As other financial giants like Lehman Brothers and AIG were in a sharp decline during the fall of 2008, Bank of America was poised to make a major acquisition. The $50 billion purchase of Merrill Lynch by Bank of America was announced in September 2008, at the height of the financial crisis. At the time of the announcement, both institutions touted the merger as creating a global financial superpower that would lead to increased earnings within two years.
Unknowingly to investors, the financial health of Merrill Lynch, and subsequently Bank of America, was in a free-fall. Shareholders for both companies voted to approve the acquisition on December 5, 2008, without direct knowledge that Bank of America executives foresaw a fourth-quarter loss of tens of billions of dollars. It wasn’t until January 16, 2009, weeks after the merger became official, that Merrill Lynch’s fourth-quarter net loss of $15.31 billion was released. The disclosure enraged shareholders who were not privy to the forecast when they approved the deal in 2008.
As a result, shareholders entered into a class action against the bank. The bank recently settled the case for $2.43 billion, ranking it within the top 10 largest securities class action settlements on record, joining the likes of WorldCom and Enron. A settlement has been reached in principle, but the claims administrator is not yet accepting claims. When the settlement is approved by the court in the coming months, the claims will begin to be accepted.
This case differs from than the majority of class action settlements in that it is what’s described as a merger case. While the eligibility requirements for a “typical” class action settlement involve a court-approved class period, eligibility of a merger case depends only on how many shares were held at the time of the merger, regardless of when the shares were purchased. As the Bank of America/Merrill Lynch merger was consummated on Jan 1, 2009, this is the day investors need to have held the shares to be eligible for filing a claim. Another interesting facet of this case is that only Bank of America Common Stock, as well as Put and Call options on the common stock, are eligible. Merrill Lynch shares held at the time of the merger are not eligible.
The Bank of America case is one of about 120 credit crisis cases filed between 2007 and 2008. Many of these cases are very large in comparison to other class action settlements, and therefore can take longer to settle. Based on the average settlement time, it is likely that we will see several more cases related to the financial crisis settle in the near future.