Unwelcome bidders in bank acquisitions face even steeper odds against success, thanks to a recent federal court decision.
Chief Judge Charles P. Sifton of the U.S. District Court for Eastern New York refused to block the merger between The Greater New York Savings Bank and Astoria Financial Corp. despite counter overtures from rival North Fork Bancorp.
The alternative bid did not mean Greater New York was "up for auction," the court said, and the seller's management was not obliged to disclose details of North Fork's offer.
Instead, a banking company's directors are "free to consider not only short-term considerations, such as merger price, but long-term factors as well," the court said.
The ruling "constitutes a broad reaffirmation of the power of a board of directors to structure strategic mergers," according to Edward D. Herlihy and C.M. Wasserman, banking law specialists in the New York law firm of Wachtell, Lipton, Rosen & Katz.
Notably, they said, the court expressly rejected a claim in a shareholder lawsuit that the cardinal duty of a company's directors in such a situation is to maximize short-term value.
That claim was based on several frequently cited Delaware court decisions. Because of those rulings, corporate directors' responsibilities to optimize short-term value, by auction if necessary, are widely known as "the Revlon duties."
The case arose out of the pending stock-cash merger between Greater New York and Astoria, valued at $19 per share. Before the deal was unveiled, Greater New York had gotten "a series of overtures" from North Fork for an all-stock deal at $18.57 per share.
After the deal was announced, a shareholder lawsuit alleged, among other things, that the board engaged in self-dealing since the merger agreement provided that all nonexecutive members of Greater New York's board would serve as paid advisers to Astoria for three years.
But Judge Sifton said the prospect of future compensation had not impaired the directors' objectivity. The arrangement was fully disclosed and the court said it was reasonable to assume it would be in the interest of the merged company to have "former directors as consultants and even on the new board."
Finally, the court said the 19% lock-up option and breakup fee, two measures used widely to protect bank merger deals, are not unlawful attempts to discourage other bidders.
Providing "financial incentives to a preferred suitor" is an established practice that other courts have recognized, Judge Sifton noted.