The resurgence of bank mergers and acquisitions has awakened a long-dormant figure: the dissident shareholder.

As consolidation picks up, an increasing number of investors are becoming activists, either by filing lawsuits over less-than-satisfactory deal terms or starting proxy fights designed to force banks to become sellers.

While some early clashes with directors and management have surfaced, market watchers say the battles have just begun.

"The shareholders own the company, and unfortunately many boards don't believe in that," said Lawrence Seidman of Seidman & Associates, who has participated in his fair share of proxy fights. "Sometimes the board needs a little nudge … and with limited organic growth in banking, consolidation is what has to be done."

A study released Tuesday by law firm Schulte Roth & Zabel LLP and research outfit Mergermarket Ltd. found that 60% of corporate executives and 64% of so-called activist investors believe activism will heat up over 12 months. Both groups agreed that among five industries, financial services will likely have the most active investors largely because of continued restructuring in the sector and negative sentiment following the financial crisis.

In the past month, a handful of bank boards and management teams have come under scrutiny from shareholders, who generally accused them either of not moving fast enough to fix their problems — or moving too quickly to find a buyer. This catch-22 often leaves the board without a winning option, or at least one without some cost.

"It's impossible to please everybody," said Frank Bonaventure, a principal at Ober, Kaler, Grimes & Shriver. "As the atmosphere becomes more adverse, the bank spends more time, energy and money justifying what they did."

Most recently, the largest shareholder of Sterling Bancshares Inc., TAC Capital LLC, said it would nominate five members to the Houston company's board during next year's annual meeting.

In a letter filed with the Securities and Exchange Commission on Nov. 4, TAC's president and chief executive, Don Adam, said it was doing so because Sterling's financial performance relative to peers "has been very disappointing," with unpredictable credit losses and weakened earnings, among other things.

Analysts called Adam a force to be reckoned with, having built up First American Bank with 14 failed Texas bank acquisitions, then selling it to Citigroup Inc. in 2005. He is now founder and CEO of American Momentum Bank in Tampa, Fla.

"If he does succeed in getting a seat, he could influence the board for an immediate sale. And regional and foreign banks have especially expressed an interest in Texas," said John Pancari, an analyst at Evercore Partners. "The second option would be to influence an accelerated downsizing, including the divestiture of its non-Texas loan portfolio."."

A Sterling spokesman declined to comment but the $5 billion-asset company said that its board is evaluating the proposal.

"At this point in the cycle, there could be some more activist investors if certain banks are slow to recognize their credit problems or persistently chided for being behind from the rest of the industry," Pancari said.

Some banks are being criticized for taking action too quickly by selling.

Several lawsuits have been filed against sellers in recently announced deals in which shareholders are questioning whether the board performed its "fiduciary duty" in selecting the buyer and establishing a price.

A notable case is Wilmington Trust Corp., which two shareholders are suing in separate cases because of its recently announced $351 million sale to M&T Bank Corp. A Wilmington Trust spokesman declined to comment.

Often, banks and analysts argue that the proposed merger was the best — and sometimes the only — option for the bank.

"In many cases, the bank has no choice but to do what it is doing," said James Gardner, chairman of the investment bank Commerce Street Capital LLC. "Time is the enemy in a merger. And lawsuits mean time."

An investor of NewAlliance Bancshares Inc. filed a lawsuit against the company after it announced plans in August to sell to First Niagara Financial Group Inc. on claims the company could have gotten a higher price.

Analysts said they expect many more lawsuits to threaten bank deals as some banks continue to sell for book value or less, drawing the ire of shareholders who bought at the peak and suffered losses after credit deterioration clipped bank valuations. "The disconnect in bank valuations could be a catalyst for shareholder activism," said David Rosewater, a partner at Schulte Roth & Zabel.

Investors who pressure banks to sell often find themselves up against a powerful force: pride.

"Being the president and CEO of a bank in a town is a very prestigious position," said Gardner, a former banker and director of several private equity and hedge funds.

"I'm aware of several situations where the guy in charge is reluctant to sell the bank because it makes him what he is," Gardner added. "Without that job as CEO of the bank, he is nothing. So you hang onto that bank, charter or name … but sometimes, you do too much to hang onto it."

That is where activist investors like Adam and Seidman come into play.

Seidman, who is a shareholder at eight banks, argues that the investors he talks with are very realistic about bank valuations and leadership. They are watching these banks closely and are ready to up the ante.

"There are more opportunities to make money in the community banking space than there was nine months to two years ago," he said. "This business is simply a business of evaluating people. You either have somebody capable of running it, or selling it."


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