Banks typically are not sued as a result of a stock buyback, but that is exactly what has happened to a Kentucky community bank.
Eight people who sold their stock in a tender offer last year are suing Harrodsburg First Financial Bancorp Inc. Their complaint: The $179 million-asset banking company was less than forthcoming about its expansion plans, including negotiations to acquire the rest of a New Albany, Ind., company in which it holds a minority stake.
They also note that, after they sold their shares for $16.50 each in June 2003, Harrodsburg First's stock began a steady ascent and hit a 52-week high of $25 on March 4. (The stock closed at $19.35 on Friday.)
"As the result of the misrepresentations and/or the concealment, each of the plaintiffs have been damaged" by about $8.50 for each of the shares they sold, according to the lawsuit, filed May 28 in the Anderson County Circuit Court.
The former shareholders are asking for "compensatory and punitive damages in an amount as may be determined by the court or jury."
Ron R. Parry, a Covington lawyer who is representing the former shareholders, stopped short of saying they would not have sold their stakes had they known Harrodsburg intended to acquire the rest of the $121 million-asset Independence Bancorp. However, he did say Harrodsburg had an obligation to disclose its plans when it made the tender offer May 28, 2003.
"The law is very clear," Mr. Parry said last week. "Full disclosure is the rule, whether you are buying or selling. ... They made a written tender offer, and they did not disclose that they were in negotiations."
One of the investors "asked if there was anything he should know about" before he agreed to sell his stock, and Harrodsburg told him it had no major strategic initiatives planned, Mr. Parry said.
Arthur Freeman, Harrodsburg's chairman and chief executive officer and a former commissioner of the Kentucky Department of Financial Institutions, insisted that the negotiations that resulted in the deal for Independence did not begin until about two weeks after the buyback was completed.
The tender offer closed June 30, 2003. Harrodsburg, which had offered to purchase up to 300,000 shares, bought back 111,000.
Mr. Freeman said the suit stems from a "misunderstanding" surrounding a Kentucky bank charter that Independence obtained at the time of the Harrodsburg tender offer.
As an Indiana company, Independence had to obtain a Kentucky charter to open a branch there. Harrodsburg, which holds a 22.5% stake in Independence, played a role in the charter-application process.
The plaintiffs are confusing the negotiations for Independence's Kentucky charter with the sale negotiations, Mr. Freeman said.
"It's an easy mistake to make," and he harbors no ill will toward the plaintiffs, he said in an interview Friday. "These are all good folks."
His explanation failed to impress Mr. Parry, who noted that Harrodsburg reported in a Feb. 27 filing with the Securities and Exchange Commission that Mr. Freeman and N. William White, Independence's president and CEO, had talked "in early 2003" about a possible acquisition.
"They should have reported that" when the tender offer was made, he said. "I guess we'll have to tell our stories and let a court decide."
The filing also says that detailed merger talks between the companies did not start until "late summer," and that due diligence did not begin until October.
Harrodsburg announced its $17.1 million all-stock deal for the rest of Independence on Jan. 22, eight months after making the tender offer.
The deal is expected to close July 9. Both companies' shareholders have approved it. Harrodsburg would swap one share of its stock for each of Independence's 690,000 outstanding shares.
Harrodsburg plans to change its name to 1st Independence Bancorp and to merge Independence's bank subsidiary, Independence Bank, into its largest subsidiary, First Financial Bank, which would be renamed 1st Independence Bank.
Harrodsburg also holds a majority interest in Citizens Financial Bank, a one-branch bank in Glasgow, Ky.
Mr. Parry said securities suits filed by stock sellers are unusual.
"I've done a fair amount of securities work," and "the vast majority" has involved suits filed by stock buyers, he said.
