Mutual banks may have a new legal weapon in their fight against activist investors.

The New York State Appellate Division of the Supreme Court ruled on March 22 that the activist investor Joseph Stilwell cannot force NorthEast Community Bancorp in White Plains, N.Y., to convert to a fully stock-owned bank.

Stilwell, who owned about 1.2 million shares of the $557 million-asset NorthEast at Sept. 30, can ask the court to hold a discretionary review of the ruling.

Stilwell's argument turns on the concept of the mutual holding company. Partially converted mutual banks have sold some stock in the public markets, but they remain majority-owned by a mutual holding company. Stilwell argued in his October 2011 lawsuit that the MHC structure serves to entrench management, to the detriment of minority shareholders.

The appellate court disagreed, saying Stilwell should have known when he bought shares of NorthEast that the MHC's board was identical to the holding company's board. Stilwell also should have known that the MHC had the power to control the affairs of the holding company and prevent a second-step conversion. The court granted NorthEast's motion for summary judgment.

"We are disappointed by the Court's ruling. We are considering all further options for seeking to maximize value for NorthEast's public shareholders," E.J. Borrack, general counsel to the Stilwell Group, said in an emailed statement.

Many investors buy shares of partially converted mutual banks in the hope that the banks will stage a second-step conversion. Investors typically record a profit on the initial boost in the stock price of a bank when it holds a second-step conversion, which is why Stilwell and other activists often press mutuals' management teams to pursue such conversions.

"We hope that Mr. Stilwell will accept the decision of the Appellate Division and put an end to this litigation which has been ongoing since 2011," Kenneth Martinek, NorthEast's chairman and chief executive, said in a news release.

Kilpatrick Townsend & Stockton is legal counsel to NorthEast in the litigation. Allegaert Berger & Vogel is counsel to Stilwell.

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