Shareholder Activist Plots a Hostile Takeover Within BHCA Rules

Shareholder Activist Plots a Hostile Takeover Within BHCA Rules
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Shareholder Activist Plots a Hostile Takeover Within BHCA Rules

Activist investor, Douglas Schaller has been in battle with Floyd, Virginia-based Cardinal Bankshares Corporation (Cardinal). Schaller is represented on  the board by Schaller Equity Partners (SEP), Schaller Equity Management, Inc. and Schaller Investment Group Incorporated, held a 8.3% stake in cardinal before increasing its holding to 9.8%.

In June 2011, the two parties were involved in a war of words after it was revealed that SEP was planning to use proxies to gain the majority voting block on the board. It is believed that Schaller’s initial option was to force cardinal to sell, an avenue that he later backed off from, this time with an excuse of pushing for change in management. On the other hand, Cardinal remained dormant, repelling Schaller, and stating that his goal was to sell Cardinal.

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Cardinal has taken all steps possible to stop Schaller and his entities from qualifying as a Bank Holding Company (BHC) through proxies, which would  make it compliant to Bank Holding Company Act (BHCA). This is Cardinal’s greatest fear, as this will make it very easy for Schaller to take over the company through proxies. However, Cardinal realized its worst fears on May 22, when Schaller and company took over the board by electing three new board members. The former three were invited back to the board with only one accepting the invitation.

Enroute to this occasion, Schaller had consistently overlooked Michael Larrowe as a candidate to keep the position of CEO. However, the new board has taken a drastic change of its mind, after it approved Larrowe to become the CEO of the bank, something he described as an apology accepted. When asked about his unexpected change of mind, Schaller said that Larrowe “consistently chose the high road” during the board campaign and “will be a leader with integrity.”

Bank of Floyd has a market cap of approximately $272.5 million as of March 31 financial reports. The company is one of the remaining few community banks with personalized services and operates in five counties in Virginia. The Bank of Floyd is not close to the size of  Wells Fargo, or Bank of America, but there is good reason the activist investor, Mr. Douglas Schaller has pushed to take over the control of the company.

Source: Victor I. Lewkow, Cleary Gottlieb Steen & Hamilton LLP, Harvard Law School

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