, BofA expressly denies admission of any wrongdoing. Thus, the parties attempted to settle the lawsuit by agreeing to the proposed Final Consent Judgment on the same day the SEC brought suit.

  • 3. On Sept. 14, 2009, U.S. District Judge Jed Rakoff, after seeking further information as to the basis for the settlement and determining that the additional information provided was inadequate, rejected the proposed Final Consent Judgment and ordered a trial to take place commencing Feb. 1, 2010. [8] In the Order, Judge Rakoff makes the following rather colorful statements:

    [The proposed Consent Judgment] is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank’s alleged misconduct now pay the penalty for that misconduct….

    * * *

    [I]n all its voluminous papers protesting its innocence, Bank of America never actually provides the Court with the particularized facts that the Court requested, such as precisely how the proxy statement came to be prepared, exactly who made the relevant decisions as to what to include and not include so far as the Merrill bonuses were concerned, etc.…

    * * *

    Overall, indeed, the parties’ submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry—all at the expense of the sole alleged victims, the shareholders. Even under the most deferential review, this proposed Consent Judgment cannot remotely be called fair.

    * * *

    [T]he Consent Judgment would effectively close the case without the S.E.C. adequately accounting for why, in contravention of its own policy…it did not pursue charges against either Bank management or the lawyers who allegedly were responsible for the false and misleading proxy statements. [9]

  • 4. On Oct. 13, BofA and the SEC entered into a Disclosure Stipulation Agreement and Proposed Protective Order (“Disclosure Agreement”) regarding waiver by BofA of attorney-client privilege regarding certain documents and communications. The Disclosure Agreement became the subject of an order by Judge Rakoff, to which the Disclosure Agreement was attached, dated Oct. 14, 2009. [10] The material subject to the waiver was scheduled to be released shortly after this column was written.

Observations on the Matter

On Jan. 1, 2009, BofA shareholders paid $29.1 billion in BofA stock for a business that had lost $27.6 billion in 2008. The bonuses have become a major issue because of claims that shareholders were misled in exercising their vote on Dec. 5, 2008, by lack of information and/or by misinformation as to the size of the bonuses. Obviously, the overriding economic issue of concern in BofA’s acquisition of Merrill are Merrill’s losses and the price paid by BofA for a company with such staggering losses. [11] (The extent of communication of those losses to shareholders, and resulting investigations and litigations, are beyond the scope of the column.)

It can be argued that shareholders should have been aware that large bonuses would be paid. Even in a loss year like 2007 ($7.8 billion in losses), Merrill had paid substantial bonuses. [12] Through the third quarter of 2008, compensation and benefits, as shown in the published financial statements for Merrill, equaled approximately $11.2 billion; for the entire year 2008, these expenses equaled approximately $14.8 billion. [13]

It also can be argued that even if prior to the filing of the proxy statement it was disclosed that BofA had approved bonuses that “do not exceed $5.8 billion,” BofA shareholders would still not have known what the actual bonus amount would be. (In fact, at the time of filing the proxy statement, no one knew exactly what the amount of bonuses would be.) And if the shareholders had seen the $5.8 billion cap, would it have materially affected their vote?

On the other hand, BofA shareholders reasonably might have expected they would be furnished some specific numbers on the projected bonus amounts at Merrill as part of the information on which to base their vote. It would be a reasonable assumption that some employees would receive bonuses based on outstanding individual and unit performance even in a year in which, overall, the employer had losses. But in a year of staggering losses for Merrill (which, as noted, by year-end reached $27.6 billion), presumably shareholders, without specific numbers, generally would not have realized that approximately $3.6 billion in discretionary bonuses would be paid.

As also noted above, at the time this column was written, materials previously withheld by BofA under attorney-client privilege were being released pursuant to waiver by BofA. Whatever those materials may disclose, it is clear that BofA shareholders lacked an adequate picture of the projected bonus amounts. This suggests that, in addition to its current litigation against BofA before Judge Rakoff, the SEC should reexamine its procedures as to disclosure of information to shareholders regarding potential bonus amounts for the year in which a merger or acquisition occurs.


