The battle over a proposed merger between two small Massachusetts thrifts is going to court.
Two investors in the $300 million-asset Westborough Bank, Philippe E. Gut and Gwen Pratt Gut, are suing to stop its sale to Assabet Valley Bancorp in Hudson, arguing that the price, $20.6 million in cash, is too low.
The complaint says Westborough's directors — including its president and chief executive officer, Joe MacDonough, and its chief financial officer, John Casagrande — violated their fiduciary duties by agreeing to a "grossly inadequate" price of $35 for each of the publicly traded shares.
Since the Nov. 14 merger announcement, the directors have rejected three higher offers from other bidders, for $38.50, $40, and $41.
The complaint alleges that the directors want to sell to Assabet for their own personal gain.
If the merger goes through, Mr. MacDonough, Mr. Casagrande, and other board members would receive about $2.5 million in cash bonuses, consulting agreements, and other benefits. That is about 12% of the amount that the public shareholders would receive.
According to the complaint, the directors enacted "a flood of changes" to Westborough's compensation agreements during the negotiation with Assabet and after the merger announcement to drastically increase the benefits they would receive in the event of a change in control at the company.
"Defendants are attempting to buy out the public shareholders on the cheap while lining their own pockets in the process," said Glen DeValerio, one of the lawyers representing the Guts. "They have breached their fiduciary duties by putting their own interests ahead of stockholders."
The Boston law firm Berman DeValerio Pease Tabacco Burt & Pucillo is seeking class-action status for the suit, which was filed Monday in Worcester Superior Court. The lawyers also asked for a preliminary injunction to block the merger until the case can be heard.
Mr. MacDonough said Westborough intends to fight.
"Based on our initial review of the lawsuit, we believe the allegations to be totally without merit and we intend to contest the lawsuit vigorously," he said Thursday, reading from a prepared statement.
"The alternative transactions mentioned in the lawsuit were all considered by the board of directors and rejected as being inferior to the Assabet proposal."
Roughly 36% of Westborough's stock is publicly held. The rest is owned by its mutual holding company, Westborough Bancorp.
One of Westborough's own investors, Marc J. Bistricer of Toronto, made the two most recent unsolicited offers to buy the company. Mr. Bistricer has said in a letter to Mr. MacDonough that he and a group of investors he represents own 9.9% of the company's publicly held stock.
Mr. Bistricer's latest offer of $41 a share is still on the table, according to his spokesman, Keith Zakheim.
Mr. Bistricer argued in his letter that Assabet's offer of $35 per share works out to less than 70% of Westborough's book value, if it were to do a second-step stock offering to go fully public, compared with his offer of roughly 96% of book value.
Though Mr. Bistricer threatened legal action to stop the merger with Assabet, he is not involved in the lawsuit filed by the Guts. But he does wish them well, Mr. Zakheim said.
"When Marc was saying that he represented many disaffected shareholders, I think the bank kind of laughed him off. They felt they could pull a fast one on shareholders," Mr. Zakheim said. "What this class action does is reinforce the fact that that is not the case."
Westborough recently extended its deadline for closing the deal with Assabet from June 30 to Aug. 15. The agreement calls for Westborough, which has four branches, to be merged into Assabet's $655 million-asset Hudson Savings Bank, which has five branches.
Mark O'Connell, Hudson Savings' president and chief executive, would be the president and CEO of the merged bank, which would have a new name that has yet to be announced.
Mr. MacDonough would succeed Assabet's retiring president and CEO and receive a five-year employment contract at an initial salary of $210,000 a year. Mr. MacDonough also would receive a change-in-control payment of $330,000 and a yearend bonus of $250,000 for 2006.
