Page 28 - Spring 2024_Neat

FROM THE BOARD ROOM

Dealing with Difficult Stock Issues

BY PHILIP K. SMITH and CHARLES PLUNKETT

First, in a bit of a hyper-technical way, the
A common issue confronting many community banks, as the
problems that exist with the “old way” of
shareholder base gets older or interest in owning community bank having the President facilitate the buying
stock becomes less appealing, is how to create a market for the shares and selling of shares is not so much one of
and liquidity for the shareholders. The question becomes, what should a conflict of interest, as much as it is
you do if you are trying to create a market for your stock in order to putting a person between the buyer and
make it more liquid, encourage trading, and thereby drive up the price seller (in most cases, the President), who Philip Smith is Chairman &
of the shares, but it doesn’t work? An organization may decide (or be is then in the untenable position of being CEO of Gerrish Smith Tuck,
encouraged) to “list” their shares in one or more ways in an attempt to an unlicensed broker of securities. If you Consultants and Attorneys
create some type of quasi-market trading that could thereby drive are helping to facilitate the transaction, an ACB Associate Member.
perceived “market value” for their shares that stockholders could providing information about the value, You may connect with
access. Often, it is believed that can be accomplished through a private information on past trades, what the Philip at
listing service, having your stock “traded” on the pink sheets, or even outlook for the organization might be, etc., (901) 767-0900 or
going to the point of somewhat formally having your shares listed on that is not a position the President should psmith@gerrish.com.
the OTCQX exchange. The problem, though, is that unless you have want to be in or ought to be in. The
multiple thousands of stockholders, you are likely to find that merely President likely is not a licensed broker of
being “listed” on those exchanges creates absolutely no additional securities. So, rather than just conflicts of
value.
interest, it is fraught with potential legal
In many situations, an organization may find that its stock, when exposure.
trading on those exchanges (to the extent it trades at all), will still trade We have found the best practice is to
at book value or less, and that book value is often less than the avoid taking the step of matching buyers
inherent value of the organization on a per share basis if it were to sell. and sellers or even providing a list to
The perception of a “market price” never materializes. Why is that? either side. Rather, the holding company
The answer is that most organizations that are listed in that way are itself should be the “buyer of first resort”
not truly large enough to materially impact the price of their own that makes a market in the shares for
shares. For example, if a $900 million company lists their stock on the stockholders. The Board of Directors, by
OTCQX, and the following week Wells Fargo announces some material Resolution, could authorize the President
fraud loss, it is likely that the community bank stock on the exchange to purchase shares from stockholders who
will decline merely because the general market for all bank stocks has approach the organization, within certain
declined, even though the community bank may be performing parameters (such as paying up to a certain Charles Plunkett is an
extremely well. attorney with Gerrish Smith
amount, buying no more than a certain Tuck, an ACB Associate
So, if “listing” the shares in the ways described above does not drive number of shares in one block, etc.). Member. You may connect
value, then what is the best way to handle the situation of creating a When the holding company repurchases with Charles at
market? Our advice might be different than what you would expect, shares, particularly where it simply uses (901) 767-0900 or
but it has been to simply ignore the “market value” and ignore what is excess capital resources or cash at the cplunkett@gerrish.com.
happening on the exchange, and use your holding company to create holding company to do so, the
your own market, buy back shares, and drive up the price. In order to organization as a whole is materially benefitted. Key metrics like
have a true market value, you must have a true market, and most of earnings per share, return on equity, and dividends per share all
those listing services for smaller organizations simply create no more typically go up. In addition, all stockholders have their ownership
liquidity than is created by a holding company repurchasing its own percentages increased without spending any of their own money. So,
shares. it is a great use of existing capital resources, it provides a market for
stockholders willing to sell, and the selling shareholder receives the
Traditionally, at the organizational level, there have been two options liquidity they desire on a quick basis.
for creating a market. The first option, as discussed above, is having the
holding company buy shares. The second option that we see many Further, when the holding company repurchases shares, unless it is a
community banks use as their default is keeping a list of buyers and very large block purchase (normally 10% or more of the organization’s
sellers and having the company or the President try to match those up net worth), there is typically no regulatory approval involved, so the
to facilitate your own “market” transactions. The benefit to the second process can happen quickly. Even if it is more than the 10% threshold,
option is the organization does not have to expend its own capital and there are still other exceptions that apply that may avoid the necessity
it helps keep control within the organization, or at least the of any regulatory approval.
organization has knowledge of what is happening with buying and
In these circumstances, the holding company can set the price
selling shares. However, for the following reasons, using the holding
wherever it desires, within its fiduciary duties. In addition, the holding
company to create a market is likely the preferred method to having
company has the obligation of full disclosure and honesty in dealing
someone at the organization, likely the Bank President, act as
with a shareholder that wants to sell, but there is no requirement to
matchmaker.
pay a particular price since it is a voluntary transaction on the
A RKANSAS | 28 | Spring 2024
COMMUNITY BANKER