Bank Directors – Other People’s Money: What do your shareholders actually desire?

As a bank CEO you are familiar with acting as a fiduciary.

We all can become “house blind” to the specifics of those duties.

Reviewing the fiduciary duties of good faith, care, and loyalty are helpful, especially when selling the bank.

Directors should ensure they are well-informed and knowledgeable of the material aspects of the transaction.

The primary responsibility of the board of directors, as fiduciaries, is to maximize value to the shareholders.

The fiduciary duties of the board of directors and corporate officers are unique to the laws of each state. I am not a lawyer, and I do not intend for this to replace legal advice or legal counsel.

The officers, directors, and controlling shareholders must adhere to the fiduciary duties of good faith, care, and loyalty.

The duty of good faith focuses on the motivation in making a certain corporate decision.

Acting in good faith, means working to benefit the corporation and the shareholders.

Errors in judgment are generally not enough to establish one acted in bad faith.

A decision made with malicious intent is an act of bad faith.

For instance, approving a loan while being aware that the borrower cannot repay it is an act of bad faith.

The duty of care requires a degree of skill, diligence, and care that a reasonably prudent person would exercise when acting in the best interests of the corporation and shareholders.

To fulfill the duty of care, you should consider all relevant information before making a decision.

Directors should actively involve themselves in decision-making by asking questions about proposed actions or transactions.

Directors can trust the information provided by the corporation's records and by officers, employees, or committees. They can rely on the expertise of these individuals when making decisions for the company.

The duty of loyalty requires directors to not act primarily for personal or non-corporate purposes.

For example, a director may make decisions that benefit themselves, such as protecting their job, pay, or benefits. These decisions may not always be in the best interest of the company or its shareholders.

Directors must not make deals that benefit themselves instead of the company. This action, called "self-dealing," violates loyalty.

The board may want to contemplate the following actions when considering and approving the sale of the bank:

• Obtain a “fairness opinion.” A fairness opinion is a document given by the seller's investment banker to the seller's board of directors. It confirms that a transaction is financially fair.
• Consider alternatives to the sale of the bank and the possible ranges of those alternatives. Four options for the bank's growth are, grow the bank organically, buy a bank, merge with a like-sized bank, or sell.
• Assess the market to find the likelihood of obtaining a higher price from another potential purchaser.
• Ensure the transaction documents allow for a “fiduciary out” and consider whether the transaction documents allow for adequate deal certainty.
  • There are three common forms of fiduciary outs:
    • The board has the right to review and accept better offers from third parties to replace the current agreement (note -you will likely not be allowed to solicit offers; this would be in the case of an unsolicited offer). This is the most common fiduciary out.
    • The board can change its recommendation and cancel the agreement if something happens that makes the bank more valuable while under the agreement.
    • The board can change its recommendation and end the agreement if they believe it would go against their fiduciary responsibilities.

• Consider the acquirer’s past performances of financial obligations and the ability of the potential acquirer to finance its offer and obtain regulatory approval.
• Maintain an active role in the oversight of the sale process. The board’s oversight should be independent from the bank’s management.
• Disclose any conflicts of interest to the board and to the shareholders of the bank. Here again is an example where bank management’s goals and the shareholder goals may be out of alignment.
  • One offer may have high salaries and important roles for the management team. However, the price offered may be lower than another offer. This, in and of itself, may not be enough to choose one over the other.

• Maintain a complete written record of the above-mentioned actions and any other actions taken by the board.

Taking the mentioned actions does not guarantee that someone will not question a board's decision. However, it can help ensure that the board conducted the process honestly and with sufficient information.

Listed below are a series of questions to aid in stimulating thought around any issues related to shareholders.

This is by no means an exhaustive list of considerations.

Each situation is uniquely related to shareholders.

The goal is to identify and address any issues before the sale process, all the way up to the closing.

• Does your shareholder mix have high concentrations of ownership?
• Does your shareholder mix have a family or families with significant concentrations of ownership?

If they are no longer involved in founding the bank, are they still active in it or do they just own shares?

• Are your shares widely held, meaning no one person owns more than 10%?
• Do you have patient capital, or is there a need for liquidity amongst your shareholders?
• Would your shareholders be interested in exchanging their stock for that of a buyer or would your shareholders be interested in cash?
• Do you have any stock options or stock warrants currently outstanding?
• Are there any share transfers in process or expected to take place soon?
• Have you reviewed your company documents recently?
  • Have you consulted with a lawyer to go over them, such as shareholder agreements, articles, and bylaws?

• Are there any considerations you need to be aware of surrounding a sale that require advanced planning?
• Has an independent valuation of the stock been performed within the past 12-24 months?
  • If so, was it distributed to all shareholders?
  • Was the valuation for a minority interest?

• Are your shareholder records current?
• What reaction are you most fearful of coming from your shareholders regarding a sale?
• Did anyone bring up any unresolved issues at the most recent annual meeting?
• Was the annual meeting attendance—in-person or by proxy—higher or lower than the previous year’s trend?
• Did the mix of in-person or proxy change from recent trend?

Shareholder considerations can be complicated.

When the board follows their responsibilities, it reduces the risk of shareholder liability.

There are zero hacks or tricks in this newsletter. Just proven tactics that help you choose the right path for your bank.

Your path will:

• Inform your strategic plan.
• Guide your annual business plan and budget.
• Clarify priorities.
• Define your message so it can be communicated with confidence.

This is how savvy bankers navigate.

They build smart and valuable banks and choose the best time to sell – serving the needs of the shareholders and the board.

I hope you found this short lesson helpful.

What are your thoughts?

I’ll see you next week.