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This Wachtell memo discusses the recent shareholder vote on the pending merger between US-based PrivateBancorp & Canada’s CIBC – which received support from over 80% of PrivateBancorp’s shareholders despite a negative recommendation from ISS.

The deal’s path to a vote was disrupted by the spike in US bank stocks following the election. Canadian bank stocks didn’t experience a comparable rise in price.  Since the deal had a large stock component, its value took a hit. This resulted in a decision to delay the vote, prompted further discussions between the parties and extensive shareholder engagement.  Negotiations resulted in two price increases that improved the merger’s value substantially before it was ultimately presented to shareholders.

The memo discusses these efforts to address the impact of stock market volatility on the deal – and throws some shade at ISS:

Conventional wisdom would hold that a proxy adviser observing a deliberate and lengthy Board process, two price bumps, no competing offer and a market that trades at a customary discount would promptly recommend the deal.

That is exactly what occurred with two competitor firms, Glass Lewis and Egan Jones. On the contrary, ISS decided to play fundamental financial analyst and substituted its judgment for that of the Board and an efficient market, based on speculation about tax reform, the future value of U.S. regional bank stocks and the housing market in Canada. Notably, in coming up with its radical recommendation ISS did not engage with PrivateBancorp after the second price increase, and declined offers from senior executives of CIBC to speak about their company and the Canadian markets. A fundamentally flawed process leads to a flawed result.

The memo also notes that many institutions that typically follow ISS opted to reject its recommendation and vote in favor of the merger.

– John Jenkins