[1] The actual merger involved the merger of a newly created subsidiary of BofA, MER Merger Corporation, into Merrill Lynch & Co. Inc. Merrill Lynch & Co. Inc. as the survivor became a subsidiary of BofA.
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[2] The column does not discuss in any depth issues involving the staggering losses of Merrill for 2008 and why disclosure of spiraling year-end losses were not made before the merger took place Jan. 1, 2009.
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[3] Other firms also faced crises. Citigroup, Goldman Sachs and Morgan Stanley, for example, experienced precipitous falls in stock price. Much of this pressure had to do with short selling, which has been thought to be responsible for a significant portion of the drop.
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[4] This excerpt from the Merger Agreement uses the term “Employees” to reference not only employees but also directors and officers of Merrill or its subsidiaries, thus incorporating the same groups as referenced by the proxy statement in its summary.
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[5] Investigations of Merrill bonuses have included an investigation by New York State Attorney General Andrew Cuomo and by the U.S. House of Representatives Committee on Oversight and Government Reform. At least one shareholders’ derivative suit is pending in the Delaware Court of Chancery involving the bonus issue. See In re: Bank of America Corp. Stockholder Derivative Litigation, No. 4307-VCS, (Del. Ct. Ch). The Ohio Attorney General (on behalf of certain pension funds) is involved in another action pending in the U.S. District Court for the Southern District of New York. See In re Bank of Am. Corp. Sec., Deriv. & ERISA Litig., No. 09-MDL-2058 (S.D.N.Y.).
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[6] Complaint, Securities and Exchange Commission v. Bank of America Corp., No. 09 Civ. 06829 (S.D.N.Y. Aug. 3, 2009). The SEC had been notified of concerns by Congress and others over the lack of disclosure of potential bonus amounts to shareholders prior to the Aug. 3, 2009, action. See, for example, letters exchanged by Representative Dennis J. Kucinich as chairman of the Domestic Policy Subcommittee of the House Oversight Committee (letter dated April 6, 2009) and Mary L. Schapiro as chairman of the SEC (letter dated April 10, 2009).
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[7] Proposed Final Consent Judgment as to Defendant Bank of America Corporation, Securities and Exchange Commission v. Bank of America Corp., No. 09 Civ. 06829 (S.D.N.Y. Aug. 3, 2009).
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[8] Securities and Exchange Commission v. Bank of America Corp., No. 09 Civ. 06829 (S.D.N.Y. Sept. 14, 2009) (Order of the court rejecting proposed settlement); see also Securities and Exchange Commission v. Bank of America Corp., No. 09 Civ. 06829 (S.D.N.Y. Sept. 22, 2009) (Order of the court adjourning trial date to March 1, 2010).
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[9] Securities and Exchange Commission v. Bank of America Corp., No. 09 Civ. 06829 (S.D.N.Y. Sept. 14, 2009) (Order of the court). In footnote 1 to the Order, Judge Rakoff makes observations regarding the source of the funds needed to pay the $33 million penalty as well as the funds needed to pay bonuses to the executives. Footnote 1 reads as follows:

Undoubtedly, the decision to spend this money was made even easier by the fact that the U.S. Government provided the Bank of America with a $40 billion or so “bail out,” of which $20 billion came after the merger. Since $3.6 billion of that money had already been spent, indirectly, to compensate the Bank for the Merrill bonuses—not to mention the $20 billion in taxpayer funds that effectively compensated the Bank for the last-minute revelations that Merrill’s loss for 2008 was $27 billion instead of $7 billion—what impediment could there be to paying a mere $33 million (—or more than most people will see in their lifetimes—) to get rid of a lawsuit saying that the bonuses had been concealed from the shareholders approving the merger? To say, as the Bank now does, that the $33 million does not come directly from U.S. funds is simply to ignore the overall economics of the Bank’s situation.

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[10] Securities and Exchange Commission v. Bank of America Corp., No. 09 Civ. 06829 (S.D.N.Y. Oct. 14, 2009) (Order of the court). The intent of BofA apparently was to waive the privilege also as to certain ongoing state and federal investigations. At least one commentator has questioned whether the effect of the handing over of materials by BofA to the SEC may constitute a waiver as to assertion of the privilege in other proceedings not intended to be covered, including private litigation. See Zach Lowe, “Did BofA Mess Up Its Privilege Waiver?” American Lawyer, Oct. 20, 2009,
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[11] BofA shareholders as well as other parties, including Congressional Committees and New York Attorney General Cuomo, have charged that BofA shareholders were misled in voting approval of the merger by lack of information as to spiraling losses. Angering and frustrating as lack of such information must have been to shareholders in connection with the Dec. 5 vote, anger and frustration must have been equal if not greater over the lack of information regarding further spiraling losses during December after the vote and before the merger. Information not shared with shareholders during this latter period included the apparent intent of the BofA Board during a period in December ending with discussions with the Government to invoke the MAC clause and terminate the merger. As noted in the text, after discussions with Treasury Secretary Paulson and Federal Reserve Chairman Bernanke, in light of the Government’s vehement opposition to a termination of the merger, BofA completed the merger with Merrill Jan. 1, 2009.
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[12] See, for example, Merrill’s 10-K for its fiscal year 2008, Part II, Item 7, p. 24 (Feb. 24, 2009) where it is stated,

Compensation and benefits expenses were $14.8 billion in 2008 and $15.9 billion in 2007. The year over year decrease primarily reflects lower incentive-based compensation costs as a result of lower net revenues and net earnings, as well as reduced headcount levels. The overall decrease in compensation and benefits expense was driven by a 30% decline in incentive-based compensation, partially offset by increased amortization of prior year stock compensation awards.

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[13] The compensation and benefits given in the text are as reported, respectively, in Merrill’s 10-Q for its third quarter and its 10-K for its fiscal year 2008.
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