Activist Investors Prevail in Bitter Battle with Virginia Bank

Cardinal Bankshares' yearlong battle with an activist investor ended with a deadlocked board, an ousted chairman and a lot of uncertainty.

The biggest challenge for all parties after Tuesday's meeting is determining who is in charge of the company.

"I haven't heard anything as of right now" in terms of who is leaving or staying, says Douglas Schaller of Schaller Equity Partners in Winston-Salem, N.C. "I'm not quite sure how the order of things will work."

Schaller succeeded in getting three new members added to the six-member board, evenly dividing the body. Making the situation more tenuous is a threat made by old-line directors during the proxy battle that they would leave if Schaller's nominees were elected.

"I've never seen this happen," Schaller says. "I think it sends a bad signal to the community that if the board members don't like the way the game is played, they can take their ball and go home."

"The fact that the board already said they were going to resign presents its own problems," says Kip Weissman, a partner at Luse, Gorman, Pomerenk & Schick. "If they don't, people will say, 'I voted because I assumed you were going to resign.' It will be a mess."

Of nine nominees, just six could make the Floyd, Va., company's board. Among those who missed the cut: Leon Moore, Cardinal's chairman, president and chief executive, and Michael Larrowe, who Moore had hoped would become his successor.

It is unclear if Moore or the other directors will stay at the company. The board must select a new chairman since Moore is no longer a director.

"This is a damaging situation to the bank and the community and it's very unfortunate," says Moore, who declined to discuss his future plans.

Cardinal held the first of a handful of potentially vitriolic annual meetings at community banks. Activists are also challenging for board seats at Harvard Illinois Bancorp and First Financial Northwest (FFNW) in Renton, Wash.

Schaller says his "accidental activist" role is "finished." Still, he is adamant that it would be detrimental to Cardinal to keep Moore. "I want him gone," Schaller says.

"You had a very typical bank situation where you had a passive board with very strong-willed personality who would roughshod over everything," Schaller adds.

Regardless of the personal jabs that were delivered by both sides during the proxy battle, the resulting vote has created some gaping holes in Cardinal's succession plan. It could also lead to gridlock in the boardroom.

Larrowe, who had stints at banks in North Carolina, was Moore's second try in the last year to groom a successor. Though he was kicked off the board, Larrowe is still a company executive.

Larrowe's hiring last July spurred Schaller's uprising. Schaller initially wrote letters to shareholders expressing concerns over Larrowe's banking experience. After a few meetings with Larrowe, Schaller says he has warmed up to the notion of Larrowe running the company. "He is certainly capable of being president," Schaller says. "He has an unproven track record but he's very sharp as an accountant."

Moore says he still believes Schaller's "true intent is to sell the organization."

Schaller says directors will meet to discuss next steps. While he initially suggested a sale, Schaller now says it was intended to get the attention of local investors who saw him as a "foreigner."

"I'd like the board to make very proactive changes to reintroduce [Cardinal] into the community and customer relationships," Schaller says.

Schaller says he will not protest if the remaining three directors stay on the board. Both new and existing members are long-time Floyd business owners, and some have known each other since grade school. "To some degree, it's caused a bit of a riff," he says. "On the other hand, it's not like these people haven't known each other for a long time."

Weissman says tension arises among members when any insurgents are placed on the board by an activist investor. "It's very difficult, it's very awkward," he says. "You feel like you need a court reporter in the room to make sure everyone agrees to who said what and when."

Schaller says it will be challenging and time-consuming to groom new management and add new directors, if necessary. But he is convinced that any changes would prove positive for Cardinal.

"Shareholders got what they wanted and they feel like corporate democracy works for them," he says. "The customers and employees will be far better off."