LCNB Corp, Lebanon, OH (LCNB)
Shareholder Proposal Shenanigans at LCNB
As an investor stuck owning shares of several banks that deserve a kick in the pants, I took my own advice and delivered a few shareholder proposals of my own, as recommended in Timyan Bank Alert's October 2023 post.
Sadly, one of my proposals wasn't sufficiently air tight. Bad faith actors look for loopholes and technicalities to exploit. In my shareholder proposal to LCNB Corp, I made it too easy for LCNB to do what was perfectly predictable it would do.
If you are a qualified shareholder looking to submit your own proposal to an underperforming bank, please read my summary below of the weak link in my LCNB proposal, so your own proposal has a higher chance of success.
Disclosure: As of this posting, I unfortunately own shares of LCNB and may subsequently either dispose of them or purchase more.
Prospective Buyers
There's no shortage of competently managed, acquisitive banks that would happily and skillfully put LCNB's assets to better use for shareholders, customers, and communities. I'd be thrilled to see the bank sold to any of these three, in particular:
First Financial Bancorp, Cincinnati, OH (FFBC)
Park National Corp, Newark, OH (PRK)
Peoples Bancorp, Marietta, OH (PEBO)
Financial Snapshot
Scoundrels
Spencer S. Cropper, Chairman
Eric J. Meilstrup, President and CEO
William G. Huddle, Director
The Skinny
How Banks Respond to Shareholder Proposals
When you submit your shareholder proposal to a bank, the bank has a legal right to report any deficiencies it sees in your proposal via a No Action Request to the SEC. If you're submitting a shareholder proposal, you should be prepared for this possibility.
Banks operating in Good Faith won't bother. They'll put your proposal in the proxy for the next annual meeting and shareholders will get to vote.
Banks like LCNB will spend tens of thousands of dollars to find or invent "deficiencies" they hope will excuse them from legal obligation to allow the proposal to proceed to a shareholder vote.
Where Timyan's Shareholder Proposal to LCNB Went Wrong
Ultimately, one paragraph made it easy for LCNB to get around having to present my proposal for a shareholder vote.
The "deficiency" my proposal provided LCNB's outside counsel was a loophole that allowed the bank to pretend it had already met the Substantially Implemented Rule 14a-8(i)(10) by hiring an investment bank to – allegedly – "begin evaluation of the potential outcome of a sale or merger," rendering the need for a shareholder vote presumably unnecessary.
In reality, LCNB hired an investment banker to do exactly the opposite of what the bank represented to the SEC. LCNB has not begun and has no plans to begin "evaluation of the potential outcome of a sale or merger." It hired an investment banker only to pursue acquisition opportunities.
Two weeks after receiving my proposal, LCNB announced the acquisition of Eagle Financial Bancorp.
Remarkably, CEO Eric Meilstrup is now unabashedly broadcasting to reporters that his stated mission is decidedly NOT to pursue a sale of the bank as my proposal recommended and as he personally represented to the SEC, but to remain independent and to grow the bank via acquisitions. The scoundrel is quite gleeful to have deceived the industry's highest regulatory body and robbed LCNB shareholders of an opportunity to vote on the bank's strategic direction.
Stronger Language Timyan's Proposal Should Have Used
The loophole my proposal gave LCNB, was the "out" of being able to say it "[began] evaluation of the potential outcome of a sale or merger."
As written, my proposal made it easy for LCNB to lie in its No Action Request to the SEC, in which the bank pretended its step of hiring an investment banker was sufficient action toward fulfilling the intent of my proposal, when the assignment LCNB gave the investment banker was directly counter to the proposal.
My shareholder proposal to LCNB included this paragraph:
RESOLVED, that the Stockholders of LCNB Corp recommend that the Board of Directors immediately engage an investment banking firm experienced in community bank mergers and acquisitions to guide the Company in promptly taking steps to merge or sell LCNB on terms that will maximize stockholder value.
Future shareholder proposals I present will include language more like this to preclude false claims of "substantial implementation”:
RESOLVED, that the stockholders of the Company, believing that the value of their investment in the Company can best be maximized through a sale of the Company, hereby request that the Board of Directors promptly proceed to effect such a sale by (i) retaining a nationally recognized investment banking firm for the specific purpose of soliciting offers to acquire the Company by way of merger, asset sale or otherwise and (ii) establishing a committee of the Board of Directors consisting of directors, who are not current or former officers or employees of the Company or related by blood or marriage to a current or former officer or employee of the Company, and who otherwise qualify as independent directors, to consider and recommend to the full Board of Directors for approval the best available offer to acquire the Company.
Sources
Bank
LCNB's No-Action Request to the SEC
Articles
November 2023 RTT News article
March 2024 Cincinnati Business Courier article
Other
Denver Law Review of SEC Rule §14a-8
September 2008 Ohio Revised Code re: Cumulative Voting
Confidential interviews with shareholders, analysts, and Ohio bankers
Phil,
Thank you for the updates and sharing your lessons learned with others. I once had a small commercial property that I rented and that seemed to attract the worst tenants. Each new tenant showed me something new that I had protect against myself against and my tenant agreement grew larger and larger with new paragraphs containing the new things I learned from the last tenant. I imagine you may be yet making a few more changes in the future in response to new ways management finds to thwart your shareholder proposals.
If you don't like the bank why not just sell your shares? It's not like the bank is screamingly cheap, you can pick up far better banks for less than 84% of TBV.