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Who says you have to cave to M&A sharks?

Maryland banker decides he’d rather fight it out

Who says you have to cave to M&A sharks?

Time is money, and money is, well, money, but sometimes you have to put aside expediency to save both, and do something out of sheer principle—even if it adds time and expense to a process or proceeding. That’s the choice Maryland banker Jim Cornelsen faced recently when an attorney specializing in shareholders’ rights cases went after his Old Line Bancshares and its most recent merger partner, WSB Holdings, Inc. It was one of those filings intended to generate a reason for someone to be paid to go away.

Cornelsen, president and CEO, wasn’t going to play that game and fought back. Last November, the bank won. It meant less money spent, but that’s getting ahead of the story.

At the outset, Cornelsen simply saw the matter as black-and-white:

“I did it on the basis of fundamental right and wrong. It’s just wrong to settle just because it’s expedient.”

Two-stage process: rapid attack

On Sept. 10, 2012, Old Line, of Bowie, Md., and WSB, parent of $374 million-assets the Washington Savings Bank, also of Bowie, announced plans to merge. At the time, the merger was projected to create a $1.2 billion holding company. The very next day, the Levi & Korsinsky LLP law firm set up a website seeking dissatisfied WSB shareholders, whom it could represent in a shareholders’ rights suit. The firm’s request form stated that:

“The investigation concerns whether the WSB Board of Directors breached their fiduciary duties to WSB stockholders by failing to adequately shop the Company before entering into this transaction and whether Old Line is underpaying for WSB shares, thus unlawfully harming WSB stockholders.”

Clicking a box automatically generated a form for retaining the firm, plus this language (the significance of which will become apparent later):

“We agree to advance all expenses in the litigation, which means that you are not liable to pay any of the expenses of the lawsuit, whether attorneys’ fees or costs. Regardless of the result, we will never ask you to directly pay for any attorneys’ fees or costs. Should we obtain a favorable result, we may ask the court to award us compensation to be paid by the defendants or as a portion of any class benefit, but, again, we will never ask you to directly pay any of the costs of this litigation. [Emphasis added.]

“As the client you are entitled to direct the litigation in any way you deem proper, and may at any time order us to dismiss the case or opt-out. Should you choose to do so, we will never ask you to reimburse us directly for any legal fees or expenses. . . .”

One shareholder, Rosalie Jones of Maryland, was selected as the plaintiff representing WSB stockholders. Under current law, it only takes one plaintiff to launch a class-action suit if the court can be persuaded that the individual represents a bona fide class.

Getting to particulars

The suit was served on the bank in late October 2012, the case having been filed in the Circuit Court for Prince George’s County, Md. The suit charged that “The Board has breached their fiduciary duties by agreeing to the proposed transaction for inadequate consideration.” Old Line was accused of aiding and abetting the WSB board in its alleged misbehavior, with the plaintiff’s complaint going so far as to question the invitation to the target bank’s chairman and one other WSB director to join Old Line’s board.

The suit’s goal: halt transactions until “defendants cure their breaches of fiduciary duty.” The class-action complaint charged that “Despite the significant synergies inherent in the transaction with Old Line, however, the Board failed to secure a fair price for the Company, either for the intrinsic value of its assets or the value of the Company’s assets to Old Line.” The action also opposed provisions in the acquisition deal that would “lock up” WSB for Old Line.

The complaint further accused the defendants of providing insufficient data to shareholders to make an informed vote. And the WSB board was criticized for not exploring other potential partnerships.

Deals as lawyer ATMs

Frequently, acquirers faced with such suits attempt to settle at some price to avoid delays, so there is a cadre of firms specializing in such actions. (Typically, such cases involve at least one public company.) A community bank attorney says it’s known that these firms all along intend to settle, in some fashion, for fees and, perhaps, something for shareholders.

The threat of undoing or delaying a deal can be persuasive.

“There’s a perception that these firms can scuttle a deal, or, at least, slow a deal,” says Frank Bonaventure, principal at Old Line’s law firm, Ober, Kaler, Grimes & Shriver P.C. By the time an acquirer has taken a potential deal through to formal announcement, much time and money has already been spent, and the natural inclination can be to spend more to keep things moving. Cornelsen believes such actions are pursued against banks in the belief that banks are afraid to push back.

“I was not surprised” by the suit, says Bonaventure. When the firm performed a litigation risk analysis on the merger, research indicated a strong chance that a shareholders’ rights firm would attack it. But Cornelsen says the defendants were confident they’d structured a fair deal and went ahead, in spite of the complaint filed.

