An Illinois bank is threatening to trigger a poison pill to punish some longtime owners who are unhappy with its lackluster performance.
Poison pills, a type of shareholder rights plan, are common among community banks that want to discourage outsiders from accumulating large blocks of stock and forcing a takeover. But rarely are they used against existing owners.
Illini Corp., a $154 million-asset company in Springfield, adopted a rights plan in June 1997 that would dilute the company's stock if a shareholder accumulates 10% of Illini's shares.
The plan is unpopular with nine members of the Noll family, who together own about 30% of Illini's shares. The poison pill will probably be activated whenever a Noll descendant sells or wills stock to another family member. In fact, Ida R. Noll, daughter-in-law of one of the bank's founders, surpassed the 10% threshold last month when her mother, Amy Rock, gave her 1,450 shares.
"This plan was designed to box in the principal shareholders," said Thomas C. Erb, an attorney at Lewis, Rice & Fingersh in St. Louis who represents Ms. Noll and her mother-in-law, Mae Noll.
Illini officials would not comment on their dispute with the Nolls. However, Craig McCrohon, a lawyer at Freeborn & Peters in Chicago, said poison pills intended to contain specific insiders have been upheld in court.
Mr. McCrohon, who designs shareholder rights plans for community banks, said poison pills can protect management from unruly shareholders who do not have the company's long-term interest at heart.
Exceptions to a poison pill also can be made for existing shareholders the company wants to protect, Mr. McCrohon said. In Illini's case, Mae Noll's 14% stake was exempted when the plan was adopted. However, the exception prohibits her from increasing her stake. The 82-year-old Noll family matriarch has told Illini officials that she wants to sell her stock because she is unhappy with the bank's performance.
At yearend, Illini's bank subsidiary, Illini Bank, reported a 0.64% return on assets and 6.66% return on equity-performance ratios that are less than half the averages for commercial banks with $100 to $300 million of assets.
The poison pill makes it impossible for Mae Noll to sell all her shares to one person-the best way to get a good price-without triggering the poison pill. Under the plan, the bank would at least double the holdings of all other shareholders, essentially cutting Mae Noll's stake to 7%.
Illini expects to dilute its stock in July if Ida Noll does not sell enough of her shares to bring her stake below 10%, said Theodore L. Eissfeldt, a lawyer representing Illini.
But Mr. Erb said Ms. Noll will not sell any shares. In a letter filed with the Securities and Exchange Commission in April, Ms. Noll threatened to hold Illini responsible for any financial loss she sustains if the poison pill is activated.
Mr. McCrohon said that, in cases where poison pills have been challenged, one side has always backed down before the company's stock was diluted. The procedure would be expensive for the company to carry out, and it would shrink the triggering shareholder's investment, he said.
"It's just like all games of chess don't end in checkmate," he said. "One of the players realizes the inevitable."