First Citizens BancShares in Raleigh, N.C., has turned to the courts in its effort to buy a much smaller bank in eastern North Carolina.

The $34.5 billion-asset First Citizens filed a lawsuit on Feb. 15 in Superior Court against KS Bancorp in Smithfield, N.C., and the $374 million-asset company’s board. The lawsuit is looking to throw out a series of moves by KS Bancorp to block a hostile takeover. The case was assigned to the North Carolina Business Court.

In mid-February, KS Bancorp adopted a shareholder rights plan, commonly known as a poison pill provision, that would be triggered if First Citizens’ stake reached 15%. At that point, all of the company’s other shareholders would receive rights to buy additional KS Bancorp stock at a discounted price.

First Citizens has asked the court to force KS Bancorp to immediately terminate the rights plan.

First Citizens, which owns about 9% of KS Bancorp’s stock, disclosed in its lawsuit that it had gained permission from the Federal Reserve to buy up to 80% of the community bank’s outstanding stock. The shares have to be purchased by March 19.

First Citizens recently bought 61,200 shares, or a roughly 4.6% stake, from seven shareholders and was finalizing a deal to buy another 8.4% stake from eight investors when the poison pill was approved. As a result, First Citizens suspended its efforts to take over KS Bancorp, the lawsuit said.

First Citizens is asking a court in North Carolina to invalidate a shareholder rights plan approved by KS Bancorp's board.

The lawsuit claims that the rights plan is discriminatory because it treats First Citizens’ ownership differently than that of other investors. First Citizens also claims that a repurchase plan authorized at the same time as the poison pill would unfairly benefit KS Bancorp’s management and directors, which own about a fifth of all outstanding shares.

“The Rights Plan has thwarted First Citizens’ legitimate and Federal Reserve-approved efforts to acquire shares of KS at above-market prices that would benefit KS shareholders, including many shareholders that have expressed a desire to sell to First Citizens,” the lawsuit claimed.

The lawsuit includes affidavits from a KS Bancorp shareholder who urged President and CEO Harold Keen and the board to accept First Citizens’ offer and an offer from another investor who planned to sell shares to the bigger bank before the rights plan was approved.

The quarrel goes back to last June, when First Citizens offered to buy KS Bancorp for $33 a share. KS Bancorp, which was reorganizing into a Subchapter S corporation, was in the process of reducing its shareholder ranks.

In mid-July, First Citizens increased its offer to $35 a share, or roughly $45.9 million, and issued a press release publicizing its efforts.

“We are disappointed by KS Bancorp’s rejection of our offer without any discussion,” Frank Holding Jr., First Citizens’ chairman and CEO, said in a press release that disclosed the takeover bid. “We believe that KS Bancorp shareholders will favor the immediate liquidity at a substantial premium that our acquisition proposal would provide.”

Keen said in a press release that First Citizens’ initial offer “did not rise to a level of pricing” to persuade the board to sell. The hostile takeover is “evidence that First Citizens’ corporate culture is not in line with KS Bank’s community banking values,” he added.

Keen later told S&P Global Market Intelligence that the board would evaluate the improved offer. “We’re working with the professionals to evaluate it, and I don’t know what else to say,” he said.

The deal would also help First Citizens compete more effectively with BB&T in nine North Carolina markets — Clayton, Four Oaks, Garner, Goldsboro, Kenly, Selma, Smithfield, Wendell and Wilson — where KS Bancorp has branches.

BB&T had a commanding 31.9% deposit market share in those markets in mid-2017, based on the latest data from the Federal Deposit Insurance Corp. First Citizens could increase its market share to 26.6% from 19.8% if it were to successfully buy and integrate KS Bancorp.

KS Bancorp posted a document on its website explaining its actions, stating the First Citizens had "created significant unrest among our employees and our existing and prospective clients." The company claimed that First Citizens has yet to directly approach its board, adding that it sought advice from legal counsel and independent financial advisers before adopting the rights plan.

"The purpose of the rights plan is not to stop the legitimate sale of the corporation, if it is in the best interests of the corporation and its shareholders," the company said. "Instead, the purpose of the plan is to insure that in the event a third party seeks to purchase the corporation, it negotiates directly with the board, which has a fiduciary responsibility to act in the best interest of all shareholders of the corporation. Your board continues to be of the opinion that First Citizens’ indications of interest undervalue the corporation and are not in the best interest of the corporation and its shareholders."

“The rights plan is similar to plans adopted by other corporations across North Carolina and the U.S., including many financial institutions," said Iain MacSween, a lawyer at Brooks, Pierce, McLendon, Humphrey & Leonard who is representing KS Bancorp. "We’re confident that in adopting the plan, the KS board acted in the best interests of the company and its shareholders, consistent with their fiduciary duties and North Carolina law.”

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