General Electric's takeover battle for Kemper Securities, and the accompanying proxy contest, may finally signal the beginning of an upturn in proxy battles and takeovers in the financial services industry.
In fact, a recent Barron's article reports that more that a dozen leading bank holding companies are "tempting targets."
The highly regulated banking industry has seen fewer contests for corporate control than other industries, but this activity may now accelerate as a result of the increased presence of institutional investors and changes in governing proxy contests and' takeover.
Because of the difficulty and time-consuming nature of regulatory approvals and cumbersome proxy rules, throughout the 1980s and early 1990s proxy contests and takeover battles for bank holding companies were hard to mount and time-consuming.
Some were successful, such as Bank of New York's takeover of Irving Trust in the late 1980s and the successful proxy fight involving Baltimore Bancorp in the early 1990s, but they were infrequent.
Primed for an Increase
However, the current climate lends itself to an increase in mergers and contests for corporate control in the banking and financial services industry, the $4 billion combination of Key Corp. and Society earlier this year being one example of what the financial services industry might expect.
Bank of New York has just announced merger discussions with Fleet Financial, and those discussions follow on the heels of the pending BankAmerica/ Continental deal, with persistent rumors that NationsBank remains active.
Some hostile bank holding company takeovers have not been consummated, such as Fifth Third Bancorp's proposal to merge with Star Banc in Cincinnati.
However, since rejecting Third Fifth's $42 a share offer, Star Bane has traded as low as $33/share within the last 12 months.
Mutual funds, bank stock investment funds, pension trusts, and other institutional investors have continued to focus their investments in publicly held banks and bank holding companies which are potential takeover targets.
Institutional stockholders have become increasingly vocal in their insistence that the directors of the takeover targets "maximize" shareholder value through the auction process or a strategic sale.
Accelerating Trend
Exemplifying this long-term trend, institutional investors increased their holdings of public corporations, including financial services industry companies, from less than 25% in 1995 to well over 50% at the beginning of the 1990s. In recent years, this trend seems to have accelerated.
In fact, the shareholder research firm of OLC reports that institutional investor holdings of the top 25 bank holding companies increased in just one year from 50% at the end of 1992 to 60% at the end of 1993.
With disintermediation of the financial markets, mutual funds are likely to relinquish their stakes in bank holding companies to other institutional investors so that the ownership of bank holding companies will become even more concentrated among a smaller group of institutional investors.
Almost 15 years ago, the California Employees' Retirement System requested that the Securities and Exchange Commission undertake a comprehensive review of the proxy regulation to enhance shareholder communications.
After many years of study, in late 1992 SEC issued its first comprehensive revision of the proxy rules in the past four decades.
Communications Easier
The new proxy rules substantially alter the strategies and tactics in proxy solicitations and communications among the institutional investors. Those new proxy rules make it easier, particularly for institutional investors, to communicate with each other.
By making communications with large shareholders easier, the new proxy rules facilitate the solicitation of proxies from large institutional investors who frequently constitute a majority or a large percentage of the stockholders participating in a proxy contest.
A successful proxy contest, even if it elects only a "short slate" and not a complete new board, can irrevocably change the balance of power on the board of directors.
A recent decision by the Delaware Supreme Court in the Paramount Communications decision raises serious doubts as to the effectiveness of certain defensive techniques, including "lockups" or "no-shop" agreements, which might be utilized by a bank holding company undertaking a strategic merger for the purpose of avoiding unsolicited hostile takeovers.
In the Paramount decision the Delaware Court invalidated a no-shop agreement involving stock options and a substantial termination fee.
The court concluded that these prevented Paramount's board from pursuing the "best value reasonably available to stockholders."
It found that where a merger would result in control by a single individual or "cohesive group," the board in essence had a duty to take action which in essence auctioned off the company.
Duty of Directors
An earlier Delaware Chancery Court decision involving a merger for Society for Savings Bank Corp. and Bank of Boston had held that the board of directors had no duty to seek such alternatives where no individual or "cohesive group" of shareholders would end up with a controlling block of stock after the merger.
However, after Paramount, it may be more likely that such a duty would be imposed in certain circumstances or that a court would question the board's action if it did not do so.
The Technicolor case, decided by the Delaware Supreme Court at the end of last year, has also had the effect of fostering the auction process for companies subject to takeovers.
The court suggested that a board of directors may be in violation of its fiduciary duties if it does not conduct an auction of the company before accepting a friendly merger offer, or eventually succumbing to a hostile takeover, even where the takeover price is at a significant premium over the market price for the target.
The court found that the directors must establish to the court's satisfaction that the merger was a product of fair dealings and that it was a fair price and that the board of directors has the burden of establishing that the price offered was the highest value reasonably available under the circumstances.
'Single Blueprint'
In Technicolor, the board of directors had only relied upon a Goldman Sachs "fairness" opinion and had not undertaken an "auction" of the company.
In the more recent Paramount decision, the Delaware Supreme Court cautioned that there was no "single blueprint" which a board of directors must follow in seeking to obtain the best value for the sale of control.
The court concluded that the crucial issue was whether the board employed the appropriate procedures "designed to determine the existence and viability of possible alternatives."
The Delaware Supreme Court's decision in Paramount suggests that a board of directors may still consider the "Just Say No" defense to a hostile takeover offer under appropriate circumstances. However, the Court did little to articulate those conditions under which a board of directors may simply resist an unsolicited takeover proposal.
Slow Process
The liberalized proxy rules discussed above may also encourage shareholder pressure so the board may be inclined to maximize shareholder value and simply not say "no" to a financially attractive takeover proposal.
Federal Reserve or other regulatory approvals are necessary in connection with bank takeovers and mergers. Under many circumstances, regulatory approvals will be necessary in connection with a proxy contest.
While these regulatory requirements do not preclude a successful proxy contest or takeover, they often slow down the process and make either a proxy contest or hostile takeover difficult.
Because of capital constraints in the banking industry, relatively smaller publicly held bank holding companies may be more vulnerable to hostile takeovers, which are often more effective if waged with cash tender offers. (Many smaller bank holding companies arc closely held and do not have large institutional investors who might be more likely to favor a takeover.)
A solid record of stock market performance, along with satisfied and loyal shareholders, still remains the best defense against a hostile takeover.
However, because of the concentration of institutional investor shareholders, the smaller publicly held bank holding companies may be most vulnerable to the larger financial institutions seeking to consolidate market positions.
As a result, the banking giants who plan to grow by acquisition will undoubtedly scour 13D filings (an SEC requirement of shareholders or groups of shareholders holding 5% or more of a public company's stock) for underperforming financial institutions with large institutional shareholders.
The concentration of institutional investors in bank holding companies should foster consolidation moves by the financial giants in the 1990s.
This process will be facilitated by the new proxy rules and recent decisions by the Delaware courts.
The traditional "Just Say No" defense may become less viable as the powerful institutional stockholders flex their muscles and insist that directors pursue a course of maximizing shareholder value.
Mr. Wienke is a partner with the law firm Ross & Hardies in Chicago. T. Stephen Dyer, also a partner with the firm, assisted Mr. Wienke with certain aspects of this article.
