City Bank takeover bid far from a done deal
By John Duchemin
Advertiser Staff Writer
When announcing its planned hostile takeover of Honolulu bank City Bank, local rival Central Pacific Financial Corp. portrayed the merger as a done deal.
"It will be good for our shareholders, good for our customers and most importantly good for Hawai'i," said Central Pacific chairman Clint Arnoldus in an April 16 news release, speaking as if the merger is inevitable.
In reality, however, the $285 million buyout offer for City Bank parent CB Bancshares is not only not "done," it may never come close unless City Bank management decides to go along with the takeover, legal experts say.
"If City Bank fights tooth and nail, the transaction costs will get horrendous," said Allen H. Sakai, a corporate lawyer at Honolulu law firm Chun Kerr Dodd Beaman Wong and author of "Buying and Selling a Business in Hawaii," a 1989 publication of the National Business Institute.
"The longer this drags out, the more it will cost. A lot depends on how hard Central Pacific wants to get the company."
City Bank officials say they are seriously considering the proposal, but rejected early Central Pacific requests for direct negotiations, and have not said whether they will approve the takeover or fight to stay independent.
Central Pacific's Arnoldus says his bank is prepared for battle, and company officials say they have strategies designed to deal with possible City Bank blocking tactics. Nonetheless, Central Pacific faces a company heavily fortified against unsolicited buyouts.
City Bank's defenses are loaded with "shark repellents," investor jargon for strategies used to discourage corporate raiders. Since the takeover blitz of the 1980s and early 1990s, such measures have become commonplace.
Embedded in City Bank's corporate rules, for instance, is a "poison pill," a nasty little measure that serves as a last-ditch defense against a shareholder acquiring a large amount of City Bank stock.
If anyone buys more than 20 percent of City Bank's shares, the pill will release its poison. In this event, all current City Bank shareholders — except for the hostile buyer — will be entitled to buy additional shares at half the market price.
The poison pill would thus flood the market with cheap new shares, which would probably cause a disastrous dilution of value for all City Bank stockholders — but would severely reduce the percentage of shares owned by the would-be buyer. This is a scenario that buyers and sellers both generally want to avoid.
To evade that semi-suicidal defense, Central Pacific has said it is willing to engage in a "proxy fight" — an attempt to win over City Bank shareholders, without actually buying their shares (and thus not triggering the poison pill).
The proxy fight essentially began when Central Pacific dangled its $70 per share offer in front of City Bank stockholders' noses. The offer has already garnered approval of two of City Bank's largest institutional investors. City Bank's largest investor, Dutch investing firm TON Finance, has formally ceded voting control of its shares to Central Pacific, giving the bank a 9.9 percent voting stake in City Bank.
City Bank's arsenal, however, contains weapons designed to dilute the power of such a proxy majority. More than 75 percent of City Bank shares must vote in favor of a merger. Even if Central Pacific gets that large a majority, City Bank is structured in such a way that shareholder approval of the merger is virtually meaningless without management consent.
The company's rules state that the 10-person board of directors needs to approve any merger vote. So no directors' approval, no vote.
Central Pacific could try to gain control of the board of directors by persuading City Bank stockholders to elect a new board. But City Bank has staggered its board elections — every year, only three or four directors come up for vote.
To ensure a majority on the board, Central Pacific would have to maintain voting control of a majority of City Bank shares for at least two more years. City Bank shareholders on Thursday re-elected four current directors to new three-year terms.
That said, Central Pacific is not without weapons of its own. Lawyers said if the bank gains enough allies among City Bank shareholders, Central Pacific could seek to amend the City Bank rules to excise many of the defensive provisions.
It's also possible that the merger will end up in court. Central Pacific could decide to challenge some of City Bank's anti-takeover provisions, corporate lawyer Sakai said. Many of the provisions have not been tested in state law, however, so there's no clear indication which way Hawai'i courts will lean, he said.
"It's kind of a dicey proposition to be litigating that sort of thing," Sakai said.
In sum, Central Pacific would be far happier if it didn't have to fight City Bank management, he said.
"It's always easier to have cooperation."
Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.
