Two former minority shareholders of Amboy Bancorp, Old Bridge, N.J., have sued, claiming the company forced them to sell their stock for far less than it was worth.
The former shareholders were among 365 who were offered $73 per share last fall, when the $1.1 billion-asset company announced plans to convert to a subchapter S corporation under the Internal Revenue Code.
They accepted the offer in December but now estimate that their shares were worth at least $130 each. Amboy shares closed at $72.625 Jan. 8, the day before the conversion took the company off the market.
Buyouts of minority shareholders are a routine but potentially nettlesome part of bank reorganizations. Because S corporations are allowed only a limited number of shareholders, majority owners typically buy out minority investors before making the switch.
Minority investors increasingly are questioning how their stakes are valued. On Dec. 8, for instance, former shareholders of Broadway Bancshares, San Antonio, asked a court to force the company to double its payout. The case is pending.
In the Amboy lawsuit, filed Jan. 29 in New Jersey Superior Court, the former shareholders sought class-action status for all investors who were left out in the conversion. They also argued that former shareholders should be permitted to rescind the exchange of their shares. Minority shareholders had owned about 20% of Amboy's common stock, the plaintiffs said.
The suit claims that minority shareholders deserve more per share because the price should factor in Amboy's potential earnings.
The conversion "was timed to deprive plaintiffs of their valuable shares of Amboy at a time when mergers and acquisitions in the banking industry ... are yielding substantial premiums for shareholders when their ownership is eliminated," the complaint stated. "At the minimum, in a cash-out transaction, plaintiffs could expect to receive at least three times book value for the shares."
George E. Scharpf, Amboy's president, declined to comment on the case. A statement released by the bank Feb. 9 said that most minority shareholders have exchanged their shares for cash.
But R. Bruce McNew, lead counsel for the plaintiffs, said that fact has no bearing on the case. "I am not aware of any requirements under New Jersey law that say you must forgo payments in order to challenge the fairness of a merger."
Despite this suit and the one in Texas, shareholder lawsuits in subchapter S conversions remain rare, according to Robert R. Pluth Jr., partner in the Chicago law firm of Schiff Hardin & Waite.
"There is always a chance that a minority shareholder in any setting, be it a merger or a conversion, will feel the amount offered was not appropriate," he said. But he said none of the several conversions he has been involved in have sparked suits.
