Turning point at Sovereign
Sovereign Bancorp's monthlong battle with some of its biggest shareholders is coming to an important turning point.
Investors have asked the New York Stock Exchange to decide whether a big transaction reached last month amounted to a change of control at Sovereign, which would require the approval of shareholders in a vote. Company executives insist that is not the case.
The exchange is expected to decide something on this subject soon, possibly this week. Among the more interesting options: side with management; demand a shareholder vote and threaten to delist Sovereign stock if none takes place; or push for changes in the deal that would avoid the issue.
Like any good fight over money, the dispute between Sovereign and a leading shareholder is a story that develops new wrinkles and growing cast of characters almost every day.
The Sovereign transactions in question involve billions of dollars, but they have become a stock market lightning rod for reasons beyond money. The issue: How far can the managers of a public company go without asking stockholders for their approval?
Here's how it all began: Sovereign disclosed two unusual back-to-back transactions on Oct. 24. First, the company sold a 19.8 percent interest in itself to Spain's Banco Santander Central Hispano for $2.4 billion. Then Sovereign struck a deal to buy Independence Community Bank Corp. of Brooklyn, N.Y., for $3.6 billion in cash. Sovereign's chief, Jay Sidhu, pronounced the moves brilliant.
But Sidhu's biggest stockholder, Relational Investors LLC, cried foul. So did many brokerage analysts who follow Sovereign stock. They said the deals were struck to insulate the company's executives, who were coming under pressure from Relational. The investment firm that owns 7.4 percent of Sovereign had been complaining about managers for months and planned to wage a proxy contest for board seats next spring. Those efforts would probably become futile once management-friendly Santander acquired such a big chunk of the company.
If Sovereign had agreed to sell 20 percent of the company, not 19.8 percent, or if it made its deal for Independence in stock instead of cash, approval from shareholders would have been required. But they didn't, and no votes are planned.
Relational chose the New York Stock Exchange as the place that gave it the best shot at challenging Sovereign's deal with Santander. Besides skirting the 20 percent ownership threshold right off the bat, the deal had raised other issues. Current directors could keep their jobs for 10 years and Santander would hold veto power over any effort to oust Sidhu. Santander also would have rights to acquire more stock -- even the entire company.
Other investors began to pile on. Franklin Mutual Advisors, another large Sovereign shareholder, complained about the Santander deal. The Council of Institutional Investors, which represents pension funds, argued for a shareholder vote. The pension fund for California teachers did the same yesterday.
A lot is at stake. A failure to close the Santander investment would be more than embarrassing for Sovereign because it will still be on the hook for its $3.6 billion cash purchase of Independence. Closing that deal without Santander's investment, or wriggling off the hook, could be very ugly.
This is the mess that was dumped in the laps of regulatory officials at the Big Board and what they decide will be public soon enough.
Sovereign may or may not have acted within the letter of the law last month. But refusing to give shareholders a chance to vote on events that would transform their company violate the spirit of corporate governance standards.
Exchange regulators aren't being asked to block a big deal, just let the owners of a company vote their shares. How can you say no to that?
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
