The parties to a merger-of-equals (or a merger-with-an-almost-equal) often divvy up board seats in the merger agreement. Sometimes, the parties simply specify the initial allocation of board seats at the closing, other times the parties lock-in the board seat allocation for a period of time following the closing. The Bank of America/FleetBoston and Anthem/WellPoint deals announced this week each contain the latter sort of lock-in provision.
The BofA/Fleet merger agreement
(download PDF of agreement)
requires BofA to maintain a 19-member board, with 12 seats held by BofA directors and 7 seats held by Fleet directors, for at least two years following the closing. The agreement instructs the BofA board to adopt a formal resolution committing itself to this allocation, and it permits the BofA board to alter the allocations only with the approval of 75% of the directors.
The Anthem/WellPoint merger agreement
(download PDF of agreement)
also allocates board seats for two years following the closing, with 12 seats of the 20-member board allocated to Anthem directors and 8 seats allocated to WellPoint directors. Anthem/WellPoint goes a little further than the BofA/Fleet deal, baking these allocations into the bylaws and requiring 80% of the directors to approve any changes during the two-year term.
As we enter the New Age of Corporate Governance, I wonder how well these board-stacking provisions will mesh with the SEC's proposed direct access rule, the new independence and other board composition requirements and the increased emphasis on independent nominating committees.
Direct Access to the Ballot
If the SEC adopts its proposed direct access rule, stockholders may soon be directly nominating directors.
Upon the occurrence of a triggering event under the proposed rule, the BofA stockholders would have the right to nominate two directors, and the Anthem stockholders the right to nominate three directors, upsetting the careful board seat allocations specified in the merger agreements.
The proposed rule would exempt companies that, consistent with state law, adopt charter amendments prohibiting stockholder nominations. Neither BofA nor Anthem appear to be trying to fit within this exemption. BofA's allocations will be memorialized in a board resolution. Anthem's will be in an amendment to its bylaws, but that amendment will not change Section 1.5 of its existing bylaws, which permits stockholders to nominate directors.
Companies that care deeply about maintaining board allocations will have to give serious thought to whether they can — and should — attempt to adopt a charter amendment preventing stockholder nominations during the allocation period. The risk of incurring stockholder wrath may, in many cases, counsel companies to go with the softer, but more vulnerable, approaches taken by BofA and Anthem.
Board Composition
Board stacking will also need to work within new board composition requirements mandated under Sarbanes-Oxley, and by rules adopted or being considered by the SEC, the NYSE and Nasdaq.
Companies listed on the NYSE or Nasdaq will need to ensure that a majority of their directors are "independent" under various definitions. The Anthem agreement requires each camp to maintain a majority of independent directors on the board; the BofA agreement doesn't address this issue.
What if one of the BofA factions proposes directors who aren't sufficiently independent? Both the NYSE's and the Nasdaq's proposed corporate governance rules require the board to make some subjective independence determinations; I suppose it is possible for one camp to frustrate the other by rejecting its candidates for being insufficiently independent.
Boards' audit committees also need to have at least one independent financial expert, and other committee members who are financially literate. Neither agreement discusses which camp is responsible for supplying the independent financial expert and the other financial literati for the audit committee. Presumably, BofA and Anthem both assume their respective factions will work together to ensure that BofA and Antham maintain boards that satisfy these qualification requirements.
Nominating Committees
Both the NYSE and Nasdaq will soon require independent nominating committees with stronger roles in the direct nomination process. For instance, the NYSE's proposed rule requires the nominating committee to "identify individuals qualified to become board members, consistent with criteria approved by the board, and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders."
By contrast, both the BofA and Anthem arrangements give each faction the right to identify and recommend its own candidates for the board. The exchange rules will permit boards to work outside the nominating committee when they are legally required to do so. BofA and Anthem are both listed on the NYSE, which provides:
If a company is legally required by contract or otherwise to provide third parties with the ability to nominate directors (for example, preferred stock rights to elect directors upon a dividend default, shareholder agreements, and management agreements), the selection and nomination of such directors need not be subject to the nominating committee process.
The BofA and Anthem board stacking arrangements don't seem to be "legally required." Each arrangement is specified in a merger agreement that, once the merger closes, will evidence the agreement of each party with itself. Neither arrangement gives any third parties any right to enforce it against the surviving corporation; in fact, each merger agreement specifies that no third parties have any rights to enforce these provisions.
It is possible that individual employment agreements for BofA and Anthem officers may require these board seat allocations, creating a legal requirement. In the end, however, these arrangements are usually just commitments between board members that are morally, but not legally, binding.
I therefore wonder whether the NYSE and Nasdaq will consider board stacking arrangements like these to be consistent with their vision for strong independent nominating committees.
Board stacking arrangements have always depended more on trust than the force of contract or corporate law; as we enter the New Age of Corporate Governance, I suspect these "soft" provisions will increasingly yield to the harder governance standards emanating from the SEC and the exchanges.
This column solely reflects the views of its author, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented. For more information on the author, please visit Corp Law Blog or contact Mike O'Sullivan via Munger, Tolles & Olson, LLP.
No comments yet