Lessons Learned from HBO’s “Succession”

My wife and I recently completed watching all three seasons of HBO’s “Succession.” It’s a wild ride on many levels, full of deceitful and dysfunctional family dynamics, corporate political backstabbing, and plain old evil greed. Despite this over-the-top intertwined family and business drama, there are quite a few relevant lessons worthy of attention from bank leaders and board members. Three in particular stand out to me.

First: Succession planning is always vital, and never more so in an organization (public or private) with any element of familial involvement. As is well known, all boards of directors should be paying close attention to succession for the CEO role and other key leadership positions. In the HBO show, there is no clear line of succession, and the company’s 80-year-old patriarch (who experiences major health issues early in season 1) has not only failed to plan for his eventual departure but has all four children thinking they can and should take over the “family” business. Only one of the four is even close to qualified, and he becomes compromised by external events. Meanwhile, daddy plays each sibling against each other. It is a mess which devolves into chaos at various times, seriously impacting both the fortunes and future independence of the business.

Second: Where is the board of directors? In this instance, the company, Waystar Royco, is a publicly traded global media and entertainment conglomerate, but the board is not governing at all. The single most important responsibility of any board of directors is the decision of “who leads”. This goes beyond the obvious CEO succession process, ideally in a planned, orderly leadership transition or worst case, a possible emergency situation. It more broadly relates to an ongoing evaluation of the CEO and his or her competency relative to the skills, experiences, leadership capabilities, temperament and market dynamics. Too many boards allow CEOs to determine when their time is up, rather than jointly crafting a plan for a “bloodless transition of power,” that encourages (or even forces) a constructive change of leadership. In “Succession,” the board is comprised of cronies of the patriarch — and his disengaged brother — who are both beholden to and intimidated by their successful and highly autocratic CEO.

Lastly, in any company with a sizable element of family ownership, the separation of economic ownership and executive leadership is vital. While at times the progeny of a successful founder and leader prove extremely capable (see Comcast’s Brian Roberts), this is often the exception rather than the rule. Therefore, the board and/or owners ideally will address this dynamic head-on, accepting that professional management is indeed the best way to enhance economic value for shareholders and family members while encouraging the offspring and descendants to keep their hands off and cash the checks. Many privately held banks grapple with this same dynamic.

Such decisions, of course, are fraught with peril for those involved, which “Succession” endlessly highlights. Creating the proper governance structure and succession plans is rarely easy, especially when personal and financial impacts weigh heavily on the individuals involved. Still, with the board’s prime directive of leadership selection top of mind, and a commitment to candor and transparency, the outcome will likely be much better than simply ignoring the elephant in the room.

When season four of HBO’s “Succession” rolls around, it will surely provide more examples of how not to govern properly.

Overcoming M&A Hurdles in Closely Held Banks

1-6-2014-Baird-Holm.pngThe family dynamic in closely held banks is a powerful driver in bank mergers and acquisitions today, and deals involving closely held financial institutions often take a very different tack than transactions by their publicly traded brethren.

Whether it is the ability to move expeditiously to execute a transaction or to pursue structures that would be impossible in a publicly held bank holding company, closely held financial institutions get deals done differently.

“Family-owned or closely held buyers have the ability to take the long view when they make an acquisition,” says John Zeilinger, a senior banking attorney at Baird Holm LLP. “The flipside has been the case for a number of recent sellers—when pressured to raise capital, family held banks may not have attractive sources from which to raise new investment, which can lead to shotgun marriages and deal structures that are creative by necessity.”

Transaction structure is probably the most salient distinction in such deals. Whereas a purchase-and-assumption transaction typically is used only in FDIC-assisted transactions involving larger financial institutions, closely held banks make use of such structures on a fairly regular basis to exclude toxic assets and obtain stepped-up tax basis when acquiring assets. For example, toxic assets may be held in a liquidating trust, to facilitate the sale of assets post-closing.

While representations and warranties are common across all transactions, buyers of closely held financial institutions enjoy greater opportunities for recourse. Personal indemnities are common in the family banking context, whether or not such indemnities are subject to escrows or holdbacks. It is common to set aside dollar amounts that are tied to assets subject to valuation disputes. For example, other real estate owned (OREO) assets, which often include foreclosed properties, can be subject to specific indemnities and holdbacks to bridge the valuation gap between buyer and seller on such balance sheet items.

Baird Holm LLP attorneys have assisted with recent deals that included creative methodologies for valuations of disputed assets and, in one case, even personal guarantees of loans for a specified period. This kind of cherry picking is impossible in deals involving publicly held financial institutions, but has become very common with closely held banks during the downturn.

Perhaps one of the most striking examples of such deal-making that made the headlines was the so-called good bank-bad bank transaction last March involving First Independent Bank. In that deal, the Firstenberg family, which owned the institution, sold its main banking operations to Sterling Financial of Spokane, Washington According to public reports, the deal required the shareholders to retain $83 million in toxic assets in exchange for a $7 million down payment with a potential $17 million earn-out depending on the ultimate value of those assets.

But transaction structure is not the only consideration to keep in mind when doing deals with closely held banks. Because the owners of family banks often maintain strong ties to the local community, strong non-compete contracts are essential to ensure the premium paid for an institution is justified. Failure to obtain a strong non-compete may result in an owner using proceeds from a transaction to set up shop “across the street” from the sold institution and to begin rebuilding the franchise by poaching key employees and customers.

Furthermore, tax planning opportunities also may exist in connection with transactions involving family held financial institutions. Because many family held banks have elected subchapter S tax status, an S corporation election that has been in force for more than 10 years may enable a buyer to purchase shares from their holders while obtaining a stepped-up tax basis in acquired assets.

However, there are potential roadblocks to doing deals with closely held banks. The internecine deals struck among the shareholder base of closely held banks can be complex. For example, shareholder buy-sell agreements may contain complicated rights of first refusal, drag-along rights and tag-along rights (contract terms that force minority shareholders to go along with a deal or give minority shareholders the right to sell on the same terms as the majority shareholders). Navigating such agreements when dissident shareholders refuse to participate in a transaction can be key to executing a deal. In addition, finding ways to address preemptive rights provisions, which grant certain shareholders the right to purchase shares before the general public, may be essential to facilitating an influx of new capital.

“Preemptive rights provisions were the bane of many banks seeking to bring on TARP investments several years ago, and they frequently forced struggling institutions to incur additional expense in connection with capital raises required by regulators,” said Amber Preston, a banking and securities lawyer at Baird Holm LLP. “Our advice to the shareholders of closely held banks today is definitely colored by the many challenges banks faced in the recent downturn.”