Former shareholders of Napa Community Bank in California are suing the bank's parent, Capitol Bancorp Ltd. of Lansing, Mich., claiming Capitol paid too little for their shares when it acquired them in June.
Capitol founded Napa in 2002. As it usually does with a start-up bank, Capitol provided 51% of the start-up cash and raised the rest from local investors. After three years Capitol typically buys out the minority shareholders for around 150% of book value.
(Capitol chairman and chief executive Joseph D. Reid last week received American Banker's Innovator of the Year Award in recognition of the company's business model.)
In this case the locals say that they should have gotten more and that Capitol and Mr. Reid conspired to pay less than what Napa was worth.
On June 30 the $3.5 billion-asset Capitol bought out most of the remaining Napa shareholders by exchanging their stock for Capitol stock. Napa shareholders got roughly half of a Capitol share for each share they owned, which worked out to a purchase price of about $15.90. (A minority group of shareholders refused to sell, but Capitol controlled roughly 90% of the shares, which gave it control of the bank.) Two of the shareholders who sold filed a class action on Nov. 23, naming all Napa shareholders who sold to Capitol as plaintiffs. The complaint says that Napa was a solid performer that had received higher offers and had been appraised at a higher value than what Capitol was offering.
The plaintiffs allege that there was no binding agreement that they had to accept 150% when they exchanged Napa shares for Capitol shares but claim that Capitol said there was.
A Capitol spokeswoman said, in general, Capitol tells potential investors that it has typically paid 150% of book value to minority shareholders but it always makes clear that the price could change over the course of three years.
John F. Friedemann, a lawyer with Friedemann Goldberg LLP of Santa Rosa, Calif., said it is not clear yet how many former shareholders had joined or would join the suit. His firm represents the plaintiffs. He declined to comment further, saying that the filing speaks for itself.
Capitol said in an e-mailed statement that it and its officers "deny all allegations of wrongdoing made in this suit, consider the allegations groundless and without merit, and intend to vigorously defend against this action."
Capitol has opened more than three dozen banks, and generally gives them autonomy while providing back-office support.
Napa was organized as a California state bank in March 2002. Since the end of that year its assets have more than doubled, to $78 million, and through the first half of this year it had already earned more than it did in all of 2004.
Napa has had some personnel issues, however. Its board asked its original chairman, C. Paul Johnson, to leave after only eight months. (Mr. Johnson is a former chairman and CEO of First Colonial Bankshares of Chicago, which was sold to Firstar in January 1995. Firstar Corp. was sold to Star Banc Corp. in 1998.)
Mr. Johnson formed a minority shareholders group that opposed Capitol's plan to take control of the bank. His group commissioned two fairness opinions that said Napa was worth more than what Capitol was offering and tried to make an offer of $17.50 for the bank, which Capitol, as the majority shareholder, rejected, according to local press reports.
Kenneth S. James, an analyst in the Nashville office of First Horizon National Corp.'s FTN Midwest Research, pointed out that the news release announcing the lawsuit came out the same day, Dec. 1, that American Banker gave Mr. Reid the award.
"That looked kind of shady, like they were trying to embarrass him as he was receiving an award," Mr. James said.
The lawsuit, filed in U.S. District Court for the Northern District of California, San Francisco Division, alleges that Capitol was able to buy the shares at a price below what they were worth on the fair market by making false statements to shareholders.
The suit said that a memorandum of fairness from Findley Group of Anaheim, Calif., and a fairness opinion by Hoefer & Arnett Inc. of San Francisco, said the stock was worth at least $21 a share. These were commissioned by the minority shareholders group. The suit also claims that Capitol did not reveal this information to shareholders when it made its exchange offer.
Capitol's offer also failed to reveal that in May 2004, JMP Financial Inc., a firm hired by Capitol, said Napa's shareholders should get 167% of book value for their shares, according to the suit.
Because of these issues, Napa shareholders suffered losses and should receive compensation from Capitol and Mr. Reid "according to proof," and should also receive attorney's fees and prejudgment interest at the maximum legal rate, the suit said.
Still, Mr. James said that Capitol's strategy has been effective and that there is no need to change it in response to this lawsuit. Each of its banks, in 12 states, has its own president and its own board of directors, and this is the first time the company has had a run-in with shareholders.
"For them to have been involved with as many people as they have been involved with over the years and as many times as they have done this, they have been pretty lucky," Mr. James said.
