Investor activism to intensify for US banks as M&A picks up

More U.S. banks could face shareholder activism as the M&A environment unthaws.

During the first two months of 2021, HoldCo Asset Management LP issued public letters to two banks addressing various concerns. While the Federal Reserve's new framework for determining investor "control" of a bank has already been driving more investor activism among U.S. banks, activism is likely to continue to increase as the M&A environment returns to normal, according to experts. More of that activism could come from HoldCo, its co-founders, Vik Ghei and Misha Zaitzeff, wrote in an email.

"While we do not pursue activism in every investment that we make, we are very comfortable adopting that role if we think that doing so will materially improve the value of our investment," they wrote. "We expect to continue to pursue activist strategies in the future."

On Feb. 8, HoldCo sent a public letter to Berkshire Hills Bancorp Inc. demanding answers regarding the company's CEO search process, plans for share repurchases and intentions to explore a sale. On Jan. 25, Berkshire Hills announced the appointment of Nitin Mhatre to president and CEO following two abrupt CEO departures in two years and recent underperformance. HoldCo had a 1.66% stake in Berkshire Hills at Dec. 31, 2020.

Berkshire Hills was not the first Boston-based bank to receive a public letter from HoldCo expressing their concerns. Of the companies HoldCo had stakes in as of Dec. 31, 2020, the largest percentage stake was in Boston Private Financial Holdings Inc. at 4.92%. On Jan. 4, Santa Clara, Calif.-based SVB Financial Group announced its proposed acquisition of Boston Private, prompting a public letter from HoldCo expressing dissatisfaction with the deal.

In the Jan. 5 letter, HoldCo questioned if Boston Private engaged in a competitive process before agreeing to the roughly $941 million deal. Hours after the complaints were made public, Scott Kavanaugh, CEO of Irvine, Calif.-based First Foundation Inc., sent an email to Ghei claiming that he had been "persistently" calling Boston Private CEO Anthony DeChellis to discuss a potential tie-up.

"We look at every investment individually and seek to tailor our approach to the unique circumstances of that particular investment. We have found that most investments benefit most from behind-the-scenes engagement with management and the board. Certain other investments, however, require ... public confrontation and advocacy," Ghei and Zaitzeff wrote.

HoldCo's second-largest holding at Dec. 31, 2020, was in Easton, Md.-based Shore Bancshares Inc., at 4.85%. HoldCo purchased the majority of its bank equity positions between July and October 2020.

"We were focusing on banks that were overcapitalized and could weather a dire and prolonged credit crisis without needing to raise capital," Ghei and Zaitzeff wrote. "In the back of our minds, like every bank investor, we knew that M&A, cost-cutting, and return-of-capital strategies, such as buybacks, could unlock substantial hidden value and that shareholder-led activist strategies would likely be helpful in making that happen, but we did not want our investment thesis to live or die based solely on the success of those strategies."

Shareholder activism pushing banks to sell will likely rise as the M&A environment heats up, experts said. "Right now, we are in a phase where that [M&A] door is increasingly open, so it's not surprising that activists are focused on that avenue as a potential value creation alternative," Sven Mickisch, a partner at Skadden Arps Slate Meagher & Flom LLP and co-head of the firm's financial institutions group, said in an interview.

Investor activism among U.S. banks has already been increasing over the past year following the Fed finalizing a new framework for determining investor "control" of a bank, Andrew Freedman, a partner at law firm Olshan Frome Wolosky LLP and co-chair of the firm's shareholder activism group, said in an interview.

"Before these new regulations and rules were adopted ... there was a lot of uncertainty for activist investors who were thinking about or who saw an opportunity where there was an underperforming bank to really help optimize that bank's performance and unlock shareholder value," Freedman said. "Now, the rules ... are much more straightforward and are much clearer in terms of the amount of influence in board representation that an activist investor can wield. What I've seen is it really serving to open the door to interest in banks."

Private engagement with the management team or board is more common than public advocacy, experts agreed. But if management or the board seems reticent to listen, the investor might choose to go public with their concerns or seek to nominate board members, Freedman said.

"An activist just going public without any private engagement, frankly, exposes the activist to a pretty easy rhetorical type of response like, 'You wouldn't even discuss this with us,'" Mickisch said.

Banks whose share prices have not recovered from the hits they took during 2020 could be most vulnerable to activism or unsolicited approaches, according to one expert.

"To the extent that there are banking institutions or community banks that fit that profile, I think they will need to be on extra guard," Richard Grossman, also a partner at Skadden Arps Slate Meagher & Flom LLP with a focus on proxy contests and responses to shareholder activists, said in an interview. "We are seeing a familiar phenomenon that we saw after the financial crisis 11 or 12 years ago."

Banks can try to avoid investor activism by regularly reviewing the board's governance documents and structures and implementing things such as staggered board structure or supermajority voting requirements, according to Jeffery Smith, a partner at law firm Vorys Sater Seymour and Pease LLP.

"While boards have to continue to address fiduciary obligations, having in place the tools to deal with unwanted overtures or the pressures that come with activist shareholders [is important]," he said. "It's a carefully choreographed dance because they have obligations to the organization and the rest of the shareholders."