Banco Santander SA's bid to buy a large stake in Philadelphia's Sovereign Bancorp Inc. for $2.4 billion is expected to draw new scrutiny today, when a large Sovereign shareholder asks the New York Stock Exchange to investigate whether the Spanish bank and Sovereign avoided a shareholder vote that might have rejected the deal, according to people familiar with the situation.
The shareholder, Relational Investors of San Diego, owns a 7 percent stake in Sovereign, which has a large Northeast U.S. franchise. Relational is expected to ask the exchange to examine whether Santander and Sovereign purposely circumvented an exchange regulation that calls for shareholder approval if 20 percent of shares outstanding are issued in a transaction. Santander has agreed to buy a 19.8 percent stake in Sovereign.
Additionally, Relational is expected to say that because Santander obtains a big say in how Sovereign will be run, including gaining two board seats and the right to veto any move to remove Sovereign's chief executive, a shareholder vote should be held.
Relational has been critical of Sovereign chief executive Jay S. Sidhu and the bank's board in recent weeks. Most recently, Relational raised questions about insider real estate transactions with directors of the bank and whether a bank director provided lawn care for bank property without proper disclosure. Relational executive Ralph V. Whitworth recently described the Santander pact as a gambit to place Sovereign's stock in friendly hands.
In a double-barreled move announced Oct. 24, Santander agreed to purchase the stake in Sovereign. In turn, Sovereign used the proceeds to reach an agreement to bolster its Northeast U.S. market by buying Independence Community Bank Corp. of New York.
Other big Sovereign shareholders have criticized Sovereign and its management as well as the Santander agreement. Last week, Franklin Mutual Advisers, which owns nearly 5 percent of Sovereign's stock, said it was outraged over the deal. It said the transactions "rank with the worst examples of management and board entrenchment and disdain for shareholder rights that we have witnessed in our history as public investors."
Other banking experts also have raised questions. Yesterday, Institutional Shareholder Services, an investor-advisory firm, told Dow Jones Newswires that it might review its high rating of Sovereign's corporate governance. Recently, Craig Wasserman, a banking attorney at New York law firm Wachtell, Lipton, Rosen & Katz, said, "Our general conclusion is that there are numerous compelling rationales for finding this to be violative of the stock-exchange rules in requiring a vote." Wasserman made his comments in a conference call hosted by investment firm Sandler O'Neill & Partners in New York.
Santander and Sovereign could well prevail before the exchange. A person familiar with the situation said the exchange was briefed on the Santander transaction before it was announced. Both banks believed they had the tacit approval of the exchange, this person said.
There appear to be few precedents for situations in which the exchange's rule governing a shareholder vote is in dispute. Relational's bid to force a vote will probably depend on how the exchange defines control and whether Santander's future sway at Sovereign is enough of a change in control to require Sovereign's shareholders to weigh in on the matter.
A spokesman for Sovereign said the bank believed it was in compliance with all New York Stock Exchange rules. Representatives for the other parties declined to comment or to discuss the details of the dispute.
Increasingly, Santander and its chairman, Emilio Botin, have been drawn into the imbroglio, signaling a rare misstep for one of Europe's best banking franchises. Just two weeks ago, Santander called the purchase of the stake in Sovereign a good way to learn U.S. banks' sales practices. The purchase also was seen as a potential move by Santander to ultimately acquire a U.S. bank. But now Santander, Sovereign and Relational have all hired New York lawyers and public-relations counsel to represent them publicly and before the exchange.