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Publicly traded community banks seeking acquisition should expect to see some lawsuits before everything is said and done. 

Shareholders, some controlling less than 100 shares and represented by big law firms, have gone after community banks in Massachusetts – mostly sellers – during mergers or acquisitions, seeking small fees in a timely manner. 

The cases rarely proceed to court and are typically withdrawn by the plaintiff, but still have had some success against community banks that want to avoid lawsuits. 

“I think it’s fair to say that most of these cases don’t serve any purpose other than for plaintiff’s lawyers to have a business model to earn some fees,” Deborah Birnbach, a partner at Goodwin Proctor, told Banker & Tradesman. “After you see so many of these cases, you can almost predict what they are going to say without reading them.” 

Suits Claim Breach of Fiduciary Duty 

The lawsuits typically allege that the bank’s holding company and its board of directors violated federal securities laws or breached its fiduciary duties by omitting certain material information from its definitive proxy statement. 

Once a merger or acquisition is announced, stock banks must submit a proxy report that details certain “material” information regarding the events that led to the merger, such as all the times the bank’s board met, and the different bidders interested in purchasing the bank. 

“And if you do that, [the plaintiffs] will say, ‘Well, you didn’t disclose what you had for lunch,’” Birnbach said. “There is always more you could say, but that doesn’t mean your proxy statement is materially misleading when you don’t. That is the nature of these complaints.” 

Not all shareholder lawsuits are frivolous, however. 

Birnbach said similar claims that do end up being litigated tend to have a true conflict of interest at hand – that just hasn’t been the case with many of the lawsuits against community banks in Massachusetts. 

Cases Filed Against Blue Hills, Pilgrim, Coastway 

Shortly after Brockton-based HarborOne Bank announced its acquisition of Warwick, Rhode Island-based Coastway Bank in 2018, Coastway disclosed in a regulatory filing that its holding company and board of directors had been sued twice regarding disclosures. 

Later in the year, Hometown Financial Group acquired the much smaller Pilgrim Bank, and Pilgrim Bank in a regulatory filing disclosed that it received a demand letter, saying that the bank omitted certain information regarding the transaction.  

Most recently, Blue Hills Bancorp, which is being acquired by the parent company of Rockland Trust, notified the public in a regulatory filing that it was being sued for similar reasons. 

The cases against Coastway and Blue Hills were dismissed, and it is unclear if the banks had to pay fees to the plaintiffs, as executives at both banks declined to comment.  

In addition to attorney fees, shareholders can apply for a mootness fee from the bank, which they are entitled to if the additional disclosures provide some benefit to stockholders, whether or not they were material to the vote.  

In the case of Pilgrim, the bank said in a filing that it had made additional disclosures, making it more likely that the shareholder behind the demand letter might have gotten some sort of fee. Executives at Pilgrim Bank declined to comment on the matter. 

Some shareholders in these lawsuits are repeat offenders.  

A shareholder named Paul Parshall sued both Blue Hills and Coastway after being involved in similar lawsuits over different M&A deals across the country. Efforts to reach one of Parshall’s law firms in Maryland were unsuccessful. 

There also seem to be law firms encouraging these types of suits. In the case against Blue Hills, several law firms issued press releases looking for shareholders that would allow these law firms to represent them. 

Those law firms include Monteverde & Assoc., Bragar Eagel & Squire and Lifshitz & Miller LLP, all based in New York, and Delaware-based Rigrodsky & Long. None of the firms returned calls from Banker & Tradesman seeking comment. 

Lawsuits Frequent, But Numbers Declining 

Lawsuits regarding disclosures and fiduciary duties during a merger are not unique to the banking sector and have been going on for years. 

In the past, they were referred to as “the merger tax,” Birnbach said, and law firms used to pursue injunction-based suits to prevent a deal from going through unless there was a settlement, which would result in a much larger sum for the plaintiffs than they get now. 

Shareholders challenged more than 94 percent of U.S. merger and acquisition deals valued at over $100 million in 2013, according to a report by Cornerstone Research. That number fell to 73 percent in 2017. 

Birnbach said a court ruling regarding Zillow’s acquisition of Trulia in 2014 explains part of the drop-off. 

A shareholder had sued both companies regarding disclosures and pushed for a settlement.  

Bram Berkowitz

The Delaware Court of Chancery rejected the proposed settlement in January 2016, saying that because “none of the supplemental disclosures were material or even helpful to Trulia’s stockholder,” the proposed settlement “does not afford them meaningful consideration to warrant providing a claim release.” 

The U.S. Supreme Court has agreed to hear a lawsuit from shareholders of Emulex Corp. and Avago Technologies Wireless Manufacturing, alleging the Emulex’s sale price in their merger with was too low. In an earlier ruling in the case, the 9th Circuit Court of Appeals said shareholders only need to show negligence, not actual intent of wrongdoing. 

If the Supreme Court upholds the 9th Circuit’s ruling, these cases will continue, Birnbach said. But a reversal could lead to another decline. A ruling is expected by late June. 

For now, Birnbach recommends that community banks think carefully about making additional disclosures when they are sued. A disclosure might only be made for only one plaintiff, but after the suit is settled, another three or four lawsuits might emerge. 

“Our best advice is: disclose what you should disclose and don’t mislead people, and in general, our clients are very much interested in doing that,” she said.