“Few banks wanted to mess with Texas during the savings-and-loan crisis of the 1980s and 1990s. Now, a rare auction of one of the state's independent financial institutions is attracting plenty of interest.”
Although Sterling Bancshare is a Texas corporation, I want to make a point about this process and Delaware law. Sterling has placed itself on the auction block and is accepting offers. A number of banks with a presence in Texas have shown interest and will likely place bids on the company. Although Texas law applies this situation, Delaware law tends to be standard and the same doctrines may apply here. In Delaware, when a company puts itself up for sale, there is a fiduciary duty called the Revlon Duty that kicks in. Essentially when a sale/takeover becomes inevitable, the target company’s board of directors has the duty to maximize shareholder value. To do this it cannot play favorites. An open bidding process insures that the company receives the maximum bid. It may seem silly that I explain this all, but it is something that came up recently in an MBA group project. It was a strategic exercise where a dairy company wanted to become more like Whole Foods with the hope of being acquired. I had to bite my tongue for the good of the project, but an acquireree cannot target an acquireror. Courting your purchaser constitutes playing favorites and it does not welcome an open bidding process that maximizes shareholder value.
Returning to Sterling Bancshare, they are conducting an open bidding process and will probably maximize their purchase price. The other interesting thing about this sale is the proxy fight Sterling is facing from its largest shareholder. Proxy contests are generally very straightforward. Each voting share gets a vote and the most votes wins. If one individual has 100 shares, he or she gets 100 votes. The process has become more questionable due to the limited time and resources of institutional investors.
Typically and institutional investor, like a mutual fund, will own shares in hundreds of different companies. Because of this large number of investments and limited time and resources, institutional investors are not able to properly research every proxy they can vote on. In response to this, companies like Risk Metrics (Institutional Shareholder Services) have come along to assist institutional investors in proxy voting. They do the research and the shares get voted.
It seems like a simple idea where everybody wins, but it does create an agency problem. Under traditional agency theory, directors and manages run the company. The agency relationship between them and shareholders governs their actions and keeps them inline with shareholder interests. Naturally, when shareholders are asked to vote on more substantial issues, like the sale of the company, self-interest directs the vote. Introducing Risk Metrics and other proxy advisors into the process complicates this issue. Institutional investors tend to blindly follow risk Metrics’ recommendations. This gives the proxy advisor significant influence over decisions in which it has no stake. It will be interesting to see where Risk Metrics and other proxy advisors come down on this the Sterling Bancshare sale. Regardless of it they comes down, its vote will most likely drive the outcome.
For more on the proxy advisory industry and agency theory, see Tamara C. Belinfanti, The Proxy Advisory and Corporate Governance Industry: The Case For Increased Oversight and Control, 14 Stan. J.L. Bus. & Fin. 384 (2009).
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