With extensive expertise in M&A and a keen eye on the financial sector’s legal battlegrounds, Priya Jaiswal offers a masterclass in the high-stakes world of bank mergers. We delve into a recent Delaware court decision that has sent ripples through the industry, exploring the dramatic clash between an activist investor and the boards of two major banks. The conversation illuminates the razor-thin line between shareholder advocacy and legal overreach, the immense power of a board’s business judgment, and the intricate dance of deal-making that shapes the future of banking.
An activist investor initially suggested Fifth Third as a potential buyer for Comerica but later sued to block that very deal. What factors might drive an activist to change tactics so dramatically, and what specific deal provisions typically trigger such strong legal opposition?
It’s a classic case of being for the destination but vehemently against the path taken to get there. An activist’s initial goal is to unlock shareholder value, and suggesting a merger is a common strategy. However, their support can sour instantly if they believe the board fumbled the execution. In this situation, the investor likely felt the deal process was flawed. They accused the board of ignoring another suitor and agreeing to what they called “draconian” provisions. This term usually points to deal protection measures like hefty termination fees, no-shop clauses that prevent the seller from soliciting other offers, or matching rights that give the initial buyer a strong advantage. The activist’s lawsuit wasn’t necessarily about the merger itself, but about the fear that these provisions locked out a potentially higher bid, thereby breaching the board’s fiduciary duty to get the best possible price for shareholders.
A judge referred to blocking a premium merger on the eve of its closing as an “extraordinary remedy.” Beyond mere speculation about a better offer, what concrete evidence must an investor present to successfully demonstrate irreparable harm and meet this high legal hurdle?
The bar is incredibly high, and for good reason. Courts are extremely hesitant to undo a deal that has cleared regulatory hurdles and received overwhelming shareholder approval. To secure an injunction, an investor can’t just whisper about a ghost bidder or a hypothetical better deal. They need to present tangible proof. This could mean a documented, superior offer that was ignored by the board, or internal communications showing directors acted in bad faith. They would need to prove the deal’s protection provisions were not just strong, but genuinely illegal or preclusive, meaning they made it virtually impossible for any other bidder to even attempt a counteroffer. As the judge pointed out, HoldCo’s arguments rested on speculation. Without a firm, actionable alternative on the table, the court saw the certain premium from the existing deal as a clear benefit to shareholders, while blocking it would only introduce damaging uncertainty and risk.
Given that 97% of Comerica’s shareholders voted to approve the acquisition, how does a board typically navigate its fiduciary duties when faced with an activist’s claims of a flawed process? Please describe the steps a board can take to prove its business judgment was sound.
That 97% approval figure is a powerful shield for the board. It demonstrates that the vast majority of owners—the very people the board has a duty to—believe this is the right move. When facing an activist challenge, a board’s best defense is a meticulously documented, robust process. This means showing they engaged qualified financial and legal advisors, conducted thorough due diligence, and actively negotiated the terms of the deal, including the protection provisions. The court noted that Comerica’s board hadn’t tied its hands; the agreement still allowed them to consider a superior proposal if their fiduciary duties demanded it. By demonstrating a careful, informed, and good-faith process, and then securing such a strong shareholder mandate, the board effectively insulates its decisions under the protection of the business judgment rule, which presumes they acted in the company’s best interests.
The court found that a $500 million termination fee was “not oppressive.” In large-scale bank mergers, what metrics or industry standards are used to determine if a termination fee is reasonable, and at what point do these protections risk becoming preclusive or coercive?
There isn’t a magic number, but termination fees are typically evaluated as a percentage of the total deal value. In large M&A transactions, a fee that falls within the 2% to 4% range of the deal’s equity value is generally considered standard and defensible. In this case, the $10.9 billion acquisition price makes the $500 million fee fall comfortably within that precedent, which is why the court deemed it “not oppressive.” A fee becomes problematic—or preclusive—when it’s so high that it would deter any rational competing bidder from even making an offer. It becomes coercive if it essentially forces shareholders to vote ‘yes’ for fear of saddling the company with a massive penalty if the deal fails. The key is balance: the fee must be large enough to compensate the jilted buyer for their time and expense, but not so large that it stifles a potential auction for the company.
This ruling was praised for affirming judicial deference to a board’s business judgment. How might this outcome influence future bank merger negotiations, particularly in how boards structure deal protection provisions and manage engagement with activist investors who may challenge the process?
This decision is a significant reassurance for bank boards everywhere. It reinforces a long-standing principle: if you run a diligent and fair process, the courts will respect your business judgment. I expect boards will feel more confident in negotiating customary deal protection terms, like those seen here, knowing they will likely be upheld against speculative challenges. It doesn’t mean they can be complacent, however. The ruling underscores the critical importance of a clean, well-documented process. We might see boards become even more methodical in their record-keeping and more strategic in how they engage with activists. The lesson here is that you can listen to an activist’s initial idea without being bound to their playbook for every subsequent step. This gives boards the confidence to negotiate robust, mutually reciprocal deal protections that provide the certainty needed to get these complex mergers to the finish line.
What is your forecast for M&A activity and activist investor campaigns in the banking sector?
I anticipate a steady, if not accelerating, pace for M&A in the banking sector, particularly among regional and mid-sized banks looking to achieve the scale necessary to compete. The regulatory environment is complex, but the strategic pressures are undeniable. As for activists, they aren’t going anywhere. This ruling doesn’t deter activism; it refines it. Instead of last-minute lawsuits based on speculation, we will likely see activists focus their efforts earlier in the process. They’ll push for board seats, campaign on performance metrics, and try to influence the M&A process from the inside rather than trying to blow it up from the outside on the eve of closing. The battleground is shifting from the courtroom to the boardroom.
