HopFed Bancorp in Hopkinsville, Ky., will restate its fourth-quarter results after a court ordered it to pay a six-figure sum to an activist investor.
The $917 million-asset company disclosed in a regulatory filing Monday that the Delaware Court of Chancery had ordered it to pay about $610,000 to Stilwell Group in New York. HopFed said the ruling will lower its quarterly profit by $403,000, or 7 cents a share, though it plans to seek reimbursement from its insurance carriers.
Stilwell had incurred expenses when it filed a lawsuit in May challenging a HopFed bylaw that the investor claimed was designed to bar it from nominating candidates to serve on the board. HopFed amended the disputed bylaw in October, mooting the need for litigation, but Stilwell, which owns 9.4% of the company, asked the court for a reimbursement of fees and legal expenses.
Stilwell disclosed in its own regulatory filing that it plans to nominate a candidate to stand for election to HopFed's board at the company's May 17 annual meeting.
John Peck, HopFed's president and CEO, said in an interview that the company's board would meet soon to discuss the court ruling, along with the possibility of filing an appeal. He said it would be “inappropriate to speculate” on Stilwell’s plans.
The ruling, by Vice-Chancellor J. Travis Laster, offered a scathing rebuke of HopFed's behavior. Beyond labeling its board's conduct toward Stilwell as "embarrassing,” Laster strongly hinted that he saw merit in Stilwell’s argument against the bylaw. A transcript of Laster's comments was included in the investor's filing.
HopFed's bylaw change barred any individual who had been subject to a supervisory or enforcement order from serving on the board. More important, the prohibition extended to representatives or agents of an ineligible individual.
Joseph Stilwell, the investor behind the firm that bears his name, entered into a settlement with the Securities and Exchange Commission in 2015 over an alleged failure to adequately disclose loans between investment partnerships he managed. The loans were repaid and Stilwell did not admit to any wrongdoing.
Stilwell argued in court that the bylaw change was an improper bid to entrench HopFed’s management and its backers on the board.
“This litigation was certainly meritorious when filed,” Laster said in his ruling. “The standard for that is really whether it can survive a motion to dismiss. This could and would have met that standard had I reached the point of actually issuing a decision.”
While Laster acknowledged that Stilwell “may have engaged in some crass and boorish behavior,” he added that the company's directors, including Peck, had a responsibility “to be the adult in the room.” Rather, "they got down in the dirt and made mud pies,” he said.
Stilwell’s beef with HopFed traces back to 2013, when he strongly opposed the company’s plan to buy Sumner Bank & Trust in Gallatin, Tenn. The deal was later terminated.
Stilwell went on to call Peck overpaid and to claim that the CEO engaged in questionable business dealings with a former HopFed chairman. Though HopFed’s board formed a special committee to investigate the issue, Stilwell said on Monday that he has heard nothing about the probe for at least six months.
The dispute has been a distraction that has taken up a substantial amount of “time that would have been better spent improving shareholder value,” Peck said, adding that he is willing to meet Stilwell to resolve their differences.
Stilwell, for his part, said he would be willing to meet with HopFed directors, but he ruled out a meeting with Peck.