CapStar Financial in Nashville, Tenn., is sending a strong message to a big investor — leave our bank and its stock alone.

The $1.4 billion-asset company filed a lawsuit Tuesday in U.S. District Court for the Middle District of Tennessee claiming Gaylon Lawrence and Lawrence Group, a firm he owns, are pursuing an illegal takeover.

The lawsuit claims Lawrence made a “series of false” statements in regulatory filings in recent months as he amassed a large stake in CapStar. It alleges that the investor should have registered as a bank holding company before building a position that has swelled to 10.2%.

CapStar, among other things, wants the court to force Lawrence to sell those shares.

The legal strategy is “aggressive and could raise interesting issues” about the triggers for becoming a bank holding company, said Oliver Ireland, a partner in the financial services practice at Morrison & Foerster.

“It is going to be a complicated matter,” added Ireland, a former associate general counsel with the Federal Reserve. He did not want to know the identities of the case's parties and declined to discuss specific details in the lawsuit.

The litigation highlights two issues CapStar has with Lawrence, his firm and the investment.

CapStar claims Lawrence misled other investors when he stated in filings with the Securities and Exchange Commission that he was buying shares for “investment purposes.” The investor spent nearly $21 million from June 12 to Oct. 16 on CapStar stock, according to his SEC filings.

The lawsuit contends that Lawrence aims to take control, claiming he made an unsolicited bid to buy the bank before its August 2016 initial public offering in an offer presented on Lawrence Group letterhead. After the offer was rebuffed, Lawrence used his company’s letterhead to try to buy a 30% stake in CapStar from two of its biggest investors, the lawsuit claims.

“Lawrence has committed multiple violations … by filing disclosures that misstate his intentions for CapStar and obscure the role of The Lawrence Group,” the lawsuit claims.

The lawsuit asserts that, under Tennessee law, Lawrence and his firm are barred from owning more than 10% of CapStar’s stock because they haven’t filed with the Fed to become a bank holding company. Doing so would require a divestiture of nonfinancial assets, including farming operations and an air conditioning distributor, and a lengthy application process, CapStar claims.

Much of the legal debate would likely focus on interconnections among the investor, the company and any other individuals or entities involved, Ireland said. For instance, lawyers will want to explore whether the individual bought shares using funds borrowed from their company. The role of other individuals is also important.

There are many instances of individual investors legally buying controlling stakes in banks. A recent example is Ken Lehman, a former banking lawyer who owns majority stakes in numerous banks along the East Coast.

Lawrence states in his regulatory filings that he uses his own funds to buy CapStar stock.

CapStar’s lawsuit aims to connect Lawrence and his investments to Lawrence Group, including claims that the firm’s letterhead was used in letters to the company and certain shareholders.

The litigation also claims that Lawrence owns several bank holding companies in three states, including Tennessee. It wants the court to force Lawrence and his firm to divest any holdings that violate Tennessee’s law tied to bank holding companies.

The lawsuit also contends that Jason West, an executive manager at Lawrence Group, is a director at a Lawrence-owned bank and has a power of attorney to sign Lawrence’s SEC filings.

“By virtue of its affiliation with Lawrence, Lawrence Group controls these banks and is a presumptive controller of CapStar,” the lawsuit claims. West’s power of attorney shows that “Lawrence Group has control over Lawrence’s federal securities filings relating to the position he is accumulating in CapStar.”

“CapStar is committed to protecting the interests of all of our shareholders and employees,” Claire Tucker, CapStar’s CEO, said in a press release disclosing the lawsuit.

“Our board believes an important part of its fiduciary obligations is taking steps to enforce laws intended to protect our shareholders and other constituents,” Tucker added. “This is important to help ensure all shareholders have an equal opportunity to benefit from our strategic plan and any strategic initiatives.”

CapStar declined to provide additional comment. The Fed declined to comment.

West, who said he works directly for Lawrence, denied claims the investor violated banking or securities laws or filed misleading regulatory statements. He said Lawrence had expressed an interest in buying a “significant number of shares” before CapStar’s IPO, then approached institutional investors about buying their stock.

“We were surprised by the lawsuit,” West said. “We haven’t had any conversations with management or the board. … We welcome a chance to open up a dialogue. I don’t know why [Tucker] feels threatened by us.”

When an investor nears a 5% stake in a bank, management typically looks to understand the reasons for the share purchases, said Ted Peters, a former community bank CEO who is now chairman of Bluestone Financial Institutions Fund. There might be concerns that the shareholders will push for significant changes such as a sale.

The investor “may have something in mind” that they want the bank to do, Peters said. “You need a dialogue to see what this person is thinking.”

Lawrence was drawn to CapStar because he knows the market — he owns other area banks — and thought the company’s stock was trading at a good value, West said. CapStar’s metrics, including asset and deposit growth, seemed like an “attractive investment,” he added.

“We look at investments in banks as generational assets for the Lawrence family,” West said.

West said Lawrence is an active, rather than activist, investor, adding that he doubts plans are in the works to buy CapStar outright.

West said he and Lawrence have discussed the investment with Fed representatives, adding that they have filed the paperwork to increase the stake to as much as 15%. “When we get there we will reevaluate the performance of CapStar and whether we want to make a future investment,” he said.

Though parties face fines and sanctions for failing to become a bank holding company, regulators may be lenient in cases where an honest mistake was made, said Jonathan Hightower, a partner at Bryan Cave who wasn’t aware of the CapStar lawsuit. Usually a violator is simply required to go back and file the necessary paperwork, assuming no other issues exist.

It’s unusual that tensions between an investor and a bank would reach the level of a lawsuit, industry experts said. This is definitely “a nuclear option” and it’s usually better for management to work with a shareholder, Hightower said.

“We typically recommend engagement and a more transparent and open discussion about their interest in the company,” Hightower said. “The end goal should be to drive value for shareholders, so it’s just a matter of how to best get there.”

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Jackie Stewart

Jackie Stewart covers community banks and mergers and acquisitions for American Banker.