Guest post: Trouble looms for Lewis at annual meeting with MAC clause top of mind

Submitted by Edward Harrison of the site Credit Writedowns

This is an updated version of a post that I wrote yesterday at Credit Writedowns. Today we are going to see whether shareholders are going to back Ken Lewis, the embattled CEO of Bank of America, and his board. I see this as a watershed event in American corporate governance because, apparently the likes of Calpers are leading the charge to oust the board, or at a minimum Lewis (see articles on these efforts here and here at DealBook)

As Bank of America (BAC) prepares for its annual meeting, it is clear that things are coming to a head. At issue is the stewardship of Ken Lewis, BofA’s CEO. Over the past few days, I have written three posts regarding the increasingly acrimonious sparring surrounding Bank of America’s acquisition of Merrill Lynch.

The latest news is stunning: Bank of America’s MAC clause could probably never have been invoked because it had a specific exclusion for the deteriorating prices of legacy assets on Merrill’s books.

Here’s what it says. All you need to do is read the highlighted parts:

3.8 Absence of Certain Changes or Events. (a) Since June 27, 2008, no event or events have occurred that have had or would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect on Company. As used in this Agreement, the term “Material Adverse Effect” means, with respect to Parent or Company, as the case may be, a material adverse effect on (i) the financial condition, results of operations or business of such party and its Subsidiaries taken as a whole (provided, however, that, with respect to clause (i), a “Material Adverse Effect” shall not be deemed to include effects to the extent resulting from (A) changes, after the date hereof, in GAAP or regulatory accounting requirements applicable generally to companies in the industries in which such party and its Subsidiaries operate, (B) changes, after the date hereof, in laws, rules, regulations or the interpretation of laws, rules or regulations by Governmental Authorities of general applicability to companies in the industries in which such party and its Subsidiaries operate, (C) actions or omissions taken with the prior written consent of the other party or expressly required by this Agreement, (D) changes in global, national or regional political conditions (including acts of terrorism or war) or general business, economic or market conditions, including changes generally in prevailing interest rates, currency exchange rates, credit markets and price levels or trading volumes in the United States or foreign securities markets, in each case generally affecting the industries in which such party or its Subsidiaries operate and including changes to any previously correctly applied asset marks resulting there from, (E) the execution of this Agreement or the public disclosure of this Agreement or the transactions contemplated hereby, including acts of competitors or losses of employees to the extent resulting therefrom, (F) failure, in and of itself, to meet earnings projections, but not including any underlying causes thereof or (G) changes in the trading price of a party’s common stock, in and of itself, but not including any underlying causes, except, with respect to clauses (A), (B) and (D), to the extent that the effects of such change are disproportionately adverse to the financial condition, results of operations or business of such party and its Subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its Subsidiaries operate) or (ii) the ability of such party to timely consummate the transactions contemplated by this Agreement.

(b) Since June 27, 2008 through and including the date of this Agreement, Company and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary course of business consistent with their past practice.

(c) Since June 27, 2008 through and including the date of this Agreement, neither Company nor any of its Subsidiaries has (i) except for (A) normal increases for or payments to employees (other than officers subject to the reporting requirements of Section 16(a) of the Exchange Act (the “Executive Officers”)) made in the ordinary course of business consistent with past practice or (B) as required by applicable law or contractual obligations existing as of the date hereof, increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any Executive Officer or other employee or director from the amount thereof in effect as of June 27, 2008, granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay (in each case, except as required under the terms of agreements or severance plans listed on Section 3.11 of the Company Disclosure Schedule, as in effect as of the date hereof ), or paid any cash bonus in excess of $1,000,000 other than the customary year-end bonuses in amounts consistent with past practice and other than the monthly incentive payments made to financial advisors under current Company programs, (ii) granted any options to purchase shares of Company Common Stock, any restricted shares of Company Common Stock or any right to acquire any shares of its capital stock, or any right to payment based on the value of Company’s capital stock, to any Executive Officer or other employee or director other than grants to employees (other than Executive Officers) made in the ordinary course of business consistent with past practice under the Company Stock Plans or grants relating to shares of Company Common Stock with an aggregate value for all such grants of less than $1 million for any individual, (iii) changed any financial accounting methods, principles or practices of Company or its Subsidiaries affecting its assets, liabilities or businesses, including any reserving, renewal or residual method, practice or policy, (iv) suffered any strike, work stoppage, slow-down, or other labor disturbance, or (v) except for publicly disclosed ordinary dividends on the Company Common Stock or Company Preferred Stock and except for distributions by wholly-owned Subsidiaries of Company to Company or another wholly-owned Subsidiary of Company, made or declared any distribution in cash or kind to its stockholder or repurchased any shares of its capital stock or other equity interests.

