A shareholder vote against executive change-in-control payments related to FirstSun Capital Bancorp's planned acquisition of HomeStreet Inc. is a sign of broader discontent with HomeStreet's management and financial performance, major investors said.
Shareholders voted against the payments by a margin of more than 700,000 votes, and Blue Lion Capital, owner of 1.3% of HomeStreet's stock, sent a scathing letter to HomeStreet's board June 27. The vote was advisory and nonbinding, and HomeStreet intends to make the payments even without shareholder approval, according to a company filing. HomeStreet declined to comment in a June 27 email.
HomeStreet Chairman, President and CEO Mark Mason is set to receive about $5.0 million in "golden parachute" compensation after the deal closes, according to the merger proposal. CFO John Michel will receive $2.1 million, and Commercial Real Estate and Commercial Capital President William Endresen will receive $2.8 million as part of the compensation agreement.
Two of HomeStreet's top 25 shareholders — Mendon Capital Advisors Corp CEO Anton Schutz and Pinnacle Holdings LLC Managing Partner Brett Kramer — said the nonbinding nature of the vote is frustrating, and the result is a sign of shareholder dissatisfaction.
Neither investor specified how their firm voted on the compensation measure, but Kramer called the valuation of HomeStreet in the merger low, and said the transaction was better for FirstSun than for HomeStreet investors, whose shares have lost value as HomeStreet's stock floundered in recent months.
"How many shareholders ended up making money here?" Schutz said. "Not very many."
In its letter, Blue Lion said it is "strongly encouraging" the company to remove the payments, which it called "egregious."
"Shareholders have been fleeced by this management team and Board," Blue Lion Managing Partner Chuck Griege wrote.
Value woes
HomeStreet became the cheapest US bank stock in January, followed by a short-lived rebound after the FirstSun deal was announced Jan. 16. The stock again became the cheapest US bank stock at the end of May, after an amendment to the merger that restructured the shareholder exchange ratio.
While the initial deal provided shareholders with 0.4345 of a share of FirstSun common stock for every share of HomeStreet common stock they owned, the ratio was reduced to 0.3867 in the amended version, effective April 30. The companies attributed the change to HomeStreet's commercial real estate exposure and the interest rate environment.
Griege noted that the change reduced the merger consideration by $30.5 million, and questioned why HomeStreet executives should receive $19.6 million in change-in-control payments while shareholders suffered. Griege blamed HomeStreet CEO Mason for the reduced valuation, alleging that Mason refused to hedge interest rate risk in the company's fixed rate loan and securities portfolios following the initial deal announcement in January, despite strong encouragement to do so by FirstSun management.
In a note before the shareholder vote, the proxy advisory firm Glass Lewis noted that golden parachute payments made up roughly 23.1% of the equity premium of the merger, a number it called "excessive."
"Although the Company may have been contractually and legally obligated to make these payments due to employment agreements, we believe shareholders should question whether the size of these awards is the best use of Company capital, and whether executives are entering this deal with the best interests of long-term shareholders in mind, or whether this excessive personal payday has shaped their judgment," the firm wrote.
Charting the course
Despite shareholder disapproval, "the merger-related compensation will be paid to HomeStreet's named executive officers to the extent payable in accordance with the terms of their compensation agreements and arrangements even if the holders of HomeStreet common stock do not approve the merger-related compensation proposal," according to a company filing.
Generally speaking, say-on-pay votes for golden parachutes are almost always nonbinding, Laura Hay, a partner at Meridian Compensation Partners, said in an interview. Companies hold nonbinding referendums because the Dodd-Frank Act requires shareholder votes, even though compensation is typically agreed upon years before any sale through employment and stock award agreements.
"Unless there's a significant amount of grievance, you don't typically see a change in course," Hay said.
Shareholder activism at US banks is at a five-year peak, according to S&P Global Market Intelligence data. Even as activism has risen, most campaigns since 2019 have failed to achieve change. In one recent example, owners of over 3 million shares of BankFinancial Corp. endorsed a shareholder proposal urging the company to hire an investment banking firm to explore a sale. The measure ultimately failed by a 2-to-1 margin.
"We have countless situations where we're not happy with management," Kramer said. "But there's not a whole lot we can do."
