Hampden Bancorp’s ongoing proxy battle with a cadre of activist shareholders may hold some lessons for community banks that want to go public – and also remain independent.
Hampden Bank went public in 2007. Since then, the bank has since struggled to produce returns adequate enough to please some of its shareholders.
Specifically, Clover Partners, a Texas-based hedge fund that owns a little more than 9 percent of Hampden Bancorp stock, has filed proxies with the Securities and Exchange Commission (SEC) to put its own candidates on the bank’s board of directors in the hopes of forcing a sale or merger. Since Hampden Bank isn’t producing sufficient returns, those shareholders say, it should consider a sale or merger, ideally similar to the merger between United Bank and Rockville Bank that closed earlier this year.
Last year stockholders defeated a similar move by Clover Partners, but the Texas hedge fund was undeterred. In recent weeks, the unhappy investors have again put Johnny Guerry and Garold R. Base up for election, and they have not minced words in those SEC filings, accusing Hampden Bank of delivering poor performance and failing to act in its shareholders’ best interests.
Hampden Bank hit back with its own proxy, asserting that Guerry, at 32, is not qualified to be a director as he has no banking experience and pointing to Guerry’s friendship with a man he later found to be embezzling money and committing fraud. (A Dallas Observer article in 2012 stated that Guerry severed the friendship with Gary Guion after learning of Guion’s illicit dealings, and later filed a lawsuit alleging that Guion was harassing and threatening him.)
Hampden Bank’s shareholders are to vote on the matter on Tuesday, Nov. 4.
Control Your Own Destiny
The activist shareholder is a salient issue right now, especially given that five mutual banks in Massachusetts have filed IPOs this year. Can a newly converted bank expect to control its own destiny? Or are activist shareholders a possibility for any institution that goes public?
Eric Luse, a partner in the law firm Luse Gorman Pomerenk & Shick who specializes in mutual-to-stock conversions, tends to believe that a newly converted bank can control its own destiny, depending, of course, on the individual bank’s operations.
In the first place, he said, the board of directors is under no legal obligation to sell in order to please shareholders, even if those shareholders are turning up the heat. Federal regulations also prohibit the sale of a recently public bank for three years following its conversion and prohibit anybody else from making an offer for five years following conversion, he said.
A bank can also put provisions into its bylaws or charter to forestall against this problem. For instance, a bank could impose a residency requirement in its bylaws, requiring that its directors actually reside in the bank’s marketplace. Luse said a community bank can easily justify that provision. In other words, how can a director help promote the bank’s business when he or she lives far away in some bustling metropolis?
Finally, he said, the best way to forestall against activist investors is to make sure that insiders – from employees to management to board members – own stock in the company, ideally into the 20 percent range.
“If you have confidence and you own stock in your company, that makes it very difficult for outsiders to force a change in the company,” he said. If insiders own 20 percent or more of the company’s stock, that makes it significantly easier to block moves by outsiders or activists.
While not commenting directly on the situation at Hampden, Luse said, “The long and short of it is, yes, the proxy fights going on can spook companies that want to convert and remain independent, but you certainly can do it if the board and management are committed to remaining independent.”
… Or Just Deliver Returns
But Donald J. Musso, president and CEO of the New Jersey-based consulting firm FinPro, sees the situation a little bit differently.
In the first place, he said, the days of fully subscribing conversions to the local community are gone, so any bank that goes public today should accept that it’s likely to have institutional investors and at least one or two professional investors. In the second place, he said those professional investors tend to be reasonable people until they feel they’re being disrespected, “at which point they become pit bulls.”
Musso advises banks to accept that they are no longer in complete control of their destiny, and to understand the motivations of those professional and institutional investors – that is to say, stock price appreciation.
“And I would make sure that during the first three years of my existence, I would have a plan that shows how I’m going to build value and I would execute value,” he said. “If they’re building value and stock price is going up, that takes all the wind out of the sails of the professional investors. They’re all about returns.”
Finally, Musso has a few words of wisdom – “My last piece of advice: when the professional investors call – and they will call and email and use every other form of communication – take the meeting and be respectful. Be firm, but be respectful. It’s OK to disagree with the professionals, but it’s how you do it.”
Email: lalix@thewarrengroup.com
