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The election inspector determined that the nominee for Stilwell Group was delinquent in turning in a signed master ballot, invalidating most of the firm's votes as it challenged the Renton, Wash., company.
May 30 -
Two directors have resigned, and the Floyd, Va., company's CEO is on administrative leave. Those departures come less than a week after a coalition of angry investors led by Douglas Schaller replaced half of the six-member board.
May 29
After paying nearly half a million dollars to court shareholders, it's hard to say who wins a proxy battle. But a series of clashes this year shed some light on the hefty price that banks and activists will pay to emerge victorious.
"I don't think I've ever spent less than $100,000, though I always say I'm not going to spend more than that," says Richard Lashley, a principal at PL Capital. Proxy fights have "been upwards of $1 million and average $150,000 to $250,000."
Lashley, who succeeded in pushing three bank sales last year, says companies can easily spend twice as much to fight an activist.
Two of the three banks involved in recent proxy battles have disclosed some of their costs. Harvard Illinois Bancorp (HARI) said it paid $100,000 in the first quarter to successfully fight off Stilwell Group.
Cardinal Bankshares (CDBK) reported that its legal fees doubled in the first quarter, compared to a year earlier, to nearly $100,000. The Floyd, Va., company
A third battle, involving Stilwell and First Financial Northwest (FFNW) in Renton, Wash., could have higher costs for both sides. Stilwell is contesting the results of the contest —
The high costs of proxy battles could lead bankers to rethink how much they're willing to lose in cash, time and reputation to defend the castle. Then again, activists are usually intent on having their targets sell, which raises the stakes for all parties.
"A board has to be strong if they believe it is in the best interest of the stockholders to fight," says Kip Weissman, a partner at Luse Gorman Pomerenk & Schick. "It's like World War II where one group is attacking by sea, another by air, one by tanks and they're flanking all sides. It's constant pressure."
Bankers and activists admit that they are paying far more than expected, given the costs for filing with the Securities and Exchange Commission.
Many activists have also chosen to run advertisements. Schaller and Stilwell held receptions for investors. In one case, an event cost $1,800, according to a club house sales director who asked not to be named.
There are other intangible costs that can be far more damaging to a bank. Observers say an dug-in battle creates more uncertainty, making it hard for a bank to plan and implement a growth strategy. "The main cost is not the dollars and cents, it's the time, the distraction, the tension and all the mental fatigue factor that's the cost," Weissman says.
"Community banks today need to devote 100% of their focus to the difficult operating, regulatory and economic environment," Weissman adds. "They're not able to do that if they're spending all their time focusing on these insurgents."
Cardinal's yearlong battle with Schaller ended last week with five out of its six directors departing and its longtime chief executive taking a leave of absence. Michael Larrowe, who is filling in as CEO while the board reorganizes, says Cardinal has not forgotten its customers, though he admits the battle "was distracting."
"The situation certainly has been unique and was challenging for everyone involved but we're now passed the decision made by the shareholders," Larrowe says. "From my perspective, it's time to get our focus turned back to our customers and to the resources that we bring to them."
In many proxy battles, activist investors attempt to unseat the chief executive from boards, which can spook other executives to look for new jobs.
"Anytime there is a fear of unknown, especially with bankers who by definition are risk-adverse people, they are going to put their ear to the ground" for other job opportunities, says Rod Taylor, an executive recruiter.
Lashley says he has "legitimate concerns" about bank losing good people when they launch a proxy battle. He contends that it should give all the more reason for senior management and directors to negotiate with the investor before a fight ensues.
"Why go through the public angst? Why not just deal with it at the senior management level? It diffuses the whole issue," Lashley says. "I don't feel guilty about it if it happens. In today's economy, if you lose one or two managers, you can hire four or five more to replace them."
Proxy season is nearing an end, but that does not mean the activists are packing up. In many cases, such as Harvard Illinois, Stilwell stated in regulatory filings that it would wage battle again next year. The firm's lawyer, Spencer Schneider, says there's a cost to fighting directors, but he did not name a price.
"Companies are owned by the shareholders," Schneider says. "There's an expense …but there would be no activist investor business if it cost more" than what was returned.
Industry observers are also wary of other investors who, for now, have remained silent as some banks continue to lag their peers in terms of profitability and other performance measures. Because of this, many observers believe that next year's slate of proxy battles could be more acrimonious that the one that just passed.
Other shareholders "may not launch proxy battles but they're still calling them [managers and the board] and pressing them," Weissman says. "Community banks don't have the resources to deal with all these challenges and it wears them down …it's a death by a thousand cuts."
