Ex-minority shareholders of Texas' Broadway Bancshares have filed a lawsuit claiming the company forced them to sell their stock at a discounted price.
The San Antonio-based company offered $67 per share to 120 shareholders as part of a conversion to an Internal Revenue Code subchapter S corporation. S corporations are allowed only a limited number of shareholders, so institutions such as $995 million-asset Broadway have to buy out small investors to make the switch.
But some of Broadway's former minority shareholders, in a lawsuit filed Dec. 1, said they were "squeezed out" of their stock ownership at an unfair price. Now they're asking a District Court judge to force the company to pay them $135 for each share they sold.
Sherman Macdaniel, resident director of Roger H. Jenswold & Co., a San Antonio investment firm representing the minority investors, said that the minority shares should be equal in value to shares owned by Charles E. Cheever Jr., Broadway president and CEO, and his family.
Mr. Cheever and his family controlled about 78% of the bank's shares before the conversion in September, according to Patrick J. Kennedy Jr., an attorney representing Broadway Bancshares. Mr. Cheever, whose family now owns 92%, declined to comment on the case.
If the former shareholders are successful, some bank analysts said, the result could make closely held banks decide against switching to a subchapter S formation. In 1996, Congress allowed small banks and thrifts to convert to subchapter S corporations. The designation allows a bank to save on taxes because profits are not classified as earnings, and earnings are not taxed until paid out to investors.
In the Broadway case, the issue is whether the former minority shareholders in the closely held bank deserved a full price for the shares they owned.
Discounting the price of minority investor shares is common in conversions, according to Ronald S. Riggins, president and managing director of RP Financial, LC, an Arlington, Va.-based bank consulting firm.
"The traditional thinking is that minority shareholders only qualify for a minority price," Mr. Riggins said. "They don't have control of the company, so they don't qualify for a full price."
A ruling for investors could make banks think twice before changing from the traditional bank corporation, he said.
"It would be very expensive to pursue a conversion to S corp. status" without discounting minority shares, Mr. Riggins said.
Both sides said they expect the court to appoint an independent appraiser to determine the price per share. The court can choose either price, or come up with its own.