As proxy season nears, so too does the decision to work with — or stand up to — activist investors.
While shareholder activism is on the rise across the corporate spectrum, the banking industry has drawn attention from dissident investors for years.
Activists often work behind the scenes in hopes of improving performance and shareholder value. Conflict arises when those efforts fall flat, or when an activist is at odds with management or the board, at which point a dispute often becomes public and nasty ahead of an institution’s annual meeting.
Though it is tempting for banks to set up roadblocks for activists, Spencer Savings Bank in Elmwood Park, N.J., and HopFed Bancorp in Hopkinsville, Ky., found out the hard way that such efforts can backfire. Judges ordered each to pay the legal fees for shareholders that challenged procedural hurdles.
Banks should prepare in advance for an activist challenge and be less reactive, industry experts said. If one happens, the bank should meet and communicate with the investor and listen to his or her concerns, while remaining resolute when necessary.
“Banks are generally not ready for these activist shareholders,” said David Baris, a lawyer at BuckleySandler and president of the American Association of Bank Directors. “The more you can do before you’re under a threat the better.”
Small banks are often the target of activist investors, though larger institutions such as Astoria Financial have also faced challenges. Many activists specifically target mutuals by becoming depositors, then acquiring big ownership stakes when the institution converts.
It is also easier for activists to gain a meaningful stake in a smaller institution that typically has fewer shares outstanding.
“It’s hard to say anyone is totally immune to a challenge unless the company is truly a high performer,” said Charles Crowley, a managing director at Boenning & Scattergood. “It doesn’t take that large of an investment in the grand scheme of things to become an activist.”
How to prepare
Banks should have a team of professional advisers, including lawyers and investment bankers, at the ready in case a shareholder becomes vocal, said Steve Frankel, a partner at Joele Frank, a strategic communications firm. Completing a vulnerability assessment prior to a challenge can uncover any weak spots.
“It’s similar to opposition research in politics,” Frankel said. “You want to know what [issues] your opponents will raise before they come along.”
Some institutions even prepare materials and statements in advance to highlight their bank’s track record. Smart boards and CEOs also foster relationships with other large investors before an activist threat emerges, Frankel said.
Dissidents are usually minority owners that need other shareholders to support rule changes or alternate board nominees. Banks with strong shareholder relationships, and a large percentage of insider ownership, can make challenges more daunting.
When an activist surfaces, the best thing a bank can do is talk to them. Creating a dialogue can diffuse the situation and prevent the concerns from escalating, industry observers said.
“It is important for the management team and the board to understand what the activist is proposing,” said Thomas Michaud, the president and CEO of Keefe, Bruyette & Woods. “I think in many ways it is important to engage and find out why the investor has reached their conclusion.”
While having a sound strategic plan is another strong defense, many banks lack one, said Jonathan Hightower, a lawyer at Bryan Cave. Most banks have an operational plan that outlines what they intend to do, such as entering new markets or adding new products, but it fails to clearly state how those moves will increase shareholder value.
“We think it is generally okay to communicate with shareholders about that plan and to listen to them,” Hightower said. “But the board also needs to do its job. If the board’s judgment is heading in a certain direction … that is in the best interest of shareholders, then they should pursue that.”
When a plan backfires
Lawrence Seidman, a well-known activist investor, said he often tries to work with management to improve performance, noting that he has served on boards without any conflict. The best management teams are ones that have “intelligence and a phenomenal work ethic,” he said.
“They understand the concept of working for several constituencies at a time, which is difficult,” Seidman added.
There have been times when Seidman and a bank failed to get along.
The activist has spent more than a decade in a dispute with Spencer. He became interested in the thrift after a friend, who was on the board at that time, told him about the perks paid to directors and management, Seidman said. Seidman, who believed the benefits were excessive, approached management about the issue.
The disagreement escalated into litigation over Seidman’s attempts to join the board. Eventually, the $2.7 billion-asset Spencer closed Seidman’s account, but a judge overruled the move and ordered the mutual to pay more than $300,000 of Seidman’s legal fees.
Seidman has “has waged a costly, time-consuming 14-year battle purely for his financial gain and for the financial gain of his colleagues,” Spencer said in a written statement. “Spencer Savings Bank will continue to put the interests of our members and communities first, and defend itself against Mr. Seidman’s predatory attacks.”
HopFed was also dealt a setback recently when a judge ordered it to pay $610,000 of legal fees incurred by Stilwell Group in New York.
Joseph Stilwell, the activist behind the firm that bears his name, has long been at odds with the $902 million-asset HopFed. In 2013, he had a nominee elected to HopFed’s board, though the representative eventually stepped down. A judge determined that HopFed's board marginalized the representative by, among other things, name-calling and denying him information.
HopFed also changed its bylaws to bar anyone with a supervisory or enforcement order to pursue a board seat, including representatives of an ineligible individual. The move effectively shut out Stilwell due to a 2015 settlement with the Securities and Exchange Commission over an alleged failure to adequately disclose loans between his investment partnerships.
Stilwell filed a lawsuit in May to challenge the change; HopFed removed the impediment five months later. Still, the court ordered HopFed to reimburse Stilwell for a certain amount of legal costs. (HopFed has said it will seek reimbursement from its insurance carriers.)
John Peck, HopFed’s president and CEO, did not return a call seeking comment, though he said earlier this month that the company was considering an appeal.
Stilwell, for his part, said he tries to engage with management teams, adding that he is not always looking to push for a sale. His first goal is for a bank to have “average” performance relative to peers. If that can’t be done, changes must be made.
“We can only do well if all of the owners of the bank do well,” Stilwell said.
The experiences at Spencer and HopFed show that fighting activists with policies and procedures is often the wrong move, industry experts said. That is especially true if a dispute leads to costly litigation that ultimately hurts shareholders, said Charles Elson, a finance professor and corporate governance expert at the University of Delaware.
“An activist investor is one of your owners,” Elson said. “To take action against an owner, who you owe fiduciary duties to, is highly problematic.”
Such moves can sour relationships with other investors, who might start to question the reasons why a bank would keep a representative off the board, said Jack Thompson, a partner at Gapstow Capital Partners, an investment firm that invests in banks.
“The proactive approach isn’t to get defensive,” Thompson said. “It is really about presenting a positive perspective rather than appearing to try to quiet a voice.”
While rules that appear to discriminate against certain investors can fail to withstand a legal challenge, milder protections such as having a staggered board terms or supermajority voting often hold up in court, Hightower said.
The biggest takeaway should be to first listen to an investor and try to understand their point of view.
“Frequently activists have good points,” Hightower said. There are “good private equity funds that are very cooperative, very supportive [and] are also ready to offer advice.”