Translation: If the market tanks and assets already on the books when this deal is consummated are marked down, then this is NOT grounds for Bank of America to renegotiate or pull out.

Look, here’s the story:

  • Ken Lewis rushed into a terrible deal for Merrill Lynch at a grossly inflated price because he desperately wanted Bank of America to be a top notch franchise across the full spectrum of products. Merrill has a very good franchise and had a good brand until recently.
  • The deal terms specifically excluded poor market conditions as a MAC clause. I should add that this is standard operating procedure in many mergers as I have been witness to countless MAC clauses with this very exclusion in mergers when I worked in Leveraged Finance and Corporate Development.
  • John Thain was doing his duty in getting the best deal for his shareholders and protecting the 60,000 jobs of Merrill Lynch from a Lehman cataclysm. Ken Lewis was arguably not worried enough that he was overpaying and wasting shareholder money.

So, if Ken Lewis says that he told Hank Paulson and Ben Bernanke on December 21st that he was invoking the MAC clause, then this was a hollow statement because the MAC clause could not be invoked. Whether Lewis knew/knows that is unclear.

As for John Thain, the man has been pilloried publicly, in particular because of the bonus scandal and the office re-design. But, let me ask you this: was BofA going to underpay its vaunted Merrill money-makers in a one-off bonus round and risk their exiting the company? No. If you went to a Fortune 500 company with a new CEO, what would you guess the average amount spent for office renovations would be?

All of the Thain theatrics were bread and circuses, distracting us from the real issues: is our financial system safe yet and, if not, how can we most prudently ensure it is.

Bank of America was once one of the safe banks. It is no longer. And yet, to date no one has paid the price. However, now a movement is underway to oust Ken Lewis and the entire Board of Directors, something Hank Paulson allegedly threatened to do in December. Giant pension fund Calpers is leading the charge. To my mind this is an important moment in American capitalism. The pendulum had swung too far in favor of insiders, managers, and corporate executives with disastrous results and shareholder value destruction. It is time shareholders have more say over how things are run in Corporate America.

For more on this theme see a Fora TV video of Vanguard founder John Bogle decrying the growing failure to observe fiduciary responsibilities in America at Credit Writedowns.

Definitive Proxy Statement (Schedule 14A), Merrill Lynch – BofA Merger – SEC Website

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Adam

    I’d just like to say that John Thain is my new hero. He sold a failing franchise for top dollar in the middle of a financial crisis. Well played. He took care of his debt holders, shareholders, and employees, that Ken Lewis continues to utterly fail at making good acquisitions, shouldn’t be blamed on the guy who took him for a ride.

  2. Dan

    Well said!
    These will one day be regarded as the stalwarts of capitalism, stronger even than Obama accoridng to CNBC.
    What the world have looked like without Ken Lewis, hero of our nation? Much more impoverished.

  3. DownSouth


    If one worships at the altar of greed and selfishness, then I can see how one could venerate Thain.

    But to think that this deal had anything to do with “free markets” or a level playing field is absurd. At what point does honest illusion transmute into dishonest pretension? Do you really believe Thain could have pulled this off without the backstops provided by the taxpayers?

    All this is like professional wrestling. Great fun, but don’t mistake it for a real contest.

