Analysis of the Sec v Bank of America

The Security Exchange Commission (SEC) on August 3 2009 brought charges against the Bank of America for violating Section 14(a) of the Security Exchange Act of 1934 and rules 14a-3 and 14a-9 for the failure of the bank to disclose, in proxy materials soliciting the shareholders’ approval for the merger. The charges also included the authorization by the bank of America to have Merrill pay the end of year bonus amounting to $5.8 billion to its employees before finalizing the merger.  The bank was also charged with failure of making the disclosure during the December 5 shareholder meeting approving the merger, of the extraordinary losses that Merrill suffered in October and November 2008.  The court order on this case required the Bank of America to make payments of $1in disgorgement and a $150 million penalty as per Section 21 9d) (3) of the Exchange Act. The bank was also mandated to carry out key remedial changes designed to restructure its disclosure and corporate governance processes targeting to benefit the shareholders. The case proceedings exposed the expenses that the Bank of America inherited from the acquisition of Merrill Lynch. The deal ought to increase the financial gains for the shareholders but the results were different. While the management of the Bank of America indicated that the acquisition of the Merrill Lynch bank was a great opportunity for the shareholder as it was a premier wealth-management, the action’s outcomes indicated a breach of the management’s fiduciary duty to the shareholders (Jo, Durairal, Tim, Enomoto, & Ku, 2010).

The Merger

The Bank of America entered into a deal with Merrill Lynch on 15th September of acquisition of the latter. This was regarded as a strategic business combination that would see the holders of Merrill Lynch had a right to get 0.8595 of a share of Bank of America for each share previously held for Merrill Lynch before the merger. The Bank of America would issue over 1.710 billion of ordinary shares and 359,100 preference shares. The acquisition deal was proposed by the CEO of Merrill Lynch during the times of financial turbulence where the stock of Merrill fell by 36% in duration of one week. The acquisition was a way of shielding Merrill Lynch from being downgraded by the rating agency which would lead to bankruptcy. The deal would lead to saving of $7 billion annually due to overlapping business and infrastructure while accumulating a cost of $3 billion. Before the close of the deal the CEO of Bank of America discovered the Merrill was expected to incur a $12 billion loss which was $3 billion higher than the estimated figure (Yulianto, 2017). The CEO considered terminating the deal as per Material Adverse Change (MAC) clause and advised the board but did not inform the shareholder. The government through the Treasury Secretary and Federal Reserve Chairman advised the CEO against it arguing that it would cause an increase in systematic risk and uncertainty in the market. The government official gave threats of firing the Bank of America’s board and management if they terminated the merger. Even with the new information, the board approved the deal and a merger succeeded.

The Bank of America Board’s Breach of Fiduciary to the Shareholders

The Board of Directors at the Bank of America failed to honor the agency agreement between the board and the shareholders. The agency theory requires the management to make their decisions at the interest of the shareholders whom they represent. In this case, the Board was aware of the over $15 billion loss that Merrill Lynch had posted and was contemplating to abort from the deal. The US Treasury Secretary and the Federal Reserve advised the management against using Material Adverse Change Clause in justifying reasons for pulling away. The board agreed to go on with the deal after the federal government threatened to remove the Board and the management. This is a breach to the fiduciary duty entrusted to board. They made the decision to go on with the merger due to pressure from the federal government rather than aligning their decisions with the goal of maximizing the shareholder value (Jo, Durairal, Tim, Enomoto, & Ku, 2010)..

The board failed to carry out a comprehensive due diligence on Merrill Lynch before agreeing to engage in an acquisition deal.  The board appointed JC Flowers to find out the fair price of Merrill Lynch based on the assumptions issued by Bank of America. A due diligence test by the Federal Reserve revealed the demerits of the deal as it was discovered that the bank would not survive on its own. This indicated that the Bank of America did not carry out a comprehensive due diligence test. The board would also have identified the past indicators from the history of Merrill’s unethical performance. The cases of Orange County and Enron were enough evidence to inform the board on not engaging in the acquisition deal (Jo, Durairal, Tim, Enomoto, & Ku, 2010)..  The ignorance of these facts is evidence of the breach of fiduciary duty owed to the shareholders.

The board betrayed their fiduciary duty to shareholders during the process of acquisition of the deal by failing enhance transparency in the deal. The board was mandated to provide all the financial information about Merrill Lynch before the shareholders voted on the merger. The board and the management however failed to discover full information on the Merrill’s losses that would be transferred to the shareholders of the Bank of America (Jo, Durairal, Tim, Enomoto, & Ku, 2010).. The board was aware of the additional losses included on the Merrill books after the vote of the merger was taken. Failure to disclose this was a breach of the duty owed to the shareholder.

The final judgment on the SEC v. Bank of America Corp required the bank to pay a civil penalty of $150 million which was too distributed only to the harmed Bank of America shareholders as per the fair fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. This was the effect of the board’s failure to uphold their fiduciary duty and protect the shareholders from unnecessary expenses that they now had to incur in making the civil penalties. The bank also required the Bank to improve their disclosure and corporate governance process that would air the shareholders views on compensation-related issue. This is an indication that prior to this case, the Board and management at the Bank of America did not have clearing structures on this.

Federal Government’s involvement in the Merger Process

The federal government through the Federal Reserve engaged in the merger process between the Bank of America and the Merrill Lynch. It conducted an analysis through a third party, PIMCO that indicated that Merrill would not survive on its own. The country was experiencing financial recession and financial institutions were collapsing. The government through Treasury Secretary and the Federal Reserve Chairman made threats to indicate that they would fire the board and the management. This was a means of placing undue influence the board and management to see the deal through. The government indicated that they would offer financial assistance through the TARP and downside protection against asset value decline.

The government argued that the Bank of America did not have a strong foundation to affect the Material Adverse Changes. The argument was based on the fact the material adverse effect shall not include effects resulting from changes occurring in the general business or economic or market conditions. Such changes include shifts in the interest rates, currency exchange rates, credit markets and trading volume in the US and foreign securities. Effects of such changes are considered as disproportionately adverse to financial conditions and the business operations. At the time of the merger, the deteriorating performance was as a result of a general economic condition and was common to all industry players. The Bank of America also had its shares plunge from $24 in September 2008 in $6.58 in December 2008. This indicated that some changes resulted from the general economic conditions (Rhee, 2010).

The government involvement is in the merger process and filing the case is legal. The government is mandated through the Securities and Exchange Commission to enforce the federal securities law and enhance regulations of the securities industry. The law provides authority to SEC to take civil enforcement actions against individuals or corporates that have violated the securities law. In this case, the Bank of America had violated, and thus SEC was fulfilling its jurisdiction which justifies its involvement through filing for the case.


Jo, H., Durairal, V., Tim, D., Enomoto, A., & Ku, J. (2010). A Tale of Two Bank Mergers: A Case Study in Corporate Governance Issues during Acquisition. AABRI.

Yualinto, K. (2017). Bank of America-Merrill Lynch Acquisition During Global Financial Perfomance. Journeyman.

Rhee, Robert J., Case Study of the Bank of America and Merrill Lynch Merger (March 27, 2010). U of Maryland Legal Studies Research Paper No. 2010-21. Available at SSRN:

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