When Giants Walk the Land

Scenario: Peter Smith is the 50-year-old CEO of the $200 million First State Bank. The bank’s outside chairman and largest shareholder (15%) has just left Smith’s office after informing him that he wants to address the issue of selling the bank at the next board meeting. The chairman is scheduled to retire from the board next year.

As with many community institutions, the bank’s stock is thinly traded, even though earnings are robust and growth potential in their market is good. CEO Smith knows the chairman is interested in the high premiums being paid during takeovers versus what the bank has been paying recently to repurchase outstanding shares. As Smith prepares the agenda for the next board meeting, he ponders how to handle this delicate situation.

“The first thought that comes to mind isu00e2u20ac”when a 15% shareholder speaks, a CEO must surely listen. The second thought is that the board represents all the shareholders, and the CEO should be sure that this is on the directors’ minds when this topic is presented for discussion at the next meeting.

With these two thoughts in hand, Peter Smith needs to deal with this issue in an open-minded manner. It is possible that a “control” premium may be available for the chairman’s stock (and that of other shareholders); however, the immediate gain must be weighed against the longer-range values available through continued operations. Mr. Smith should point out that, prior to taking any action on this issue, the board needs to weigh carefully the values potentially available through both options.

There is obviously an element of self-interest present here for both the chairman and the CEO. Mr. Smith should, however, avoid a confrontational discussion. The decision to sell or remain independent lies at the heart of a board member’s responsibility to shareholders, and liability can accrue for decisions made without objective, documented, value analysis.”

Bill C. Houston


Department of Financial Institutions

State of Tennessee

Nashville, Tennessee

“Retirement and death of executive officers and principal shareholders are the leading reasons why community banks sell. Regardless of whether Mr. Smith likes the fact that his largest shareholder wants to place the issue of sale on the board table, the reality is that a significant shareholder can force the issue to be considered by the board or, alternatively, and with perhaps greater disruption, by the shareholders. We have found that management is sometimes reluctant to address the issue of strategic alternatives, for they believe the process will inevitably lead to a sale of the institution. Experience indicates, however, that a board that is properly educated in its fiduciary duties will be more deliberate in considering this question and less likely to sell in less-than-ideal circumstances.

What Mr. Smith needs to do is manage the process of educating the board with respect to the bank’s strategic alternatives by hiring appropriate advisors; developing a business plan that demonstrates how the bank can increase shareholder value as an independent entity; and putting in place a process that it is deliberate, thoughtful, and free of personal interest. Mr. Smith can take comfort in the fact that there has never been a case where directors have been held personally liable for refusing to sell an institution, but rather [there are cases of liability] where they have sold for too little.”

Frank M. Conner III

Financial Services Group

Alston & Bird LLP

Washington, D.C.

“I believe the board should review its strategic planning to determine where the bank and shareholders want to be in the next five to 10 years. ‘Do we remain a strong, independent bank in the community, or do we look to other alternatives relative to our shareholder value?’

The current high premiums require the large majority of us to agree to sell. We need to determine if that consensus is possible. If that avenue isn’t available, we need to face the reality that the large premium from a stock merger transaction is not available to us.

We should be exploring alternatives to enhance each of our shareholder’s value and still remain independent. We need to determine the best internal price for our stock, based on our bank’s profitability and growth, and adjust our buy/sell [decision] accordingly. This value won’t give us the ‘top dollar’ of a 100% sale, but it will give us an enhanced value over each of our minority interests.

The result: Let’s first determine where we are going, and then face the realities and opportunities of that decision.

Fred L. Manuel, CPA


Border State Bank

Greenbush, Minnesota

“As Peter Smith prepares his upcoming board meeting agenda, he will, no doubt, include the request by his chairman to address the possibility of a potential bank sale.

Financial and strategic alternatives should include an evaluation process of not only selling, but also acquiring or successfully remaining independent and should address the social and fiduciary responsibilities involved in any course of action by the board.

The chairman owning 15% must consider the other 85% of shareholders who currently are seeing good earnings and growth potential in the market. (There is always danger when giants walk the land.)

