Sovereign Bancorp's ( SOV) largest investor is suing in federal court to derail the Philadelphia-based bank's planned sale of a large equity stake to Spain's Banco Santander. Late Monday, Relational Investors said it had filed a lawsuit challenging the value placed on the equity stake, which is being sold for $2.4 billion, or $27 a share. The lawsuit seeks a declaratory judgment that Sovereign is worth much more than that. Relational, which owns 7% of Sovereign's stock, has been rallying shareholder opposition to the Santander deal, ever since it was first announced in October. The lawsuit comes nearly a month after the New York Stock Exchange refused to order Sovereign to put the deal with Santander up to a shareholder vote. San Diego-based Relational and other institutional investors had requested the shareholder vote. Instead of blocking the deal, the NYSE prodded Sovereign and Santander to revise the transaction to remove a number of egregious provisions that had previously read like long-term employment contracts for Sovereign's CEO Jay Sidhu and the bank's directors. The dissident investors, however, were not satisfied with the NYSE's partial measure. They contend the deal, even without the most odious provisions, was structured to deliberately avoid an NYSE rule that requires shareholder approval for any transactions involving the sale of a 20% or greater equity stake. In the Santander deal, the Spanish bank is acquiring a 19.8% equity stake, just under the 20% threshold. But it also has the option to later increase its equity interest to 24%. Relational contends the proposed deal "constitutes a 'control transaction'' under Pennsylvania corporate law. The asset-management firm is asking a federal judge to issue a declaratory ruling siding with its interpretation of Pennsylvania law. Relational, in the lawsuit, says a court-appointed appraiser should be named to determine the "fair value'' of the equity stake Santander is purchasing.
A Sovereign spokesman declined to comment because the bank had yet to see the lawsuit. Anything that upsets Santander's deal with Sovereign will have ramifications for New York-based Independent Community Bank ( ICBC). On the same day Sovereign announced the deal with Santander, it also said it planned to buy buy Independence for $3.6 billion.