Ruling May Change How Bank Buyers Tackle Noncompete Agreements

For bankers looking at out-of-state acquisitions, there is quite a difference between applying business practices and exporting state laws and policies.

Prosperity Bancshares in Houston entered Oklahoma in the last two years through a couple of acquisitions, including F&M Bancorp in Tulsa. While Texas and its neighbor to the north have a lot in common, including relatively low costs of living and vibrant energy sectors, they differ greatly on the power of noncompete agreements.

A judge in the U.S. District Court for the Southern District of Texas ruled earlier this week that a noncompete clause embedded in employment contracts between Prosperity and a group of former F&M energy lenders is not enforceable. In his ruling, Judge Gray Miller rejected Prosperity's claim that Texas law should prevail simply because such jurisdiction was outlined in the contracts.

The impact of the ruling could be tremendous for banks interested in entering other states, industry experts said. For starters, acquirers shouldn't expect the laws of their land to hold sway should disputes arise.

"Noncompetes are highly disfavored by the Oklahoma courts, especially if you try to put one on your run-of-the-mill employee," said Jason Reese, an employment lawyer at Resolution Legal Group in Oklahoma City. "If you're an out-of-state company and you think you're going to be able to come in and just slap your laws into an agreement, think twice."

The $21 billion-asset Prosperity bought F&M in April. A group of lenders led by Chris Cardoni filed a lawsuit in an Oklahoma state court in early June against Prosperity and the former leaders of F&M seeking to have the lenders' employment agreements voided. Prosperity responded two days later by filing a lawsuit in Texas state court seeking to enforce the agreements, while claiming that the lenders were in breach of contract. The case was moved to federal court.

While the matter awaited a judge's review, the parties agreed to terminate the lenders' employment, effective Aug. 28. Cardoni's team joined the Tulsa office of CrossFirst Bank on Sept. 2.

Cardoni did not return a call and CrossFirst executives declined to comment. David Zalman, Prosperity's chairman, president and chief executive, redirected a request for an interview to Charlotte Rasche, the company's general counsel.

"We are currently evaluating the order and consulting with our legal counsel regarding our appellate remedies," Rasche wrote in an email. "We are not in a position to comment further on pending litigation."

Prosperity, a prolific acquirer, is operating under a self-imposed moratorium on deals in order to digest the banks it has already bought. Still, Zalman said during a September conference hosted by RBC Capital Markets that Prosperity would soon return to dealmaking.

Zalman has also expressed an interest in having $3 billion to $5 billion in assets in Oklahoma. F&M and Coppermark Bancshares added a total of $3.7 billion in assets in the state.

Asked if the case's outcome would dissuade Prosperity from pursuing more deals in Oklahoma, Rasche said the company plans "to evaluate strategic opportunities in Texas and other states on a case-by-case basis as they arise."

The judge's ruling is perhaps concerning for future deals in Oklahoma, analysts said.

"Certainly a big piece of M&A is the ability to hold on to the people attached to the company you're acquiring," said Brad Milsaps, an analyst at Sandler O'Neill.

Others, however, said they doubt Zalman would be discouraged.

Zalman "looks at acquisitions for their earnings streams and the longer-term impact on earnings per share," said Brett Rabatin, an analyst at Sterne Agee. "The ruling may factor in his mind a bit. … It is not a positive, but it is not the end of the world."