John Porter Price and Virgil Trotter, two of the 11 Union Bank shareholders listed as defendants in a December lawsuit filed by the bank, say Zach McClendon, the bank’s chief executive officer and board chairman, used a merger and conversion to an “S” corporation as a vehicle to “squeeze out” the shareholders and pay them less than fair value for their stock.
McClendon declined to comment, citing the pending litigation.
“The public can make up their mind on whether it is true or not,” McClendon said. “The truth will always come out in the end.”
The defendants listed in the lawsuit are long-time Union Bank shareholders Lucy Jackson Cyphers, Charles E. Jackson, Jr., Jimmie Jo Jackson Leech, Deborah Jackson Thornhill, Marsha R. Moffatt Daniels, William R. Daniels, Ruth C. Moffatt, Patricia T. Kirkland, William Yates Trotter, John Porter Price and Virgil Trotter, whose grandfather in 1899 founded one of the two banks that would later merge to form Union Bank.
First Union Financial Corporation, the holding company of Union Bank & Trust in Monticello, filed the lawsuit against the 11 shareholders following their demand for fair value for their shares in a merger that closed in late September. The bank petitioned the Drew County Circuit Court to determine the fair value of the defendants’ stock.
The bank says the stock is worth $182 per share.
Union Bank offered their shareholders $182 per share for their stock, which is 72 percent of $252 book value as of December 31, 2012. The bank arrived at that valuation through its review of the bank and the banking industry and an ESOP (Employee Stock Ownership Plan) valuation report, according to the lawsuit.
“Basically it’s a squeeze out,” Trotter said in a recent interview. “If you represent controlling interest, you can force the other shareholders to sell their interest to the bank.”
Prior to the merger, the McClendon family collectively held 68.48 percent of the shares of stock in the bank. After the merger, the family held 87.10 percent of the stock, according to an exhibit in the 372-page lawsuit.
Price said he is convinced the motivating factor is greed.
“I am completely convinced nothing but greed is driving this — greed on (McClendon’s) part — because he had enough stock he could do anything with the bank he wanted to,” Price said. “He just wanted more.”
The purpose of the merger was to reduce the overall number of shareholders in connection with the bank’s election to convert from a “C” corporation to an “S” corporation for federal and state income tax purposes, according to the lawsuit.
In 1996, Congress passed legislation allowing banks the opportunity to elect subchapter “S” taxation. The law quickly resulted in subchapter “S” conversions by many financial institutions across the country.
Commercial Bank in Monticello converted to an “S” corporation several years ago. That conversion went smoothly with little dissent, according to Trotter and Price.
“Commercial Bank just went through this procedure and they sent out a nice letter to all of their shareholders,” Trotter said. “They said, ‘We’re going to do this. If you would like to be an ‘S’ corporation shareholder, this is what will change. If you don’t want to do that we’ll pay you a fair price for your stock, which is book value, and if you don’t like that, we’ll negotiate…’”
“They had one dissenting stockholder and they negotiated with him,” Price added.
Price said he asked McClendon if he would take $182 per share for his stock.
“He said, no, he wouldn’t take it because he owned control and his stock was worth more than that,” Price said. “And I said, ‘But you’re asking us to sell it for $182′. And he said, ‘That’s all it’s worth.’”
Had McClendon offered book value, Price said, the dissenting shareholders would have taken it without dissent because the lawsuit is costing them a great deal of money.
“If he’d done what Bennie (Ryburn) did and offered his stockholders book value, we would have sold the stock and never said a word,” Price said. “We’re sorry we had to sell the stock but we understood the process.”
Trotter and Price, both long-time Union Bank directors, said Union Bank had not paid a dividend to its shareholders in more than 10 years but now that the bank is beginning to make money the shareholders are being forced out, at a reduced price.
“The price that he is projecting to buy almost a quarter of the equity in the bank is on the cheap at a bargain price of $182,” Trotter said. “The stock is worth much, much more than that and the statute is set up to prevent predatory owners, like the McClendons in this case, from feeding on the minority interest shareholders by requiring a majority owner to pay fair value which doesn’t distinguish between majority share and a minority share.”
To complicate matters, the process was heavily lawyered, Trotter said, referring to the thick packet of materials outlining the process required to dissent.
Trotter said the stack of materials was so large that the average shareholder would have to hire a $200-an-hour lawyer to explain it to them. As a result, most shareholders decided to accept the offer and cash in their stock.
“You had to get a lawyer to answer them in a specific way and if you didn’t, you lost out,” Trotter said. “Their intent was to make this as difficult as possible for their shareholders; that’s the real guiding point.”
All shareholders, except the defendants and one other shareholder, accepted the $182 per share offer. The other shareholder, Dermott Distributing Co., did not submit a timely dissent, according to the lawsuit.
Ultimately, the Drew County Circuit Court will determine the value of the stock.
Price said the shareholders, whose families have supported the bank for many, many years, are crushed.
“This is not about money,” Price said. “It’s about integrity and honesty.”
In a July 10, 2013 letter to McClendon, Price asked to be removed as an honorary board member of Union Bank:
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 buy out that I only recently became aware of just how unfair this buy out 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.
John Porter Price