More Banks Want To Sell For This Reason


liquidity-1-14-19.pngPeople often ask what are the main factors that are motivating banks to sell. Not surprisingly, sellers frequently cite a lack of succession planning, a lack of scale and increasing costs for technology and compliance.

But one surprising area that is becoming more influential is shareholder liquidity, now more often the primary factor we see pushing institutions to sell.

For many banks, the age of their average shareholder is approaching or exceeds 70. This leads to three primary challenges:

  • As shareholders pass away, the personal representative often needs to liquidate shares in order to settle the estate. If the issuer can’t provide a source of liquidity, the estate will “dump” the shares, sometimes at a steep discount.
  • Other shareholders are engaged in estate planning and seeking to sell shares.
  • Local shareholders are bequeathing shares to children and grandchildren spread all over the country who have no commitment to the community or desire to hold shares in the local bank.

There are also de novo banks whose investors bought in during the late 1990s and early 2000s with the promise of a 10- to 15-year time horizon. They are 20 years older and eager for a liquidity event.

There are many tools institutions can use to provide shareholders with increased liquidity, including:

1. Matching Programs. Some of our clients keep “interested purchaser” and “interested sellers” lists, in order to help match prospective buyers and sellers. This can be a simple way to help shareholders find an avenue for sale. If a shareholder asks for help in selling their shares, you can provide them with a list including the contact information of interested purchasers.

There are important considerations when administering a matching program. You will want to (1) avoid activity that would require registration with the SEC as a broker-dealer, and (2) make sure you, as the issuer, are not seen as “offering” the shares. To mitigate those risks, you should play a very limited role in any matching transaction. You should not negotiate, offer opinions, handle transaction money, or actively promote the service or solicit customers. You may, however, provide certain limited information and make shareholders aware of the service.

2. Repurchase Programs. Repurchase programs can take many forms, but the two most common are buyback programs and tender offers. With a buyback program, the board adopts a policy authorizing the company to repurchase shares within certain parameters. You may then inform shareholders of the program, but you may not actively solicit shareholders to participate in the program. Alternatively, a tender offer is an active solicitation whereby you ask a shareholder to make an investment decision in a limited amount of time. Furthermore, a tender offer is often more successful because it is “easy.” A shareholder simply needs to accept the issuer’s offer and doesn’t need to engage in negotiations with the company or other unfamiliar shareholders. Tender offers also allow the issuer to target strategic goals, such as offering redemption to small shareholders or out-of-state shareholders.

There are certain bank regulatory considerations involved with any share buyback or redemption transaction. In addition, specific securities laws and requirements apply to tender offers.

3. Transfer Services. Legislation enacted in recent years (the JOBS Act and the FAST Act) allows the use of a third-party online platform to implement certain securities transactions. By using a third-party platform, you can remain involved and offload most of the compliance risk to the vendor. Such platforms can often act as a white-labeled bulletin board for your shareholders to interact.

4. Listing. There are always the options of listing your securities over-the-counter (or OTC), on the recently-created bank-specific OTCQX, or going public and listing your shares on NASDAQ or NYSE.

To fund some of the repurchase initiatives identified above, some banks have successfully raised new capital from community members and customers, many of whom have not had the opportunity to invest in the bank. When a repurchase program is coupled with an offering, several banks have successfully “recycled” their shareholder base, buying time to execute their strategy without the added pressure of liquidity concerns.

There are a lot of options to consider, but community bank executives and boards should be aware of the increasing challenge shareholder liquidity is presenting to their peers and how to manage it proactively.

Mastering the Art of Unsolicited Takeovers


takeover-11-25-15.pngAssume you sit on the board of a bank that has no present interest in being acquired. Without warning, you receive an unsolicited takeover offer. Much as you may find this an annoying distraction, you cannot dismiss the offer out-of-hand. Rather, you must ensure that the board respects the foundational principle that, as a body, it must make decisions that enhance shareholder value. It must accept its decision-making responsibility, and promptly undertake a financial analysis to determine whether the offer is one that could put the shareholders in a better position than maintaining the status quo. If the board concludes that the offer is legitimate and that, once accepted and consummated after negotiations, it could put the shareholders into a more favorable position than retaining their existing bank shares, then a decision is virtually unavoidable.

If You Are the Target
In most states, following their version of the business judgment rule will protect the board’s decision and courts are reluctant to second-guess that decision as long as:

  1. The board has adhered to the bank’s documented governance processes and recusal mechanisms that are consistent with peer institutions and designed to eliminate board member self-interest influences.
  2. The board relied in good faith upon non-conflicted expert advice.
  3. The board minutes establish that it conducted a thoughtful decision-making process. If the financial analysis makes the ultimate decision too close to call, thereby giving good reason to consider non-economic issues, and the bank’s by-laws permit the board to weigh non-economic factors, it is imperative that negotiations over non-economic concerns be carefully documented to mitigate litigation risk regardless of whether a transaction receives a green or red light.

If You Are the Acquirer
Now assume you are a board member of the acquiring bank. Knowing that your unsolicited offer will gain traction only if the target’s board finds the offer to be legitimate, your first concern should be to make certain that you have assembled a team with the necessary expertise willing to devote the resources to due diligence. The better the acquirer understands the target’s governance and attitude, as well as its customer demographics, competitive position and the potential for regulatory concern over market concentration, the more tailored the offer will be to the interests of the target and the more likely the offer will receive favorable consideration. If later challenged, the board’s due diligence will be judged by the investigative standard of reasonableness, where management decisions were ratified by the board only after independent inquiry. The board must uphold its duty of care, and that obligation will have been met if it has made reasonable examination of the totality of available information, including strategic, operational, management, timing and legal considerations.

Using Advisors
Whether you are on the board of the target or the acquirer, you will need to have a level of market, industry and technical expertise that requires engagement of outside advisors, with investment bankers often being the most prominent. The board will need to understand every advisor’s motive. It is essential that the advisors challenge your assumptions, and if their financial incentives depend on closing the deal, you must remain alert to that natural bias. The board must resist investment banker pressure to get a deal done, making sure that board agendas provide adequate time to study implementation progress, to anticipate and mitigate risks and to identify additional and alternative opportunities.

Clarity and open communication among members of the key leadership team and their advisors is imperative, especially with regard to keeping the transaction true to the board’s primary business goals.  These factors will drive contract negotiations, elevate the quality of the due diligence effort and ensure that the initiatives and business elements that create value are prioritized in the integration process.

For both acquirer and target, investment bankers in collaboration with legal counsel can be invaluable in guiding the boards towards successful completion of the transaction. Seasoned investment bankers can help set appropriate price terms and conditions and establish critical protocols for communicating with employees, the media, the market and investors. Experienced legal counsel can negotiate a transition services agreement governing consolidation and systems conversion and provide early, active and competent interaction with regulators to ensure unimpeded processing of all necessary filings and approvals.

Above all, it is vital to remember that failing to close the deal may ultimately be in the best interests of the enterprise. Ego, incentive compensation and deal momentum can all too easily distract the board from its paramount responsibility, namely, to constantly vet all pro forma assumptions of the deal.