Shareholder Proposal Seeks to "Declassify" Board at Troubled Capitol Bancorp

Are disgruntled shareholders trying to seize control of the board Capitol Bancorp Ltd. or at least sack all the directors in one fell swoop?

The ailing $2.5 billion-asset company said in a press release Friday that it adjourned its annual meeting on Dec. 8 and rescheduled it for Jan. 18 so that shareholders could consider certain proposals, including one that would require board members seek reelection each year. Forcing annual elections — also known as "declassifying" the board — could conceivably make it easier for dissident shareholders to oust an entire board at once.

It is unclear if the proposal came from one shareholder or a group of shareholders. In a Securities and Exchange Commission filing Friday, Capitol, which has dual headquarters in Lansing, Mich., and Phoenix, said only that the proposal to declassify the board "will be considered and acted upon, if properly presented at the adjourned session of the annual meeting."

Observers said the proposal is not surprising given Capitol Bancorp's health. At Sept. 30, the company had a $93.5 million equity deficit, despite the fact that it has brought in $152 million over the last few years by selling 21 of its banks. Several of its banks units are struggling, as they are classified as significantly undercapitalized and have received prompt corrective action directives from regulators.

Eliot Stark, a managing director at Headwaters MB, a Denver-based investment bank. Stark, who is based in Michigan, said the proposal could be purely emotional driven. "There is a lot of anger among shareholders. This is a stock that used to sell at above $40 per share and now it is worth pennies."

He added, however, that even if the proposal passes, it could be a moot point, should any of the banks fail.

"If they got rid of the classification, it likely wouldn't be an issue until next year's board election, if the company is still going then," Stark said.

Calls to Capitol Bancorp were not immediately returned.

David Baris, a partner at BuckleySandler LLP and the executive director of the American Association of Bank Directors, said he prefers declassified boards, because having directors stand for reelection each year makes them more accountable to shareholders. Staggered boards are often considered more insulated, as anyone trying to seize control would have to be willing to spend several years trying to gain control, Baris added.

"Shareholder proposals to declassify the board tend to be more common when the institution is disappointing shareholders," Baris said.