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Activity has quickened since the Great Recession when many activist investors bought community bank stock at bargain prices. Now they want to cash in.

With the recent rapid rise in community bank stock market values, including banks who may be potential acquirers, the temptation of activist shareholders to force an unwanted sale on a community bank will increase.

We believe that many community banks are not prepared to fight back or take legal steps to protect themselves from a premature sale of the bank. This is true both for those banks that already have activist investors and those who haven’t yet.

AABD believes that several hundred community banks are faced with activist shareholders who have a different time frame for investing than the local investor in community banks. For the local investor, there often is a motivation to invest and remain invested not to just have a good investment but also have a positive impact on the community.

Activist shareholders don’t give a hoot about the community. For them, it is simply a financial calculation.

Just because a bank receives an offer to purchase control of the bank at a higher price than market doesn’t mean the Board needs to accept it. The “just say no” defense is alive and well in many jurisdictions, particularly where the bank has a written long term strategic plan charting a successful independent course.

Some activist shareholders have been exceedingly aggressive. They can resort to personal attacks on management, threatening to elect enough directors to control the bank, and threatening lawsuits, among other things. They sometimes will claim that they have enough support from other activist shareholders to throw current management and board out.

They don’t normally acquire enough shares themselves to accomplish that. That would require non-objection from one of the federal banking agencies and, if it is a state chartered bank, the applicable state banking authorities.

Instead, they will purchase under 10% of the outstanding, the threshold for the change in bank control act to trigger a prior notice and clearance requirement.

Other activist investors, directly and indirectly, find out that activist investors have targeted a particular community bank. We believe that there is often direct communication, ongoing. Or they use the indirect routs, through SEC filings if the bank or its holding company is an SEC-reporting company.

Together, these investors will often accumulate far more than 9.9% of the outstanding. Some are able, as a group, to acquire 40% or more of the outstanding. That gives them effective control over the destiny of the bank.

They must believe that they are acting in compliance with law and regulation. But they may not be.

The Change in Bank Control Act requires prior notice of a change in control and clearance not just for those who own or control shares individually, but collectively where they have “acted in concert.” AABD sees evidence of “acting in concert” in a number of instances.

Acting in concert in violation of law can deprive bank boards of directors of the authority over whether or not to remain independent. Pressure on the board to sell can lead to foolish decisions that are not in the best interests of all shareholders.

That is why AABD is writing to each of the federal banking agencies to ask them to launch an investigation into the practices of these activist investors to assure that they are acting consistent with the law.

The agencies have subpoena powers to get to the truth. We urge them to use that power appropriately and get to the bottom of what is happening.

In the meantime, banks do have defenses available to them. They need to know what they are and how to employ them.

AABD has formed a Working Group of banks that either have activist shareholders intent on forcing a premature sale of the bank or are vulnerable to such investors investing in their bank.

That way, the banks can share their experiences and ideas on how to ward off an unwanted sale. AABD will assist the Working Group to facilitate discussions and ideas, as well as supporting efforts to enlist the banking agencies in appropriate cases to determine whether any activist shareholders have violated the law.