River Valley Bancorp could face a challenge from an investor who is upset over some of the Madison, Ind., company's policies and procedures.

Thomas Davee wants River Valley's board to do away with a bylaw designed to discourage investors from owning more than 10% of the $520 million-asset company's stock. Davee, who has a 6.3% stake in the company, recently disclosed that he could file a shareholder proposal to force a change.

The bylaw in question caps an investor's voting rights at 10% of outstanding shares.

"It's a very disadvantageous measure that really disenfranchises shareholders," Davee said. "If you own a block of stock, you should be able to vote it."

Other industry observers questioned the reasons for the rule.

"It's an anti-takeover device, but in my view a very unfriendly one to investors," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "It certainly doesn't make them shareholder friendly."

The rule closely resembles regulations from the Office of the Comptroller of the Currency that allow converted mutual thrifts to limit beneficial ownership to 10% when they become stock-owned companies.

The OCC's regulation "is designed to protect a newly public organization from takeovers and also help them raise capital to begin with," said Chip MacDonald, a lawyer at Jones Day in Atlanta. "It can help [management] get over the fear of losing their jobs by taking their company public and losing capital."

The OCC, however, recommends that banks remove ownership limits within five years of a conversion. River Valley became a stock-owned company in 1996.

River Valley did not return multiple requests for comment, but industry observers said a delay in changing the bylaw, per the OCC's guidance, could stem from the company's relatively small size, low profile and a diverse shareholder base that is likely made up of depositors who bought in during the conversion.

River Valley's biggest shareholder at the time of its March proxy statement was its employee stock ownership plan, with a 6.4% stake. The company's board collectively holds about 13% of its shares outstanding.

"For smaller banks, people know each other and they trust each other," MacDonald said. "They're not necessarily subject to the same pressure [as larger banks], and there's not a lot of institutional shareholders."

Davee, who has raised concerns about the issue at least as far back as 2008, said he doesn't expect the issue to gain much traction with the company's board.

Removing the bylaw would give Davee and his wife a chance to build a bigger ownership stake, which could make it easier for them to push a bigger agenda at River Valley. In 2009, the couple proposed an amendment to do away with plurality voting in board elections; they only gained 42% of the vote.

Davee also wrote an open letter to River Valley Chairman Fred Koehler in April arguing that the company's policy of paying directors more than $100,000 annually is "excessive and destructive of shareholder value."

Davee, who has until Nov. 19 to file his shareholder proposal, said he has been able to contact fewer than 10 other investors. "I'm trying to find ways that bring their bylaws up to a level that's fair to all shareholders," he said.

River Valley, meanwhile, has been among the nation's top-performing publicly traded community banks, posting a three-year average return on equity of 11.57% from 2011 to 2014. The company earned $4.8 million last year.

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