Banks Refine Art of Proxy War in Response to Dissidents, New Law

The sniping and cattiness are still there, but otherwise bankers and activist shareholders have entered a new world of proxy battles.

Shareholders at community banks have become much more involved. A new federal law is making life more difficult for challengers to solicit votes. Beleaguered management teams are showing more signs of exhaustion, and everyone is frustrated by low interest rates and a sluggish economy.

A continuation of these trends could force bankers and activists to rethink how they tussle for investor support, industry observers say.

"Those developments will definitely change how proxy contests are conducted," says John Peck, president and chief executive of HopFed Bancorp in Hopkinsville, Ky. Earlier this month an activist investor managed to unseat one of the $981 million-asset company's directors.

"More participation, especially with more knowledgeable retail investors, means that shareholders will be voting more on each side's strategy rather than maintaining the status quo," Peck says. "Articulating your message is more important now."

Shareholder participation is on the rise. Nearly 90% of outstanding shares voted at last week's annual meeting for South Street Financial (SSFC) in Albemarle, N.C. HopFed Bancorp (HFBC) had nearly 84% participation.

Generally, 80% participation is viewed as a solid turnout, says activist investor Joseph Stilwell, who prevailed at HopFed and is awaiting final results of his contest with Harvard-Illinois Bancorp (HARI) for a second straight year. Based on historical participation, "we peg that we need at least 42% of the outstanding shares to win."

"Higher participation is a good thing, regardless of the outcome," Peck says, adding that increased turnout indicates more participation by retail investors. "The institutional investors will always participate," he says. "We spent a lot of time, as did Stilwell, marketing to retail shareholders."

Higher participation rates are having an impact. Mark Jaindl, a Pennsylvania banker who tried to wrest three board seats from South Street, failed in his quest even though 45% of the voting shares backed his nominees. Jaindl, who lost by less than 100,000 votes, owns nearly a quarter of South Street's outstanding shares.

Increased turnout could reflect more aggressive lobbying by banks and activists, says John Gorman, a partner at Luse Gorman Pomerenk & Schick who represented Jaindl in his proxy battle. "Management in particular is working harder to get the shareholders to come out and support them," says Gorman, who declined to specifically discuss the South Street matter.

Lobbying efforts are escalating at a time when it is getting harder for disgruntled investors to communicate directly with fellow shareholders at many banks. This year's proxy season was the first to take place since the Jumpstart Our Business Startups Act paved the way for dozens of small banks to stop filing with the Securities and Exchange Commission.

Deregistration "deprives the dissident of using the [Schedule] 13D avenue as a clarion call for shareholders," Gorman says. "The 13D is such a convenient way to get the message out. Now they have to write more, mail more and make more phone calls."

In the case of South Street, Jaindl called at least one sizable shareholder six times in the run-up to this year's annual meeting. Likewise, South Street sent out several mailers and had representatives working the phone lines in the weeks before the annual meeting.

It is unclear how much the change will ultimately increase costs. Historically, the typical proxy battle costs activists $150,000 to $250,000, Richard Lashley, a principal at PL Capital told American Banker last year.

Bankers are also showing more signs of fatigue. Executives who once asked investors for more time to improve their companies for the long run are now asking for leniency so they can deliver higher multiples to attract a buyer, Stilwell says.

"Poorly performing banks used to talk about growing out of" their problems, Stilwell says. "Now they're talking about managing through the tough times until they can get a better price for selling. I think it is a grudging acknowledgement by bankers that growth just isn't going to happen."

Some industry observers disagree with Stilwell's assessment. "Bankers may be pointing to the market and noting that it is not the most favorable … but I also think they are saying that they can still deliver value and serve shareholders," Gorman says.

Still, the message gets muddled in some instances. Ronald Swanner, chairman and chief executive of South Street, talked about "building for future growth" during the $281 million-asset thrift company's annual meeting. Swanner also indicated that the board was holding on in hopes of making itself more valuable to an acquirer.

"Right now, bank stocks are low," Swanner said, when asked by an investor about the board's decision to reject an offer by Jaindl to buy the company. "The prospect for growing the value of the company is ahead of us."

"I certainly understand his perspective," Peck says of Swanner's comments. HopFed recently announced plans to buy another bank in a move that angered Stilwell.

"We have to do things every day to make our company better, whether that is to ultimately sell or remain independent," Peck adds. "We have an obligation to do some soul-searching every day. The things we do each day make our company worth more. Does our deal make us a better acquisition? Possibly. But we're not in a defensive mode."