On Thursday December 4, a New York State Supreme Court justice dismissed a shareholder class action against The Bear Stearns Cos. Inc.’s officers and directors challenging its merger with JPMorgan Chase & Co. The class action lawsuit claimed the $10.00/share stock swap was inadequate and not in the best interest of shareholders. The suit sought damages from Bear Stearns directors for alleged “violations of fiduciary duties” and from JPMorgan for its “tortious conduct.”
State Supreme Court Justice Herman Cahn rejected the consolidated class action in a 44-page ruling, saying that the decision to merge was protected by the “business judgment rule,” meaning that the board of directors made an informed decision in what it believed was the best interest of the company and therefore were not liable.
The merger was brokered by the Federal Reserve to prevent a bankruptcy
at Bear Stearns, “an event with potentially cataclysmic consequences for the broader economy as well as for the shareholders,” wrote Justice Cahn.
Initially, JPMorgan agreed to purchase Bear Stearns shares for $2/share but an amended agreement increased the initial offer to $10/share when there was a significant backlash from shareholders and company officials. Of the Bear shareholders that took part in approval vote, approximately seventy-one percent voted to go forward with the takeover of Bear by JP Morgan Chase.
The fallout of this transaction had devastating effects on investors and employees of Bear. Many employees lost most of their 401K value and shareholder saw their stock value decline over 93% from a prior year high of $157/share.
The fall of Bear Stearns in March 2008 was only the first of many failures and mergers in the financial sector which has thrown the markets into turmoil and caused billions of dollars in investor losses.
Bear Stearns’ financial situation started to unravel with the failure of two Bear hedge funds that took huge bets on supprime mortgage bonds. The two fund managers are currently under federal indictment after being arrested June 19, 2008 and charges with fraud.