Small N.C. bank dealt legal blow in effort to block hostile takeover

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KS Bancorp in Smithfield, N.C., was dealt an early legal blow in its effort to fend off a hostile takeover by First Citizens BancShares in Raleigh, N.C.

The North Carolina Business Court on Wednesday granted the $34.5 billion-asset First Citizens’ request for a preliminary injunction barring KS Bancorp from taking any action under a shareholder rights plan its board approved in early February.

The injunction will be in effect until the litigation is resolved.

First Citizens, which owns 9% of the $374 million-asset KS Bancorp's stock, filed a lawsuit on Feb. 15 seeking to throw out the rights plan, arguing that it was discriminatory and diluted the value of the shares it already owns.

In a decision supporting the preliminary injunction, Judge Gregory McGuire determined that KS Bancorp, as a privately held company, isn’t allowed to implement a shareholder rights plan that discriminates between the rights of shares in the class.

First Citizens “has demonstrated a likelihood of success on the merits of its claim for declaratory judgment,” McGuire wrote in his decision.

McGuire also determined that First Citizens could suffer “irreparable harm” if KS Bancorp had been allowed to act on its right plan before the lawsuit is resolved.

KS Bancorp’s right plan, commonly known as a poison-pill provision, was set to trigger if First Citizens’ stake reached 15%. At that point, all of the community bank’s other shareholders would have received rights to buy more KS Bancorp stock at a discounted price.

First Citizens had been amassing a stake in KS Bancorp after receiving approval from the Federal Reserve to buy up to 80% of the target’s stock. The authorization was set to expire on March 19, though First Citizens has the right to seek an extension that could go to Dec. 19.

Around the time that KS Bancorp approved its rights plan, First Citizens was buying 110,499 shares and was in contact with shareholders owning another 86,678 shares. Buying all those shares would have increased First Citizens’ stake to 24%.

KS Bancorp had argued in legal documents that First Citizens’ actions had scared away one commercial lender and had harmed its ability to court wealth management clients, among other things.

The quarrel goes back to last June, when First Citizens offered to buy KS Bancorp for $33 a share. KS Bancorp, which was reorganizing into a Subchapter S corporation, was in the midst of reducing its shareholder ranks.

In mid-July, First Citizens increased its offer to $35 a share, or roughly $45.9 million, and issued a press release publicizing its efforts.

“We are disappointed by KS Bancorp’s rejection of our offer without any discussion,” Frank Holding Jr., First Citizens’ chairman and CEO, said in a press release that disclosed the takeover bid. “We believe that KS Bancorp shareholders will favor the immediate liquidity at a substantial premium that our acquisition proposal would provide.”

Harold Keen, KS Bancorp's CEO, said in a press release that First Citizens’ initial offer “did not rise to a level of pricing” to persuade the board to sell. The hostile takeover is “evidence that First Citizens’ corporate culture is not in line with KS Bank’s community banking values,” he added.

Keen later told S&P Global Market Intelligence that the board would evaluate the improved offer. “We’re working with the professionals to evaluate it, and I don’t know what else to say,” he said.

The deal would also help First Citizens compete more effectively with BB&T in nine North Carolina markets — Clayton, Four Oaks, Garner, Goldsboro, Kenly, Selma, Smithfield, Wendell and Wilson — where KS Bancorp has branches.

BB&T had a commanding 31.9% deposit market share in those markets in mid-2017, according to the latest data from the Federal Deposit Insurance Corp. First Citizens could increase its market share to 26.6% from 19.8% if it were to successfully buy and integrate KS Bancorp.

Some industry observers have suggested that First Citizens could also be trying to block a competitor from entering or expanding in those markets.

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