They say every deal is different — but this one is proving to be really different.
Bond Street Holdings' $13 million agreement to buy Atlantic Coast Financial (ACFC) in Jacksonville, Fla., drew attention from the beginning because it would have withheld 40% of the deal price to cover shareholder suits. That provision made an unhappy investor — Jay Sidhu — unhappier, and he has waged war in writing for two months.
The parties removed it from their agreement this week, but the fight is still on, with Sidhu saying he remains opposed and executives at Bond Street and Atlantic Coast countering that they had taken a step toward winning the support of other shareholders.
"Most bank mergers go through uneventfully, but this one stands out," says David Baris, a partner at BuckleySandler and executive director of the American Association of Bank Directors.
The big drama surrounding the small deal returned Tuesday, when Bond Street in Weston, Fla., said it would give the Atlantic Coast shareholders the full $5 per share at the closing of the deal, removing a provision that would have put $2 aside for a year to cover the cost of shareholder litigation.
Sidhu — Atlantic Coast's former chairman who, along with an aligned shareholder, owns nearly 7% of the $784 million-asset company — said in a voicemail that the move isn't enough to garner his vote.
"I'm glad they got rid of the escrow account, which should have never been there. It was an absolutely ridiculous provision," said Sidhu, who is also the chief executive of Customers Bancorp (CUUU). "But I still happen to believe that the $5 offer is very inadequate, at 33% of book value. Unless Bond Street increases its offer… I will vote against it."
The holdback was a rarity, observers say. It may have spooked average shareholders, or at least left them scratching their heads.
"It was a very unusual provision," Baris said. "You don't often see a holdback unless it is in a closely held bank."
Thomas Frankland, the chief executive of Atlantic Coast, said his company and Bond Street removed the provision to eliminate any confusion.
"As we went through this process of talking to shareholders and listening to dissenters' concerns, we saw that there was uncertainty and concern as to what [the holdback] meant," Frankland says. "We passed along those concerns …and the other side has been accommodating."
With it gone, the banks can focus on selling shareholders on the merits, says Kent Ellert, president and CEO of the $3.2 billion-asset Bond Street's Florida Community Bank unit.
Ellert acknowledges that Bond Street would pay a discount to Atlantic Coast's stated book value, but he argues the offer is a significant premium to its stock price, which hovered around $2 per share for most of 2012.
Atlantic Coast is deeply troubled, having lost $63.3 million since 2007, including $88 million in provisions for loan losses. It has also failed to achieve capital ratios dictated by its regulators and would need to raise $35 million in equity to recapitalize itself. Its auditors have also expressed doubt about its future.
Meanwhile, the struggling company is dealing with a high cost of debt, but would have to pay $29.9 million in prepayment penalty fees to extinguish it.
"It is straightforward and easy to see the compelling nature of the deal," Ellert says. "We were glad to provide that clarity by eliminating" the holdback.
The removal of the provision does not prevent any litigation. Separate from Sidhu's activism, the deal is already the subject of a class action stockholder suit. Brower Piven, a law firm that has spent the last few years trying to challenge bank acquisitions, has filed suit, with Lucas Lindsey serving as the lead plaintiff, in the U.S. District Court of Maryland, claiming that Atlantic Coast breached its fiduciary duty to get a fair price. Brower Piven did not respond to requests for comment.
Additionally, The Albury Investment Partnership, an Australian firm which owns a 9.97% stake in Atlantic Coast, said this month that it plans to vote against the deal. A call to its Chicago attorney was not returned.
A majority of the Atlantic Coast's shares must vote in favor of the deal to make it happen. For that reason, the elimination of the holdback was likely aimed less at winning over Sidhu, but rather limit his ability to use that provision — one he has described as having a "coercive effect" on Atlantic Coast's shareholders — to persuade other shareholders to join him in fighting the deal.
"One can argue that the dissidents had an impact," Baris says. "A block of 17% is significant, but maybe not enough to defeat the merger. But there is that chance that the other shareholders would join them."