It's usually a good idea to get a second opinion, but in bank M&A it depends on who gives it.
A great example is the merger deal between two First Citizens banks in the Carolinas that's right, they both have the same name. Its fate could hinge on the quality of the second opinions that the parties received.
The city of Providence, R.I., has sued First Citizens BancShares in Raleigh, N.C., to block its agreement to buy First Citizens Bancorp. in Columbia, S.C. Providence owns shares in the North Carolina company and claims its shares will be diluted if the deal goes through.
One of Providence's central arguments is that members of the Holding family, which has a majority interest in both companies, breached their fiduciary duty to protect the interests of othershareholders. Specifically, the North Carolina company agreed to pay a 40% premium, a far higher price than the South Carolina company deserved, because of the family connections, the suit said.
First Citizens BancShares will pay $637 million to $676 million in cash and stock for First Citizens Bancorp. The value depends on whether the South Carolina company's shareholders choose to receive cash or class B shares as their payment. The combination of the two banks will create an institution with about $31 billion in assets, making it the largest family-owned bank in the U.S., passing BOK Financial in Tulsa, Okla.
Shareholders frequently sue to block mergers, and the lawsuits frequently get settled before ever going to trial. What makes the First Citizens case unusual is that the controlling shareholders on both sides of the table belong to the same family.
For that reason alone, to avoid the appearance of a conflict of interest in awkward circumstances, buyers and sellers have to take extra steps to ensure all shareholders were protected, said Richard Morris, a corporate attorney at Herrick, Feinstein in New York who has advised banks on mergers. One of the main ways to do that is form a special committee of independent directors to provide a second opinion on the deal.
"There should be a group of intelligent, active, involved directors that are not part of the family," said Morris, who's not involved in the First Citizens deal. "They should be truly independent, both in substance and form."
That's the question in the First Citizens case. The companies go to great lengths in merger documents filed with regulators to show that they formed special committees with independent directors. The city of Providence, however, claims the directors were not independent and bowed to the Holding family's wishes.
The South Carolina company formed a special committee of four directors and hired its own law firm, Robinson Bradshaw & Hinson. A separate firm, Haynsworth Sinkler Boyd, was counsel to the full South Carolina board of directors. The North Carolina company also formed a special independent committee, consisting of three directors; that committee also hired its own law firm, Smith Anderson. The North Carolina company's full board took advice from the law firm Ward & Smith.
It's important that both the buyer and seller hire their own lawyers and own investment banks, Morris said.
"The special committee is there to protect and serve the shareholders, and to do so they've got to be well-equipped" with their own advisers, Morris said. "You don't send someone out to plow a field with a teaspoon."
It's also important that the independent committee members be able to clearly show they aren't connected at the hip to the controlling family, said Jin-Kyu Koh, a corporate attorney at Dykema Gossett in Detroit. That means it's not enough to simply be outside the family, Koh said.
"They could be considered conflicted, even if they're not blood-related," said Koh, who is not involved in the deal. "There could be significant business relationships, for example."
The city of Providence alleges that the special committees were too closely aligned with the Holding family and were allowed to be railroaded into accepting the deal's terms.
"Because the Holding family and its affiliates control both [the] North and South [Carolina companies], any purported control premium for South is an unjustified transfer of wealth to the Holding [family]," the city of Providence wrote in its complaint, filed on Aug. 6 in Delaware Chancery Court in Wilmington, Del.
The South Carolina company did not warrant its sales price, as even the companies themselves admitted that it had "limited external growth potential." Furthermore, the South Carolina company's shares represented an "illiquid minority interest" as they are lightly traded on an OTC Markets platform and would have few other potential buyers.
Making matters worse is that the South Carolina company was highly dependent on the North Carolina bank, Providence said. The North Carolina company provided it with more than $25 million in technology services last year. And the North Carolina company owns the trademark to the First Citizens name, which restricts the South Carolina company's ability to conduct marketing, the city said in its court filing.
A spokesman for First Citizens of North Carolina declined to comment. The city of Providence did not respond to requests for comment.