BofA-Merrill Merger Settlement Affirmed

(CN) - The 2nd Circuit affirmed a final settlement of shareholder lawsuits stemming from the Bank of America's merger with Merrill Lynch at the height of the global banking crisis.

The underlying litigation harkens back to Bank of America's negotiations with Merrill Lynch in the fall of 2008, which culminated in the two financial institutions merging in January 2009.

The negotiations took place against the backdrop of the collapse of Merrill, and included whether Bank of America would subsidize prospective year-end bonuses for Merrill Lynch executives, a condition to which Bank of America agreed. The parties also agreed that these bonuses would be paid out in December 2008, prior to the merger officially closing.

Holders of Bank of America stock and derivative options brought claims against Bank of America when it was discovered that senior officers at the Bank withheld information leading up to the shareholder vote on the merger -- information that included Merrill Lynch's losses of more than $20 billion in the final quarter of 2008 and agreements regarding bonuses orchestrated by the two financial institutions in anticipation of the merger.

Plaintiffs contended that rather than disclose the true extent of Merrill Lynch's losses in the fourth quarter of 2008, the financial institutions filed a joint proxy statement seeking shareholder approval of the merger.

The plaintiffs charged these alleged false and misleading statements were violations of the Securities Exchange Act of 1934 and the Securities and Exchange Act of 1933. They further asserted that while some Bank of America officials wanted to stop the merger from taking place, those efforts were stymied by then-Treasury Secretary Henry Paulson and then-Chairman of the Federal Reserve Ben Bernanke.

The plaintiffs said for agreeing not to invoke the so-called "material adverse change" clause that would have killed the deal, the federal government provided Bank of America with a $138 billion bailout.

The aggrieved shareholders weren't the only ones to take notice. In January 2010, the Securities and Exchange Commission charged Bank of America with violating federal proxy rules by failing to disclose "extraordinary financial losses at Merrill Lynch & Co." before the shareholders vote that approved the merger of the two companies. The SEC said the bank knew that Merrill lost $4.5 billion in October 2008 and billions more in November - between its merger announcement and the shareholders vote - but did not inform shareholders of it.

The action came just weeks after Bank of America agreed to show the SEC the legal advice it received before buying Merrill Lynch, a move the Courthouse News characterized as "a giant step" in trying to dress up the allegations that Merrill agreed to hand out billions of dollars in bonuses even as it failed, that Bank of America approved the plan while accepting $45 billion in a taxpayers' bailout, and that both companies lied about the bonuses to shareholders.

U.S. District Judge P. Kevin Castel consolidated the claims and named lead plaintiffs to pursue actions on behalf of the larger class. However, before the trial commenced, the parties negotiated a $2.4 billion settlement agreement that set aside funds to pay any litigation costs and attorneys' fees award by the court.

Castel approved the notice of settlement to class members in December 2012, but after it was issued, a number non-named class members objected to the proposal.

Specifically, four family trusts questioned whether attorneys' fees under the settlement agreement were reasonable, whether representative plaintiffs were entitled to a $453,000 reimbursement for litigation costs, and when the notice complied with due process requirements and various federal regulations.

Judge Castel ultimately concluded the settlement notice was "the best notice practicable under the circumstances," the appellate ruling states. The objectors promptly appealed Castel's ruling.

On review U.S. Circuit Judges Peter Hull, Ralph Winter Jr., and Barrington Parker Jr. found no evidence the district court abused its discretion in approving the settlement agreement.

In regard to the reimbursement to the representative plaintiffs. the three-judge panel found the notice approved by Castel "unequivocally conveys the relevant information to the respective class members. The district court, therefore neither exceeded the bounds of its discretion in approving the notice, nor violated the Federal Rules of Civil Procedure or the United States Constitution."

The panel also noted the representative plaintiffs submitted detailed affidavits to the district court regarding hours dedicated to litigation and a statement that these hours constituted lost work time.

On the matter of attorneys' fees, the panel said that "Despite challenging the reasonableness of the fees awarded in the present case, the objectors-appellants have failed to identify any specific abuse of discretion on the part of the district court, and therefore our review convinces us that the court awarded fees based upon an application of the criteria set out in Goldberger."

Goldberger v. Integrated Res., Inc. was a 2000 case in which the 2nd Circuit said, "What constitutes a reasonable fee is properly committed to the sound discretion of the district court, and will not be overturned absent an abuse of discretion, such as a mistake of law or a clearly erroneous factual finding."

Finally, the panel rejected the objector's claims that Judge Castel erred on the average amount of damages per share he award. Here again, the circuit judges concluded, the lower court was well within its discretion to decide the matter as it did.

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