Activist lawsuit a reminder for banks to tread carefully in proxy fights

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An activist investor is taking an aggressive approach in a longstanding effort to force First United in Oakland, Md., to sell.

Driver Management in New York filed a lawsuit on Sept. 4 in the U.S. District Court for Maryland against First United, alleging that the $1.6 billion-asset company lied to investors and abused the regulatory process to quash dissent and win a proxy battle.

The litigation, which also singles out First United CEO Carissa Rodeheaver and the company’s board, all but ensures a protracted feud between the parties will continue for several more months. Driver wants the court to throw out the election results and order First United to hold another vote.

The case serves as a reminder that banks and investors must be mindful about the tactics used during proxy battles, industry observers said.

"There are certainly activist investors out there that are very good at making noise," said Robert Bolton, president of Iron Bay Capital and a former bank director. "In these times of heightened litigation, it's smart to walk and talk carefully when it comes to anything you are dealing with that has heightened sensitivities."

Driver, which owns about 5% of First United’s stock, claims that the company concocted a secret plan to try and prevent the shareholder from nominating directors at June’s annual meeting, ensuring that the current board remained in place.

“What they did was just fundamentally wrong,” Abbott Cooper, Driver’s managing member, said in an interview. “They violated the rights of all shareholders.”

First United responded in a statement that the lawsuit "is completely without merit and we will vigorously defend the company and directors against these baseless claims.”

The litigation escalates a fight that began last year as Driver pressured First United to find a buyer. During that process, the investor claimed that the bank was mismanaged and had been underperforming for the past decade.

After First United balked at pursuing a sale, Driver nominated three candidates to stand for election at the 2020 annual meeting. After the meeting, Driver claimed that First United’s management and the board used a misinformation campaign to bias the results.

The lawsuit claims that First United incorrectly told regulators that Driver had violated Maryland securities law by buying shares without notifying the state's Office of the Commissioner of Financial Regulation, which would have barred the investor from voting those shares at the annual meeting.

Maryland’s financial regulator investigated the matter earlier this year but closed the probe without conclusive findings of wrongdoing. Cooper maintains that Driver adhered to the law.

Driver also claims that First United used company resources to lobby state regulators and lawmakers to either prevent Driver from voting or to “confuse shareholders” about the investor’s ability to vote and legitimately nominate directors.

The lawsuit alleges that a lawyer representing First United contacted state officials about the investigation and that bank executives sought help from state legislators and Gov. Larry Hogan's office — without informing shareholders — in an effort to tilt the election.

First United “repeatedly lied to investors about the election, the voting process, and the merits of the concerns raised by Driver, all while abusing the regulatory process with its primary regulator and then lying to shareholders about it directly and in SEC filings subject to federal securities laws prohibiting false and misleading statements," the lawsuit claims.

In addition to a new vote, Driver is pursuing an unspecified amount of damages.

“They wanted regulators to take away our voting rights,” Cooper said. “It couldn’t be a more clear-cut violation. … The board and this CEO demonstrate a complete lack of fitness for the job and are fundamentally disloyal to shareholders.”

First United and Rodeheaver have characterized the bank as the target of a hostile takeover. Its management and board have said in the past that they tried to compromise with Cooper well ahead of the June vote, offering to appoint two independent directors — one selected by Driver — before the annual meeting.

Driver rejected the proposal, First United said.

Ahead of June’s meeting, the proxy advisory firm Institutional Shareholder Services recommended that shareholders vote for three of First United’s four director nominees, stating that Driver had failed to make a convincing case for an immediate overhaul and sale. Glass Lewis, another advisory firm, recommended that all four incumbents be reelected.

First United is in the midst of what it calls a “board refreshment” that will result in four new directors over the next three years — changes intended to bring new perspectives to corporate oversight.

“First United has a history of engaging constructively with its shareholders and we are fortunate to have received valuable feedback from them, particularly in the months leading up to the annual meeting,” Rodeheaver said in June, after the board vote.

“We will continue to welcome and implement this feedback as we execute our board and corporate governance refreshment initiatives, as well as our plan to maximize long-term value,” she added.

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