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Relational, Sovereign Settle Fight; Largest Shareholder to Receive Board Seat

Posted on: Thursday, 23 March 2006, 12:00 CST

By Mike Freeman, The San Diego Union-Tribune

Mar. 23--San Diego money manager Relational Investors yesterday settled its bitter fight with Sovereign Bancorp, with the Philadelphia bank agreeing to add Relational principal Ralph Whitworth to its board.

The deal ends a fierce, expensive and high-profile battle in courts and before regulators. Relational sought to oust three of Sovereign's board members, including Chief Executive Jay Sidhu.

Sparking the proxy and legal fight was a controversial deal in which Sovereign would sell a 19.8 percent stake to Spain's Banco Santander Central Hispano for $2.4 billion. Sovereign would use the proceeds to help fund its purchase of Brooklyn Independence Community Bancorp for more than $3 billion.

Relational, the bank's largest shareholder, opposed the Santander/Independence transaction, as did other large Sovereign shareholders.

In the settlement, Relational agreed to drop its opposition. Sovereign says it now expects the deal to be completed in the second quarter.

In addition to placing Whitworth on its board, the bank will select a second outside director from lists of candidates provided by Relational "of high caliber persons of national reputation with no prior involvement with Relational or Sovereign," both parties said in a press release.

"I am pleased to achieve our original objective of obtaining board representation, and I look forward to working constructively with the board and Sovereign's management team to build share value for the future," Whitworth said in a written statement.

Whitworth did not return a phone call seeking comment yesterday.

An activist investment fund, Relational specializes in investing in companies, seeking board seats and then working to fix problems it has pinpointed. Its principals, Whitworth and David Batchelder, previously worked with corporate raider T. Boone Pickens.

Until now, Relational has gained board seats without proxy battles or lawsuits. But Sovereign fought Relational's efforts at every turn. The bank delayed its annual meeting to sideline Relational's shareholder vote to join its board. It sought the aid of Pennsylvania lawmakers, who passed an 11th-hour bill making it harder for shareholders to remove directors of companies incorporated in the state.

Relational fought back with lawsuits, regulatory challenges and full-page newspaper advertisements attacking Sidhu and his fellow directors. Santander hired former New York City Mayor Rudolph Giuliani to help press its case with regulators.

Under the settlement, Sovereign will increase the number of representatives on its board from seven to nine to accommodate the two Relational directors.

When the Santander/Independence deal is completed, three board members from those institutions will be added Sovereign's board, bringing the total number of directors to 12 and possibly diminishing Relational's clout to make changes.

Investors have applauded Relational's efforts to win seats on Sovereign's board. Their widely held belief is that Relational will push the company to sell itself. Relational officials, however, have stopped short of calling for a sale, instead vowing to force Sovereign to clean up its governance and take unspecified steps to create value for shareholders.

The agreement will make it tough for any other party to mount proxy campaigns in the future. Relational agreed to vote its nearly 30 million shares in favor of the board's nominees for directors. That pact is in place until 2012, except under certain circumstances.

Sovereign also agreed to hire an outside firm to study its governance practices. Sovereign said its board will proceed to take such action as it deems appropriate with respect to future policies as determined by a majority of its board.

Relational owns nearly 30 million Sovereign shares, which are worth about $664 million.

Dow Jones News Service contributed to this report.

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Copyright (c) 2006, The San Diego Union-Tribune

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SOV, STD,

Source: The San Diego Union-Tribune

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