  4. Doc Holiday


    Lewis obviously has a crack staff that is creative and highly resourceful; hiding stuff from the man and investors is an art form that requires practice! What were these pirates smoking?Full Disclosure: The Author has just had cereal and plans to take one step at a time today…

  5. rita

    I’m not sure that your reliance on the highlightede clause is appropriate unless you would argue that the deterioration in the value of the various MBS and other assets resulted from a downturn in the market dating only from June, 2008 (the date referenced in the preface to the paragraph from the agreement that you have cited). Isn’t there a reasonable likelihood that that the markdowns resulted from conditions in the market over the past two years and not just the past 6 months? Isn’t the problem here that the Merrill was delaying the recognition of losses so that bonuses could be paid?

  6. Doc Holiday


    Thank you, that was a rare find, but I’m really concerned about what financial people in the wall street gutters are smoking. The list of people that are in collusion or perhaps in collective denial, who are out of their minds, who are being rewarded for being stoned, retarded, idiotic, pathetic, corrupt and out to lunch is mind numbing! WTF are mutual fund managers thinking about when they buy shares of insolvent banks and then fail to read disclosure statements that fully explain how stupid these situations are fro their shareholders? I think we can all agree in unison that these filthy pig bankers should be dealt with but is today too soon? Huh? When, then?

    Where is the fiduciary responsibility with pension managers and people that do have managerial responsibilities and legal obligations?

    The dope pusher mentality that is connected to wall street being a circus, casino and illusion of a Bush-era pipe dream, but now that these Adults have been replaced by new Adults, we really have to wonder if absolute power corrupts absolutely — which begs the realistic question as to if there ever will be regulations to control accounting fraud, manipulation and all the illegal activities that do occur on a daily basis while our Rome is burning … I mean smoking.

    This could be a lengthy diatribe on the evils of nepotism and the fact that The Obama clones are just mutated Bush clones or that this ebola-like parasitic virus of pig-lust greed on wall street that lay dormant for almost 3 years — found a tsunami of Home Ownership Society hosts who enabled its rebirth and engaged its will to mutate from the twilight state of recrudescence, when The Patriot Act seemed to offer glimmers of potential hope (Pre-Disclosure: The Author is drooling and pounding on the keyboard) ….

    Yes, where indeed is the brain cell of these collective parasites and amoebae who split apart and divide like cancer cells to cause collective damage? These friggn termite-like pests that play with other peoples dough need to be wiped out and by God we need regulation and lynch mobs to return America back to a time when smoke and mirrors were not that basis of capitalism; American Taxpayers need to take action by voting with their shares and cash — and invest in ethical businesses that are local and run by people that depend on honest interactions.

    Maybe the next era to evolve from this systemic crash will be a return to home grown output instead of global manipulation and all the shit that global suppliers dump into our economy, like melamine and aminopterin…..


    Full Disclosure: The Author needs
    Chocolate. Furthermore, I refuse to go back over this …

  7. Doc Holiday

    I hate to be rude with a double post, but I really like the idea of applying the concept of
    gibbeting to Lewis — or whoever the hell it is this post is actually about, because all these pirates should be hunted down and displayed!

  8. Alan

    Looks, like it will be an historic moment – BofA shareholders have set a new standard for the amount of filth they can stomach – and still elect the board. Wow, long live King Ken and capitalism!

  9. emca


    Thanks for your link on Chocolate producers in Venezuela.

    A small time venture based mainly on sweat-equity (sweet-equity?), the production of tangible product having value to market, rewards for that investment to an individual and society.

    Sounds like capitalism at its finest. Refreshing reading in a sea of large scale financial blunders, intrigues and cronyism.

  10. kackermann

    Do they still make those spools for drawing out the intestines?

    Personally, I would have made the subject turn the crank himself.

  11. Doc Holiday

    Speaking (much later) about intestines:

    FYI: Swine flu might be dangerous, but eating pork is not “I’m more concerned about my hogs getting swine flu from some human, not some human getting it from the hogs,” said Denny Belew, a pork producer in Tahoka. “Our biggest concern as far as health goes is something being brought in by humans.”

    Full Disclosure: The Author is not currently eating pork, but I’m pondering making green pork chili this week, but maybe I’ll wait for Cinco de MayoAlso see and hear: Corazón espinado-Maná-Santana

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