Steps to Help Keep Your Bank Independent

09.26.18

As we all know, merger and acquisition activity involving community banks in Wisconsin is occurring at a significant pace. There are right and wrong reasons for selling your Bank, and selling your Bank for the wrong reasons may diminish the price paid and unnecessarily result in the loss of your community bank franchise. Some of the wrong reasons for selling the Bank include the failure to anticipate and address shareholder concerns, the failure to consider or act on alternatives to selling, and the failure to prepare for an unsolicited ​“offer” to buy the Bank. There are, of course, many right reasons for selling, including high compliance costs imposed on community banks and seeking an immediate recognition of shareholder value. The purpose for this short post is to help your Board minimize the likelihood of a sale for the wrong reason. 

A. The following shareholder concerns may need to be addressed by the Board to minimize the chances of being sold for the wrong reason:

1. Stock Liquidity. Liquidity of the stock may be a critical issue for some Bank shareholders, and informal practices for maintaining a market for the Bank stock may no longer be adequate. The holding company for the Bank can help maintain a market for its stock and better anticipate the need of some shareholders for immediate liquidity from time to time. This may be one of the more critical shareholder concerns that could compel shareholders to push for sale of the Bank. In this context, a bank holding company can be a very useful structure to help maintain a market for the holding company stock due to the flexibility granted a bank holding company under various state and federal laws to repurchase its stock from time to time from shareholders interested in immediate recognition of shareholder value. Some bank holding companies even establish a formal process for repurchasing stock from time to time, including establishing a formula to be used to determine a price for the repurchased stock and establishing a process shareholders may follow to initiate a repurchase of their stock. The process and the formula for establishing the price are announced from time to time by the Board to shareholders. Stock redemptions by a bank holding company may be a significant solution to accommodate the wishes of those shareholders interested in selling their stock. This suggestion for bank holding company help by the redemption of stock is counter to some who claim community banks no longer need their holding companies. I disagree, and this is one of the major reasons I disagree.
2. Maximizing Shareholder Value. It is important to develop a plan and to show shareholders a plan for maximizing shareholder value over the long-term. Without such a plan the Board may run the risk of shareholders demanding immediate recognition of shareholder value. 
3. Management Succession. Management succession plans would help give confidence to shareholders of the continuing successful management of the Bank following its current generation of leaders. 
4. Strategic Plan. I suggest your Board also consider adopting a strategic plan to remain an independent community bank. The Board’s plan should describe the benefits of that plan for long-term shareholder value. 

B. The Board may also consider adding defensive measures to the bank holding company’s articles which could be helpful in situations involving an unsolicited or unfriendly effort to buy the Bank. Most unfriendly takeovers do not succeed, but an unfriendly effort to buy the Bank may have the unintended consequence of forcing a sale of the Bank to a friendly buyer. It has been my experience that most buyers of community banks are interested in willing sellers, not unwilling sellers. Although there are no absolute show-stoppers to an unfriendly takeover, defensive measures can help maintain a community bank’s charter or at least force a buyer to negotiate with the Board of Directors. 

1. Some defensive measures for consideration by the Board as amendments to the bank holding company’s articles include the following: 
   • “Supermajority vote requirement.” This provision in the articles imposes a supermajority vote requirement in the event of a merger, consolidation or sale of all or substantially all of the assets of the bank or bank holding company where a shareholder vote is required. For example, a supermajority vote requirement may require a seventy-five percent (75%) shareholder vote for approval of a merger unless the merger is approved by a majority (or some other higher percentage) of the Board. 
   • “Staggered terms for directors.” This provision in the articles provides for staggered terms for directors which would prevent a buyer from immediately taking over the Board. 
   • “Limitations on removal of directors.” This provision in the articles would prevent a director from being removed by other directors or shareholders except by a supermajority vote of outstanding shares or directors. The articles may also include a provision which prohibits the removal of directors other than for cause as defined in the articles. 
   • “Prior notice requirement.” This provision in the articles requires advance notice (60 or 90 days) from shareholders for nominations for directors and shareholder proposals for consideration at the annual shareholder meeting. 
   • “Blank check preferred stock.” This provision in the articles grants the Board ​“blank-check preferred stock” authority to issue preferred stock at a price and terms determined by the Board. This would allow the Board to issue a type of stock that may discourage an unfriendly takeover. 
   • “Right of first refusal.” This provision in the articles prohibits shareholders from selling their stock to third parties without first offering the stock to the bank holding company at the same price offered by the third party. 
   • “Limitation on shareholder vote to amend articles.” This provision in the articles requires a supermajority shareholder vote to approve any amendment to the defensive measures included in the articles. 

2. There may, of course, be other defensive measures which could be considered by the Board. In the end, however, the best defense may be a profitable bank with a fairly valued stock. 

C. Finally, the Board always needs to consider its fiduciary duty to the organization and its shareholders when considering the sale of the bank or bank holding company or the adoption of defensive measures. When making these decisions the directors may be protected from liability by the ​“business judgment rule” if the directors perform their duties based on information, in good faith, and in a manner they honestly believe to be in the best interests of the organization and its shareholders. Note that a critical part of this protection for directors if applicable is the requirement that they perform their duties based on information, and it is for this reason I suggest that any strategic decisions made by the Board be based on information provided to the directors by management and certain third parties with expertise and information pertaining to the banking community in general. The Board’s consideration of such information from management and third parties should be reflected in detail in the minutes of the Board meetings at which this information is provided along with copies of any documents provided to the Board by management and third parties.

Deciding to sell or not to sell the Bank is a complicated legal and corporate decision which will involve consideration of many facts and circumstances far beyond the scope of this brief post. I have attempted here to briefly enumerate some of the factors which I have seen implicated in the Board’s decision-making process on the matters. You may wish to discuss these matters with the Board and with your legal and other advisors. 

• Bank & Holding Company Capital |
• Corporate Matters & Governance |
• Merger & Acquisition