Saturday, June 27, 2009
I received a couple of questions offline about Lewis’ “MAC-attack” and whether a MAC claim would have plausible (who knew we had readers in Europe?!). The strength of a potential MAC claim by BAC was well covered by Steven a couple of weeks ago at the Deal Professor (Assessing a MAC Claim: The Lewis Ostrich Defense). I’d like to address Lewis’ concern. He apparently told Paulson/Bernanke that he feared shareholders would sue him for not claiming a MAC. It’s hard to imagine that this was anything other than a threat to get the Fed/Treasury to put up more cash. Why? Well, the lawsuit he suggests is one that wouldn’t go very far.
Alvarez’ assessment of a potential lawsuit was correct. Any suit for failure to claim a MAC would start with the BAC board enjoying the protection of the business judgment rule, which we all remember is a presumption that “the directors of [the] corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one.”
That means that any challenge to BAC decision not to invoke a MAC in the agreement would have had to fight a very steep uphill battle. To succeed, plaintiffs would have had to make the case the BAC board was uninformed/unreasonable. Since proving a MAC is extremely difficult to do in any event, it’s not clear at all that a board having discussed and considered the circumstances – which it appears clear from the abundance of the e-mails was happening -- would have made an unreasonable or uninformed decision by not attempting to claim a MAC. Basically, plaintiffs would have to make the case that finding a MAC would have been a “no-brainer” for a court looking at the facts and that the board was somehow absent when it neglected to reach the same conclusion in order to come close to winning on a claim against BAC’s board. I’m pretty confident that a court would pretty quickly dismiss such a suit.
So, what was Lewis afraid of beyond the
inconvenience/embarrassment of a lawsuit?
Who knows, but he’s got all the inconvenience you can imagine by having
to appear in front of Congress on a near regular basis these days. More likely, the threat of being forced into calling a MAC because of "shareholder pressure" and a potential lawsuit was just a negotiating tactic to get more support from the Fed.