Regulators usually try to stay above the fray when banks and investors fight proxy battles.

Still, there are rare instances when regulators pay close attention, including this year's battle at Solera National Bancorp (SLRK). The Lakewood, Colo., company is involved in a messy fight with its Michael Quagliano, its biggest shareholder.

Quagliano, an Illinois restaurateur and real estate developer, nominated six directors including himself, his daughter and his fiancé. He launched an aggressive campaign against Solera's leadership, which he argues is overpaid and underperforming.

Investors voted last week, but Solera had not learned the result by Tuesday afternoon. Quagliano told the Denver Post he was confident, and Solera Chief Executive John Carmichael called a win for the investor is a definite possibility.

The Office of the Comptroller of the Currency is among those awaiting the results. Carmichael says Solera's OCC examiner officially asked to attend the meeting, though he persuaded the agency to stay at home due to concerns the examiner could be identified and made uncomfortable.

"Solera is on the right path," Carmichael says. "To change that is concerning for the examiner, and rightly so."

It's unusual for regulators to publicly get involved in a proxy fight. They do take note when there is a potential change in control, which comes when a party owns 25% of a company's stock, controls a majority of the board or has a controlling influence over the bank's management.

The Federal Reserve Board has, on occasion, sought to limit the number of directors an activist nominates, but agencies usually don't want to get involved. A spokesman for the Fed declined to specifically discuss Solera. In a statement, the OCC said that "[r]egardless of the shareholders' choice, the OCC holds directors to the same high standards that ensure the bank operates in a safe and sound manner, and complies with applicable laws and regulations."

"Historically, it's safe to say that regulators have been hands-off and uncomfortable inserting themselves in the middle of a fight, but they certainly have concerns about changes that occur through that process," says David Baris, a partner at BuckleySandler. "They're interested parties but they might not assert themselves, even if the bank wants them to."

Dissident shareholders often seek a regulator's approval for their board candidates before launching a battle, but it is unclear if Quagliano had those conversations. Carmichael says that, as far as he knows, Quagliano has not spoken with regulators – an omission that would be somewhat unusual, industry experts say. Efforts to reach Quagliano for comment were unsuccessful.

"Usually, if you start a control battle without regulatory approval it's really hard to gain approval afterwards," says Kip Weissman, a partner at Luse Gorman Pomerenk & Schick. "You have to know what you're doing with the regulators and the SEC. If you do, you can navigate it. If you don't, you can get in trouble really quickly."

Solera's proxy fight has been dramatic. Quagliano, who independently owns about 23% of the company, is by far the biggest shareholder. He insisted that an independent monitor oversee the vote. Two proxy advisory firms called Quagliano's board nominees unqualified.

"We believe there is no justifiable basis upon which to suggest retaining a 28-year-old Florida horse farm employee and a 21-year-old college student in any way serves the interest of any shareholders other than" Quagliano, advisory firm Glass Lewis said in its report. Quagliano argued that the nominees would help attract a younger clientele.

Solera's recent struggles could help Quagliano. The $168 million-asset company has lost about $3.5 million in the last five years, including $369,000 in the first quarter. Its stock is down about 40% since its 2007 initial public offering.

Solera has taken heat for high costs and outsized executive pay. Carmichael says he has tried to rein in costs since becoming CEO last year, but Solera's noninterest expenses have remained stubbornly high, rising 4% in the first quarter from a year earlier, to $2.5 million.

Quagliano has not made it clear what he plans to do if he takes over the board, stating generally that he wants to cut costs and attract new customers by improving Solera's product offerings.

Carmichael said that, privately, Quagliano has been vague about his plans. "He has no plan that he's articulated. He simply wants control of the board and the company," Carmichael said. He claims Quagliano has privately suggested he wants to give his daughter an expanded role, possibly with the long-term goal of "turn[ing] Solera into a family business."

If Quagliano wins control, regulators would likely opt to closely vet his candidates and management plan. They would also be likely to closely monitor Solera in case its finances deteriorate.

"Regulators are more likely to step in on the basis of Camels or the bank's capital ratios, rather than preemptively based on proposed board candidates," says Kevin Jacques, a finance professor at Baldwin Wallace University and a former regulator with the OCC and Treasury Department.

Win or lose, the contest has been a major headache for Solera's management. "We're trying to run a bank here, and we're trying to do it responsibly on a collaborative basis with our regulating agency," Carmichael says. "It's really unfortunate that this has been a huge distraction, a giant disruption."

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