If proper attention has been paid to assembling a cohesive team capable of perpetuating competitive, up-to-date products and services, and officers and directors who are driven to provide the highest possible level of customer satisfaction that serves the needs of the market, a board can build a strong case that staying independent is just as beneficial to shareholders as selling the bank. One way or another, First State Bank needs a discussion about its strategic alternatives.”

William J. Walsh


First National Bank of Ottawa

Ottawa, Illinois

“There are several important items that need to be addressed at the board level, given the retiring chairman’s preference to sell the company. Two of the most important are: What is the attitude of the collective board as to the continued independence of the bank and what is the value of the retiring CEO’s stock?

Prior to the next board meeting, CEO Smith should determine the other directors’ attitudes toward continued independence. He may want to suggest the formation of a committee of directors to analyze the alternatives available to the company.

If the board and management prefer to remain independent, they must be aware that their largest shareholder wishes to receive a large premium for his stake and that he may be disruptive if his wishes are not met. Some possible solutions under this scenario are:

  • other investor(s) are found to buy the chairman’s stock at a fair value
  • the chairman is convinced by management and the rest of the board of the underlying value in the stock and how management plans to unlock that value so that he changes his mind and decides to hold the stock.
  • the bank repurchases the stock at prices about the level they had been paying for stock, justifying the higher price through a more leveraged capital structure.
  • the bank improves the marketability of the stock.

Whichever path the CEO chooses, the board should be of the opinion that all shareholders should be treated fairly. The bank’s largest shareholder does not merit special treatment if it is going to disadvantage the other shareholders.”

John G. Duffy

Executive Vice President

Keefe, Bruyette, & Woods

New York, New York

First State Bank is a classic example of why banks like this should be sold. It is an all-too-familiar scenariou00e2u20ac”no plan and poor leadership. First, the retiring chairman apparently holds office because of his ownership stake, not for his leadership abilities. A skillful leader would have used robust earnings for expansion instead of stiffing hapless shareholders with undervalued share repurchases. An expanding bank usually means stock dividends, greater investor interest in the stock, better liquidity, and a better market price. Second, the CEO is an ineffectual leader. A strong CEO would have said, ‘Mr. Chairman, a sale of the bank is serious business. We have other stockholders’ interest to consider as well. You and I need to discuss this at length far in advance of a board meeting so that all alternatives can be put on the table. After all, you, me, and the entire board have a fiduciary duty to all shareholders.’ Third, apparently other directors lacked the moxie to insist upon a strategic alternative plan for the future direction of the bank, especially with a large shareholder in a strong position of influence nearing retirement age. The conclusion is the bank must be sold.

Jerry Shearer

Shareholder activist

Managing Partner

Mid-Atlantic Investors

Columbia, South Carolina

“The mission of all bank employees should be to maximize shareholder wealth within the parameters of ethical behavior, abiding by the law, following regulatory guidelines, and managing within the approved policies and procedures of the bank. Management of the shareholder resource is an extremely important function. Community banks suffer from thin or nonexistent markets for their stock, and shareholders pay the price with severe minority and liquidity discounts. Certainly, CEO Smith should not be surprised about the request of the chairman. It is Smith’s responsibility to understand and communicate the sales value of the institution to the board and the stockholders.

This scenario deals with personal agendas. The chairman’s age indicates that he is interested in ‘cashing out’ while CEO Smith most likely looks forward to 20 more years at the helm of First State Bank. Therein lies the conflict for both men. The bank is not Smith’s high-salary, perk-laden ride into the sunset, nor is it a ‘cash machine’ to be activated upon the chairman’s retirement. The bank is managed for the shareholders, and the process of ‘sale’ is, and must always be, an alternative. Continued operational independence of First State Bank is only supported when empirical, objective evidence reflects shareholder wealth greater than the after-tax, present value of the sale. CEO Smith and the chairman may certainly campaign for their agendas, but the shareholders must be the winners.”

J. Michael Woody


J. Michael Woody Inc.

Edmond, Oklahoma

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