Delaware Supreme Court Affirms Settlement of Bank of America / Countrywide Merger Litigation

5/21/2010 - On May 21, 2010, Chief Justice Steele of the Delaware Supreme Court issued an opinion affirming the approval by Vice Chancellor Noble, of the Delaware Court of Chancery, of a settlement reached by BR&B in litigation relating to the acquisition of Countrywide Financial Corporation by Bank of America. In the Supreme Court decision, which was issued by the full Court sitting en banc, Chief Justice Steele noted that the Vice Chancellor had approved the settlement as fair and reasonable to the former shareholders of Countrywide over the objection of certain shareholders who had argued the settlement should be rejected because Countrywide’s Board had failed to value or preserve certain derivative claims they had brought in another action. In approving the settlement, the Vice Chancellor found that the objectors’ “failure to value” and “failure to preserve” claims were “functionally worthless” and not consistent with Delaware law. In light of the fact that Countrywide had shopped the company but only Bank of America had expressed interest, the Vice Chancellor found that the “economic realities confronting Countrywide at the time left little choice” for Countrywide’s Board but to accept Bank of America’s offer, and that the record demonstrated that “facing increasing pressure, the Countrywide board determined that some arrangement providing stability was necessary.” The Vice Chancellor further found that any significant recovery on the objectors’ theories was “unlikely” and the Board’s failure to value the derivative claims “did not likely harm Countrywide shareholders.”

The Vice Chancellor further stated that the Countrywide Board’s decision to “sell the entire corporate entity instead of auctioning off assets separately” was unlikely to be found objectionable under Delaware law, noting that selling an enterprise as a whole rather than piecemeal is frequently “the best method to maximize shareholder value.” Indeed, the Vice Chancellor noted that the objectors had not challenged the merger price as unfair; rather, they had simply advocated that the settlement should not be approved because Countrywide’s Board had not taken actions to either value or preserve derivative claims that would be wiped out under Delaware law as a result of shareholders voting in favor of the merger (and having nothing to do with the settlement).

In affirming the decision of the Vice Chancellor, the Delaware Supreme Court held that the Vice Chancellor did not abuse his discretion in approving the settlement or in finding that the claims for breach of the duties asserted by the objectors “were worthless and, therefore, added no conceivable value to the merger.” The Delaware Supreme Court noted that the objectors had not claimed Countrywide’s Board had “inadequately priced the merger transaction,” and further stated that on the record in the case they could not have reasonably made that assertion. The Court further stated: “The Vice Chancellor appropriately denied the objection, because Delaware corporate fiduciary law does not require directors to value or preserve piecemeal assets in a merger setting, and [the objector] failed to show a likelihood of prevailing on the merits of its claims.” While the Supreme Court went on to note that Countrywide’s directors may have acted inappropriately or perhaps even fraudulently in terms of how they had run the company, based on the record before the Supreme Court there was no basis to credit the objection to the settlement and no basis to find any abuse of discretion on the part of the Vice Chancellor in approving the settlement.

If you have any questions about this case, please contact BR&B partner Jeffrey W. Golan by telephone at (215) 963-0600, or by email