Photo courtesy of SEArkToday.com
The 2013 buyout of minority shareholders at First Union Financial Corp. provides a case study on investor dynamics in a privately held concern.
The family of Zach McClendon Jr., which held a 68.4 percent stake in the bank holding company, launched a buyback of the remaining First Union shares in July.
The family’s controlling interest allowed them to legally force the sale, but the way the McClendons accomplished the transaction caused ripples. (Click here to read Protest Letter).
Only a handful of minority shareholders, representing a combined 7.7 percent stake in the outstanding shares, managed to negotiate the tedious process of perfecting their right to challenge the price under Arkansas law.
Those 11 dissenting stockholders will get to argue that their minority shares are worth more than the price they were forced to take. The $182.30 per share reflects 72.2 percent of book value for First Union, the one-bank holding company for the $187.5 million-asset Union Bank & Trust of Monticello.
That price was dictated by the fair market value contained in the McClendon-initiated stock buyback, which gave the family sole ownership of First Union.
Zach McClendon Jr. has declined to talk about the dispute while it’s in litigation in Drew County Circuit Court in a case filed last month.
“The long and short of what’s going on here is that the smallest bank in the state, Bank of Rison, sold for 94 cents on the dollar,” said Bennie Ryburn III, vice chairman of Monticello competitor Commercial Bank & Trust. “It seems odd to me that the McClendons are trying to pay 72 cents on the dollar.”
Commercial B&T’s holding company, Drew County Bancshares Inc., included a stock buyback offer as part of its conversion last year to a subchapter S corporation.
“For those that wanted to sell, we purchased the stock at current book value,” Ryburn said. “That’s what we’ve done, and we think that’s fair.”
Virgil Trotter, one of the 11 dissenting shareholders of First Union, believes McClendon could have orchestrated a similar friendly buyout instead of taking the steamroller approach.
“I think it was designed to wash out some of the minority shareholders at a bargain price,” said Trotter, who abstained from voting on the buyback and resigned from the Union Bank & Trust board of directors. “The process places the onus on someone to spend a significant amount of money to develop and retain their dissenting status.
“This is something I find troubling.”
In round numbers, the completed buyout of minority shares at the discounted price represents a $990,000 savings over book value for the McClendons. This 23.5 percent block of shareholders forfeited their shot at taking a dissenter’s seat in court.
In some cases, shareholders lost their potential standing early on by not submitting written notice of their intent to exercise dissenters’ rights and demand payment for the shareholders’ shares.
That had to be done before the Aug. 6 vote on the buyback, guaranteed to pass because of the McClendon’s controlling interest.
Some minority shareholders were shocked to learn they had to sell at $182.30 per share without any recourse because they hadn’t given written notice, even though they voted “no” in person at the special shareholders meeting.
The rights of dissenting shareholders and the process for perfecting the right to challenge the price were included in the voluminous proxy material distributed to First Union’s 73 shareholders. The vote included converting the company to a subchapter S corporation that would deliver tax benefits.
Surviving Hardship
The dispute over stock valuation is in the forefront now. But the story wouldn’t be complete without a look at the historical backdrop of the holding company and its bank during the past 10 years.
Union Bank & Trust experienced significant loan losses during 2003-06 that produced net charge-offs of $15 million. The losses resulted in regulators placing the bank under a supervisory agreement to improve asset quality and capital, an arrangement that ended in February 2008.
James Jett resigned as president of the bank in May 2005. His exodus preceded Union Bank & Trust posting a $9.3 million loss at year’s end. It took the bank eight years to produce enough profit to cover that loss.
To shore up the bank’s capital at the time, First Union Financial Corp. issued $4.6 million in trust-preferred securities through First Tennessee Bank of Memphis and borrowed $1.6 million from Metropolitan National Bank of Little Rock.
“Zach McClendon pledged everything he had to get those loans and save the bank,” said a veteran of the Arkansas bank scene. “No one else stepped up to do that, to my knowledge. It was a very, very trying time, and Zach was a hero.
“If he didn’t do that, Union Bank wouldn’t have survived, and those shares wouldn’t be worth anything.”
The bank has been profitable since 2005, but shareholders haven’t received a dividend from bank profits in more than 10 years. Instead, dividends have flowed to the holding company to repay recapitalization debts or remained in the bank to rebuild capital.
Some shareholders believe they are being forced out by the McClendons in advance of a restart of dividend payouts.
The $182.30 share price isn’t a dart-board creation of the McClendons. The number is the product of a stock appraisal based on the year-end 2012 numbers for First Union. The shares were deemed to be a “marketable minority interest” for valuation purposes in the appraisal analysis used by the McClendons.
Under that premise, the book value of the minority shares in First Union Financial was discounted by nearly 28 percent.
That effective discount was the result of an amalgamation of four valuation methodologies based on income and three market approaches bearing a risk-adjusted capitalization factor: price to earnings, price to book value and price to tangible book value.
Those four assessments produced valuations that ranged from a low of $144.63 per share under the adjusted price to earnings method to a high of $239.26 per share under the adjusted price to tangible book value method.
The lowest two values were weighted 30 percent each, and the highest two were weighted 20 percent each to produce a marketable minority interest of $182.30 per share.
Though mentioned in the narrative, the asset-based approach — basic book value — received zero consideration because of the marketable minority interest premise.
That book value of $251.85 per share contrasts with $182.30 per share derived from the marketable minority interest appraisal used by the McClendons as a cost basis in their buyout.
Though mentioned in the appraisal, the definition of fair market value was turned on its head considering the McClendon buyout gave other shareholders no choice but to sell at $182.30.
Fair market value is considered to represent a value at which a willing buyer and a willing seller, both being informed of the relevant facts about the business, could reasonably conduct a transaction, neither party acting under a compulsion to do so.
Barring a settlement, the court will decide if the price should be higher for the 11 dissenting shareholders.
Protest Letter
John Porter Price, a former director at Union Bank & Trust of Monticello, is among those who aren’t happy about the way the McClendon family chose to expand its controlling interest in the bank.
Price considered the legal move to force out minority shareholders in the bank’s holding company, First Union Financial Corp., to be predatory in nature. He asked to be removed as an honorary board member of the $182.3 million-asset bank in a letter to Zach McClendon Jr., chairman of Union Bank & Trust and chairman and CEO of First Union Financial Corp.
“This is a sad moment for me because of my long association with said institution. I feel this is the only option I have because the bank is now taking a course that I feel is counter to the best interest of its stockholders.
“It is a course that is contrary to a long history of fairness and honesty that Union Bank has always been known for. I feel that no longer exists.
“My only regret is that I am only now speaking out. My defense is that I was furnished so little information about the buyout that I only recently became aware of just how unfair this buyout is.
“I think it is shameful that stockholders, who have stuck with the bank through all its problems, have endured 10 years of no dividends, and now just when the bank could start paying returns, they suddenly learn they are being asked to sell for a fire-sale price.
“This course of action has already done irreparable damage to the bank.
“The public is wondering if the bank cares no more for its stockholders than this, what my value as a customer is. This is not about money; it is about integrity and honesty.”
Please place this document in the board minutes.
Sincerely,
John Porter Price
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