In October 2005, Sovereign announced that it would pay $3.6B for Independence Community Bank, a regional thrift. To finance the deal, Sovereign sold just under 20% of itself (in newly issued shares) to Santander. The 19.8% holding of a friendly Santander appears to comply with the NYSE regulation which dictates that a sale of less than 20% of the company does not require shareholder approval. However some shareholders have claimed that this level of ownership plus the right for Santander to purchase later an additional 5.1% through a voting trust effectively gives Santander control of the company with little in the way of a premium. Moreover, the deal includes generous gross-up rights and also favorable voting rights that amount to an effective âchange of control.â The deal also includes a provision granting Santander a veto right over the firing of the CEO.
GMIâs concern is the revelation that Sovereign has maintained questionable disclosure of its practice of granting loans and credit to its non-executive directors. It appears that disclosure of related party transactions with the SEC is at variance with disclosure to the Office of Thrift Supervision. One large Sovereign shareholder, Relational Investors claims that Sovereign Bank has established a practice whereby Sovereign Board members can receive money from the companyâs subsidiaries in the form of loans and other extensions of credit at preferential terms, and directors and/or their affiliates can receive commercial loans that are approved by a âcommitteeâ of fellow board members. During the past six years, the amount of loans approved by the board for its members and the companyâs executive officers has soared by 1,922%, from $4.7M to $94.1M. Relational contends that Sovereignâs public filings do not disclose basic information, such as the amount of loans made to individual directors, payment terms, interest rates, the nature of collateral (if any), or whether or not the loans are in default. Relational estimates that over 95% of these loans were made to directors, and that they were made in a manner designed to hide the magnitude of the conflicts of interest. Sovereignâs CFO has admitted that a significant portion of the approximately $90M in loans to directors are related to real estate development projects. GMI notes that director Cameron Troilo is actively involved in real estate development projects and in the absence of any disclosure to the contrary, GMI has reclassified Mr. Troilo as a non-independent director. As other information becomes available, GMI will also reconsider the independence status of other Sovereign board members.
Sovereign has also been scrutinized for overpaying its non-executive directors in the past. Among other things, Sovereignâs directors had been eligible for an unusual stock bonus program and a cash payment in an amount equal to three times the highest annual retainer paid to a director during his tenure. Under this agreement, non-executive directors have a special director guarantee whereby each incumbent director of Sovereign that helps oversee the sale of a 100% interest in Sovereign to Santander at a future date of Santanderâs choosing at any time in the next 5 years will automatically be entitled to serve on Santanderâs U.S. subsidiary bank board for ten years. This and other elements of the merger agreement between Sovereign and Santander call into question just how independent the Pennsylvania bankâs directors are.