The Delaware Supreme Court ruled last week that in the course of a normal stock swap transaction, banks are not required to conduct an auction opening the process to other bidders.
The ruling is the first to specifically address banks since the same court two years ago outlined expanded board directors' duties in the wake of QVC's hostile bid for Paramount Communications.
That decision required directors to reach the best possible deal for shareholders.
But whether that meant auctions was unclear, and the issue has hung like a dark cloud over the bank industry as it has progressed though a record period of mergers and acquisitions.
In the Dec. 28 ruling, Arnold v. Society for Savings Bancorp, the court made clear that except under three scenarios, auctions are not required.
An auction is required only when a company initiates an active bidding process; when a company that has a strategy of independence refuses an unsolicited bid but decides to sell; or when the acquirer is a privately held company, the court ruled.
"The Delaware courts made clear there is no fundamental change in bank transactions resulting from the Paramount decision," said Edward Herlihy, an attorney with Wachtell, Lipton, Rosen & Katz.
The ruling means transactions can continue to be structured as before, but without the dread of a court ruling requiring auctions, he said.
The Delaware court also ruled that in the proxy statement announcing the merger, if an alternative bid is mentioned, then the value of that bid must be included.
In the case before the court, the proxy announcing the $200 million purchase in 1993 of Society for Savings Bancorp by Bank of Boston Corp. mentioned Norwest Corp. had bid on a subsidiary of Society, but did not say the bid was for $275 million.
But the court did not say all bids must be included in the proxy. The court said if one bid is mentioned, then all details of that bid must be included.
"The Court's decision underscores the need for extremely careful preparation of background and historical detail in proxy statements concerning director and management consideration of strategic alternatives," Mr. Herlihy said.
Many banks are incorporated in Delaware, and most states follow Delaware precedent, so the decision will directly affect much of the industry.
