First Interstate Bancorp has few corporate takeover defenses, legal experts say, so its board would face an uphill fight against Wells Fargo & Co.'s $10.1 billion hostile bid.
Though First Interstate does have a so-called poison pill, which would dilute the interests of acquiring shareholders, experts say that defense can be overcome.
What's more, First Interstate's charter does not include a prohibition against unwanted suitors making "written consent" solicitations - that is, putting their offers directly to shareholders.
And directors' terms are not staggered, so the board is elected as a whole each year. Installing a sympathetic majority would be harder for Wells Fargo if First Interstate had followed the widespread corporate practice of reelecting only a portion of the board each year.
"The absence of a staggered board and the ability to conduct a written consent solicitation makes First Interstate more vulnerable," said Charles Nathan, a partner with Fried, Frank, Harris & Shriver who specializes inhostile acquisitions.
Staggering directors' terms is critical, said Mr. Nathan. "In theory, even if a hostile suitor is victorious in capturing one-third of the board, two-thirds can still resist."
For example, a hostile suitor this year won a majority shareholder vote to unseat the board at Younkers Inc., a retailing company. But because Younkers' board is staggered, only a third of the directors are sympathetic to the hostile suitor - while the majority continue to resist a sale.
Also, First Interstate is chartered in Delaware, whose corporate laws do not require a predator to present formal substantiation, or "just cause," for a proposal to unseat an unstaggered board.
And from a procedural standpoint, Mr. Nathan said, the road is wide open for Wells Fargo to unseat First Interstate's board, because there is no First Interstate charter provision prohibiting a suitor from calling a shareholder meeting, he added.
All Wells Fargo needs is a simple majority of investors to overturn the board, Mr. Nathan said.
If First Interstate decided to use its poison pill, which directors can implement when a hostile suitor buys 20% of the common shares, Wells Fargo can move to unseat the unstaggered board and reverse the action.
However, even if First Interstate had a staggered board and written consent provisions, it might only succeed in delaying Wells Fargo, said Howard Adler, a bank lawyer with Gibson, Dunn & Crutcher.
It will take the Federal Reserve at least six months to approve a hostile tender offer anyway, he said, so the lack of a staggered board and a written consent provision is not important.
Because First Interstate has so many institutional investors, it would be hard pressed to reject Wells Fargo's rich offer without a similar bid in hand, Mr. Adler said.
Kohlberg Kravis Roberts & Co., which would nearly quadruple its initial investment with a Wells takeover, by itself owns 8.1% of the bank. And nearly 70% of First Interstate's common shares are owned by institutional investors, while only 1.32% of shares are owned by management.
Observers cite two probable reasons for the seeming paucity of corporate defenses at First Interstate: Institutional investors would have resisted the moves, and there has been a long-standing sense in the banking industry that hostile deals could not happen.
While more banks are now beginning to add defensive mechanisms such as poison pills and staggered boards, most do not have them, said Mr. Adler.
For example, First Chicago Corp., which agreed to merge with NBD Bancorp this summer, had few defense provisions.
Hostile takeovers in the clubby banking industry have been rare because of fear of regulatory disapproval, customer runoff, and the suitor's inability to perform due diligence.
But as competition engulfs the industry, balance sheets appear more pristine, and regulators give the go-ahead to consolidation, the objections to hostile bank acquisitions may be less persuasive than a few years ago.