Legislators Pass Pro-Sovereign Bill

State lawmakers step in to help potential merger despite shareholder opposition.
Stephen TaubFebruary 3, 2006

Pennsylvania lawmakers have passed a bill that includes provisions apparently designed to help Sovereign Bancorp in its battle with dissident shareholders.

One provision would make it harder for shareholders to remove directors without cause, while another change would weaken an antitakeover law that could interfere with Sovereign’s controversial deal that sparked the investor outrage, said a Dow Jones report.

The bill is pending, awaiting the signature of Gov. Ed Rendell, noted the Associated Press. A Rendell spokeswoman said the governor’s lawyers were still reviewing the legislation, and declined to comment on whether the state’s chief executive supported the legislation or would sign it, added the wire service.

At issue is a push by asset-management firm Relational Investors LLC to replace two Sovereign directors and stop a merger deal between the Philadelphia-based bank and Spain’s Banco Santander Central Hispano S.A. Essentially, Sovereign would sell a 19.8 percent ownership stake to Banco Santander for $2.4 billion. The proceeds of the sale would then be used to help Sovereign acquire New York–based Independence Community Bank Corp. for $3.6 billion.

Relational is trying to convince a state court to declare that the Banco Santander deal is a “control” transaction, which would therefore require shareholder approval under Securities and Exchange Commission regulations.

In November, Sovereign revised the deal to gain approval from the New York Stock Exchange — which lists the bank’s shares — to eliminate a shareholder vote from the transaction process.

The NYSE okayed the deal, said the AP, because its rule requires a shareholder vote if the transaction involves new shares accounting for at least 20 percent of the total outstanding shares. Sovereign officials contend that the bank is using new shares, as well as shares it had repurchased. Therefore, the number of new shares doesn’t meet the 20 percent threshold. The dissident shareholders say this is a mere technicality, asserting that if company-owned shares were counted, the deal would exceed that 20 percent minimum.

Pennsylvania law also carries a 20 percent rule, so the new bill would exclude company-owned shares from being counted toward that threshold, reported Associated Press.

Erik Arneson, the chief of the staff for the Senate’s Republican leader, told the AP that Sovereign had two options: to seek changes in portions of Pennsylvania law to protect itself from “corporate maneuvering by outsiders” or reincorporate in another state. As a result, Pennsylvania’s lawmaker’s reportedly swung into action to keep the bank within the state borders.

In response, Ralph Whitworth, principal of Relational, said, “It’s shocking,” according to the AP. “We have a pre-Enron board in a post-Enron world. People like this should be flushed out of corporate America.”

“This is an extraordinary abuse of the legislative process: major amendments to an important law affecting substantial rights, slipped into a bill in the middle of the night, without any debate…apparently all for the benefit of a single special interest,” Peter Langerman, chief executive of Franklin Mutual Advisers Fund, wrote in a letter to Governor Rendell, according to Dow Jones.