Legal Advisers: Don’t Make a Deal Without Them

For years, observers of Hawaii’s banking market have speculated over a potential merger between CB Bancshares Inc. and rival Central Pacific Financial Corp. Similar-size institutions, both were founded by Japanese-Americans in the aftermath of World War II and are considered lenders of choice for Honolulu’s small- and mid-size business market. In 1999, the two sides held informal merger talks, at CB’s behest, with no result.

In 2002, the two sides revisited the issue again, with Central Pacific doing most of the talking. After a brief review, CB’s board rejected the idea. But something was different this time: CB’s stock, hammered by a period of higher-than-usual loan losses, was at a low, while Central Pacific’s was riding high. This February, the latter began buying up CB shares, and a month later Central Pacific approached CB with a bear-hug letter outlining the terms of a $70 per-share deal-roughly a 50% premium over CB’s share price at the time.

Central Pacific later went public in what quickly became the industry’s nastiest unsolicited takeover skirmish in two years. Over the next few months, the two sides traded barbs in the local media and courted CB shareholders with their own visions of the future in the runup to a heated proxy contest.

When the fur starts flying in a hostile takeover attempt, can the lawyers be far behind? Of course not. Indeed, good attorneys are considered something of a necessary evil in the chess match that inevitably emerges when one bank aquires another-whether the overture is hostile or friendly. Choosing the right law firm, with the right expertise and pedigree, can sometimes spell the difference between success and failure.

And so it was that CB wound up at the doorstep of Skadden, Arps, Slate, Meagher & Flom, the powerhouse New York corporate law firm. Skadden, along with a couple of its Manhattan neighbors-Sullivan & Cromwell and Wachtell, Lipton, Rosen & Katz-are considered the cru00e8me de la cru00e8me of takeover defense legal teams. At least two of the three firms have been involved in most of the hostile takeover battles the industry has seen in recent times, including SunTrust Bank’s unsolicited effort to break up the Wachovia Corp./First Union Corp. marriage and North Fork Bancorporation’s failed bid for Dime Bancorp in 2001.

Why? The big three all have comprehensive teams that boast experienced M&A experts, litigators, tax attorneys, proxy specialists, and the like. “We have the experience and expertise from being around these transactions,” says Fred White III, a Skadden partner who is working on CB’s defense. “People who don’t do this stuff very often simply don’t have the ability” to help mount a solid defense.

Hostile deals have long been considered particularly tough sells in banking. Not only is it nearly impossible for the predator to conduct the needed due diligence required of financial institutions, but the lack of cooperation from the target’s board doesn’t score any points with regulators. Of 34 takeover attempts in the industry since 1994, just four have been successful, according to Sheshunoff Information Services.

But observers say the likelihood of unsolicited takeovers and other proxy battles has grown in recent years, thanks to the emergence of opportunistic activist shareholders, an uncertain economic environment, the death of pooling-of-interests transactions, and what is still viewed as an overabundance of banks. With acquisition premiums typically well above trading multiples, “the truth is that most companies are worth more dead than alive,” says Kip Weissman, a Washington, D.C. securities partner with Jenkens & Gilchrist.

Institutions with a recent history of poor performance or management teams that are perceived as weak are especially vulnerable, he adds, as are those lacking a solid strategy or identity. “Activists and hostile suitors look for vulnerability,” Weissman says. “They’re opportunistic.”

Not surprisingly, Weissman, who has helped several banks in proxy battles, disputes the notion that you need to head to Manhattan for the best legal counsel. “You need lawyers with independence and experience in M&A,” he says, “but someone who’s a little feistier and hungrier than your normal deal lawyer.” That would make some regional firms that have been active M&A players, such as Dallas-based Jenkens, Bracewell & Patterson in Houston, Minneapolis-based Lindquist & Vennum, and Manatt Phelps & Phillips, a Los Angeles firm with strong political connections in California, potentially strong merger and acquisition firms.

Attorneys who answer the firefighter’s call to rescue an institution under attack generally relish the opportunity. H. Rodgin Cohen, Sullivan & Cromwell’s chairman, has touted his “fascination” with such battles. “They’re so high profile and so all-consuming. You have to eat, sleep, and drink them, morning and night.” White calls takeover defenses “the brain surgery of our business; the most interesting, intense, and satisfying work that we do,” but also admits to some mixed feelings. As the legal point man for First Interstate Corp.’s losing 1995 takeover battle with the old Wells Fargo & Co., he saw many friends’ jobs disappear. “This is an intense corporate activity,” he concludes. “The would-be acquirer has fired a gun, and the target doesn’t have a lot of control. It can be frustrating and a little disturbing.”

Staying ahead of the game

But while there’s an occasional need for attorneys to save a company from the jaws of a predator, most smart banks find that preventive medicine is the best strategy. Weissman usually walks his clients through a series of questions before anything occurs: “Are your charter and bylaws in the right shape? Are there vacancies on the board? Are your elections staggered? And, if so, are your strongest directors all coming up for votes at the same time?” he asks. “You need to think ahead about how you’ll respond and whether the right resources are available.” In the more common case of a friendly transaction, having legal counsel at the ready is just as essential. The legal adviser should examine the deal terms, negotiate any pricing mechanisms, and help navigate the institution through the obstacle course of regulatory requirements before the final handshake takes place. In addition, a well-qualified firm will oversee the due diligence process and ensure that the proper board-level governance practices are being followed.

When, however, the board is not looking to sell, the best offense is a good defense. In addition to basic tactics, such as shareholder rights’ plans, staggered boards, and golden parachutes for top executives, less-obvious moves-making sure D&O insurance policies and severance packages are strong (to embolden directors and retain key employees), maintaining good relations with shareholders, and implementing director eligibility standards-should also be considered. “If you’re a country bank, and your bylaws state that directors have to live within 10 miles of a branch, then a hostile takeover artist from New York might have a tough time finding someone to run against your directors in a proxy fight,” Weissman offers as an example.

Such efforts likely won’t win your company any awards from governance watchdogs. Groups such as Institutional Shareholder Services, not to mention large shareholders, regularly pan such tactics as working against shareholders’ interests. As a result, you risk scaring away investors, thus making your stock less valuable-and potentially leaving the bank vulnerable to attack.

But Weissman says that if your primary objective is to scare off potentially hostile suitors, then, as the saying goes, you gotta do what you gotta do. “It’s the difference between setting up barbed wire, trenches, and machine-gun nests before a battle, and having nothing,” he says. “If you get your defenses up beforehand, you can deter an aggressor and have a better chance of prevailing if there is an attack.”

Ultimately, such defenses can prove their worth. On Presidents Day 1997, H.F. Ahmanson & Co. CEO Charles Rinehart approached Stephen Trafton, CEO of California thrift rival Great Western Financial Corp., with a surprise bear-hug letter. Rinehart said, “If you don’t negotiate with us overnight, on our terms, we’re going public tomorrow morning,” recalls White, who represented Great Western. Ahmanson “had already booked flights to New York and an analyst meeting. They wanted to steamroll [Great Western], and make them believe there were no options.

“But Great Western had a staggered board and a shareholder rights’ plan, so they did have options,” White adds. Ahmanson’s scare tactics didn’t work. Later that year, Great Western found a white knight in Seattle-based Washington Mutual, which eventually bought Ahmanson, as well. In the world of takeover defenses, that’s about as happy as endings get.