PHILADELPHIA (AFX) - Shareholders of Sovereign Bancorp will get their first chance on Wednesday to confront the board of directors about a controversial acquisition deal they opposed and that was crafted in a way to bypass the need for shareholder approval.
But it's not clear what effect they will have at the months-delayed annual shareholders meeting, since Banco Santander Central Hispano S.A.'s purchase of a 19.8 percent stake in Sovereign for $2.4 billion in cash closed in June. Sovereign simultaneously had bought Independence Community Bank Corp. in New York for $3.6 billion, also in cash.
'If this board holds true to form, it will ignore shareholders no matter what they say,' said Chris Young, director of mergers and acquisitions research at Institutional Shareholder Services, or ISS, a proxy advisory firm in Rockville, Md. 'This company has pursued every trick in the book to disenfranchise shareholders.'
Since the deal was announced in October, shareholders had been unhappy about Sovereign's stock performance and the fact that they didn't get to vote on the deal, according to filings with the Securities and Exchange Commission.
The New York Stock Exchange requires shareholder approval if a member company issues new shares that equal 20 percent or more of current outstanding shares.
Sovereign sold a combination of new shares and treasury shares -- those already issued but bought back by the company -- adding to a 19.8 percent stake, according to regulatory filings. Since treasury shares aren't counted by the NYSE, Sovereign has been accused of effectively giving more than 19.8 percent of its pre-acquisition outstanding shares to Santander without breaking the 20 percent rule.
Sovereign declined to comment Friday on the deal's structure.
Several major shareholders -- including the powerful California Public Employees' Retirement System, or CalPERS, and the investment council that oversees New Jersey's public pension funds -- have said that the Santander deal dilutes their voting rights and essentially puts a big bloc of shares in friendly hands. They contend that Santander would have substantial control over Sovereign.
The New Jersey State Investment Council did not immediately return a call for comment. A spokesman for CalPERS would only say the pension fund generally holds shares for the long term.
Meanwhile, Santander has been steadily buying up more Sovereign shares in the open market, according to SEC filings. It has now accumulated a 24.9 percent stake in the thrift. Santander can only vote its one-fifth stake; the rest is held in a voting trust.
Philadelphia-based Sovereign initially wanted shareholders to approve a proposal to boost Santander's voting rights to the full 24.9 percent, but withdrew the plan last week.
Under the investment agreement, the Spanish bank gets the right to buy the rest of Sovereign for more than $40 a share from mid-2008 to mid-2009. Afterward until 2011, Santander still has the right to buy Sovereign, but without a set price in the agreement.
Jay Sidhu, Sovereign's chief executive, said this week that the thrift may ultimately be sold.
Shareholders who oppose Sovereign's actions can dump shares or withhold their votes on directors slated for re-election. But it's an uphill battle to stop re-election since Santander and company insiders hold a one-third stake.
'It's unfortunate for shareholders that they are only allowed to weigh in on a symbolic level, after the fact,' Young said.
At some other companies, a large number of shares withheld could lead to a board shake-up. Young cited Walt Disney Co., in which withheld shares were a kind of 'no-confidence' vote that led to the departure of CEO Michael Eisner.
But Young is not optimistic about Sovereign, given its past actions.
Shareholders Relational Investors LLC and Franklin Mutual Advisers -- two other large shareholders -- declined to comment about what actions they might take.
Opposition to the Santander deal was led by San Diego-based Relational, which filed lawsuits, convened a shareholders forum and took out newspaper ads criticizing Sovereign's board for excessive pay, conflicts of interest and crafting deals to protect director positions.
Sovereign countersued Relational for its actions, in part saying the accusations were misleading. The thrift also asked the SEC to investigate Relational's conduct.
Shareholders could also vote for a proposal submitted by CalPERS, designed to make the board more accountable to them. The activist pension fund said Sovereign's three-year stock performance has underperformed the S&P 500 Index and S&P 500 Bank Index by over 20 percent as of August 31.
CalPERS wants to dismantle Sovereign's staggered board, an antitakeover measure in which only a portion of the board stands for re-election each year. The activist pension fund has said that such 'insularity' hampers accountability and wants the directors to stand for re-election annually.
In February, Gov. Ed Rendell signed into law a bill that effectively makes it more difficult to remove a Pennsylvania company's board of directors, a threat Sovereign faced. The law also exempts treasury shares from being counted towards the 20 percent state threshold in a control transaction.
In March, Relational and Sovereign dropped all the lawsuits and other activities after Sovereign agreed to name its principal, Ralph Whitworth, to the board. Sovereign also said it would appoint an independent director proposed by Relational, subject to the thrift's approval.
Relational agreed to vote its 6.6 percent stake to elect incumbent directors.
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