Settling, but not on fees

After the lawsuit was filed, negotiations resulted in a memorandum of understanding in which Old Line and WSB agreed to make additional disclosures to shareholders regarding the proposed merger. No financial remedy was included in the agreement, which was subject to court review. So far as the deal structure and pricing, says Cornelsen, “nothing changed.”

Cornelsen dismissed much of what was added to disclosures as “superfluous changes in wording.” In court papers, the bank pointed out that neither the plaintiff Jones nor her law firm contacted the banks prior to filing suit in any preliminary attempt to obtain further information.

Another element of the proposed settlement was agreement that at a future point, the plaintiffs would seek attorneys’ fees and court costs, subject to the defendants’ agreement as well as the court’s approval.

Frankly, says Cornelsen, “we knew this was basically a way to substantiate their legal bill.” He says he’d heard such bills could come close to $1 million, leading banks to negotiate settlements of so much on the dollar.

Characterizing the affair as “a little bit of a cat and mouse game,” Cornelsen decided not to give in. (Meanwhile, the merger was completed in May 2013, with WSB shareholders voting 98.6% in favor of the deal.)

Second-stage: fighting the bill

The plaintiffs’ firm eventually requested $400,000 in fees and costs—down from the potential $625,000 figure mentioned in public announcement of the settlement. Old Line’s law firm fired back:

“This lawsuit has, from the outset, been nothing but a baseless strike suit seeking to disrupt a bank merger under the guise of a class action and to pad the pockets of Plaintiff’s counsel—without providing any value to the actual Plaintiffs. Indeed, the putative class counsel has filed dozens (if not hundreds) of similar actions nationwide. Plaintiff’s counsel now asks the Court to approve a six-figure application for attorneys’ fees and costs in this matter.

“These actions invariably settle with an agreement that requires the defendants to provide additional (and unnecessary) disclosures, but does not make any adjustment to the sale price because none is necessary. Indeed, these are the very terms that the litigants agreed upon in the settlement that is now before the Court for final approval.”

Notably, the bank’s lawyers continued the argument to point out exactly who would be paying for the fees and costs if Old Line didn’t fight the bill:

“This case differs from most others . . . In the other actions the defendant ultimately ‘rolls over’ and consents to opposing counsel’s excessive fee application so that it may put the matter behind and focus on its normal business activity. Old Line Bancshares rejects that approach and opposes the Fee Petition because it is unwarranted and unfair to Old Line Bancshares shareholders (who include the class members, the former WSB Holdings, Inc. (“WSB”) shareholders) and employees—each of whom will bear the burden of paying any such award.” [Emphasis added.]

The bank’s reply also speculated about Levi & Korsinsky’s jumping on the case—before final disclosures had been filed with the SEC: “More likely, the only urgency was Levi & Korsinsky’s desire to position itself to become lead counsel in order to maximize its opportunity to collect attorneys’ fees.” And it noted that many initial accusations fell by the wayside.

And the judge rules . . .

On Nov. 12, Maryland Associate Judge Crystal Mittlestaedt ruled on the fees and cost part of the case.

“Just because this lawsuit was filed, is not in and of itself sufficient to entitle an award of fees and expenses,” Judge Mittlestaedt said, according to a transcript. “. . . I think one of the things that were really concerning for me, that made a big difference in terms of how I’m going to decide this case is the issue of whether this was a meritorious lawsuit filed.”

She noted that the suit was filed “prior to any harm to the shareholders, prior to any initial disclosures. Basically, without a factual basis to support this claim, that there was a breach of fiduciary duty related to this merger. And for this, the Court determines that the lawsuit was not meritorious . . . So I deny your request for attorney fees in this case.”

She added that her decision affected any claim for expenses. The settlement was otherwise approved.

In the meantime, the merger has gone well and appears to be living up to its potential.

For the industry at large, says Bonaventure, “What we’ve found is, you can fight these.”

Steve Cocheo

Steve Cocheo’s career in business journalism has taken him to all 50 states and nearly every corner of banking in institutions of all sizes. He is executive editor of ABA Banking Journal, digital content manager of ababj.com, and editor of ABA Bank Directors Briefing. He coordinates the popular Pass the Aspirin and First Person features and wrote the booklet series Focus On The Bank Director. He is the only journalist to have sat in on three federal banking exams, was a finalist for the Jesse H. Neal national business journalism awards, and a winner of multiple awards from the American Society of Business Publication Editors.

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