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When M&A gets personal

What happens when a board member bucks the consensus?

When M&A gets personal

Sometimes, a director is too emotionally invested for his or her own good—and for the good of the bank’s owners.

While a personal viewpoint can be an attribute and a benefit to the bank over the course of normal operations, it may blind the director to opportunities such as a merger or acquisition that could enhance value for the organization’s shareholders and potentially for the community itself.

I’ve hammered home in this blog repeatedly that the primary obligation of a community bank’s board of directors and senior management team is to enhance the value for the organization’s shareholders in the M&A context and others.

Every decision, big and small, should be filtered through that lens.

However, sometimes executing on the obligation to enhance shareholder value is derailed by personal agendas of individual board members. So what happens when things get “personal”?

You can’t avoid the human factor

Community bank mergers and acquisitions are a personal matter. You can’t avoid that. Community banks are all about people. And when banks merge, frequently people lose jobs, communities lose banks, and customers may lose service.

And a community bank deal becomes personal for community bank directors for any number of additional reasons. For example…

• At some point during the negotiation process, it may dawn on a member of the board that a large number of the acquired institution’s employees may lose their jobs. These may be people that that director has known for years. They might even be friends or relatives.

• It could also be that a director is a member of the family that founded the bank 100 years ago. He or she does not want the bank to cease to be a part of the community. The family name may even be part of the bank’s name.

• Perhaps the director had a bad experience with the acquirer, if the director serves on the board of the target bank. It is hard to put aside the feelings that may surface.

• Or perhaps the director does not want to personally have to pay taxes resulting from the sale of the institution.

Whatever the case may be, the reality is that directors are human. And issues extraneous to shareholder interests may cloud their judgment.

In the best-case scenario, the community bank director should put aside his or her emotions and continue with healthy discussion. Unfortunately, that is often not the case.

When a director digs in

In my practice, I have seen many directors draw a line in the sand and refuse to compromise. Not only does this risk robbing the shareholders of potential value, but it completely annihilates any opportunity for normal, healthy discussion by board members.

No price is high enough. No concessions by the other party are sufficient.  Discussions slam to a halt.

Officially, a board can certainly approve a transaction other than unanimously. Under the charter and bylaws of most community bank holding companies, only a majority of the board is required for approval.

However, that scenario is not a favored one for a potential acquirer. In fact, most buyers want a unanimous board of directors. To push this, most transactions require the board to sign what is often called a “joinder.” This document requires the board of directors to recommend the transaction to its shareholders and vote shares personally owned in favor of the transaction.

The failure of the board to be unanimous also can create problems when the transaction is recommended to shareholders. Shareholders will immediately wonder why the board cannot make a unanimous recommendation, which often results in shareholder approval becoming more difficult to obtain.

By allowing the merger or acquisition to become personal, the director not only risks breaching the fiduciary duties that he or she owes the shareholders, but can also make it very difficult for the rest of the board to do its job appropriately.

How the chairman can step in

So what is a board to do? 

At minimum, the chairman, exercising his leadership role, should remind the entire board of its fiduciary duties to the shareholders. If appropriate, the chairman may need to counsel a director, in private, of his or her particular duties in this specific merger and acquisition case.

The chairman should remind the director that while circumstances may not be ideal on one level or another, the board ultimately must act in the best interest of the shareholders.

If the board fails to do so, the shareholders will vote for a board that will.

When the chairman’s counsel fails

Theoretically, if preliminary discussions do not resonate with the conflicted director, then further action could be taken. This might take the form of removing the director in accordance with the bank’s bylaws. Or the board may hire outside counsel to conduct a third-party evaluation of the director and to further remind the director of his or her obligations to the shareholders.

As a practical matter, however, the dissident director will typically simply resign, rather than vote in favor of the merger transaction.

I suppose in some sense this “saves face” for the director in the community so he or she can then be the “good guy” who did not sell the bank and the community down the river to the acquirer.

None of that is very appealing.

In my experience, it is rare that a director is so far gone that he or she cannot be brought back around to reason. But management and the board must be prepared for such possibilities.

Remember fiduciary duties: If you find yourself in one of the rare occasions where a director is immovable for personal reasons, the rest of the board should not be afraid to do whatever is necessary to make sure that the shareholders stay in priority position.

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish Smith Tuck Consultants, LLC, and a member of the Memphis-based law firm of Gerrish Smith Tuck, PC, Attorneys. He frequently contributes to Banking Exchange and frequently speaks at industry events.

In mid-2016 Gerrish's blog received a national bronze excellence award from the American Society of Business Publication Editors. This followed his receipt of the regional silver excellence award for the Northeastern Region from the same group.

Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish Smith Tuck has assisted over 2,000 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at [email protected]

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