Martin v. Kilgore First Bancorp, Inc.
| Decision Date | 07 December 1984 |
| Docket Number | 84-2199,Nos. 83-2662,s. 83-2662 |
| Citation | 747 F.2d 1024 |
| Parties | R.S. MARTIN, Jr., Plaintiff-Appellant, v. KILGORE FIRST BANCORP, INC. and Kilgore First National Bank, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Charles H. Clark, Tyler, Tex., Joan Sprague, Dallas, Tex., for plaintiff-appellant.
Beth Fielding Siever, Austin, Tex., Richard Grainger, Tyler, Tex., for defendants-appellees.
Ronald R. Glancz, Eugene M. Katz, Washington, D.C., for amicus curiae--C.T. Conover, Comptroller.
Appeals from the United States District Court for the Eastern District of Texas.
Before CLARK, Chief Judge, JOHNSON, and WILLIAMS, Circuit Judges.
Plaintiffs seek review of rulings of the district court (i) refusing to enjoin the sale of bank holding company stock to satisfy the requirements of 12 U.S.C. Sec. 215(d), and (ii) denying a motion for summary judgment on their claim that the same section requires the auction of stock in a national banking association, rather than stock in a bank holding company chartered under state law. The district court certified the second question for interlocutory appeal as a controlling question of law pursuant to 28 U.S.C. Sec. 1292(b).
We find that in the type of transaction at issue here the demands of section 215(d) are satisfied by the auction of stock in the bank holding company and affirm the district court.
Plaintiffs were minority shareholders in Kilgore First National Bank (First National I). Sometime in 1980 or 1981 a majority of the board of directors of First National I decided to convert the bank's ownership from individual shareholders to a bank holding company. A reverse triangular merger was chosen to achieve the conversion. This type of merger has three phases: (1) the principals of an existing bank establish a bank holding company; (2) these same principals then apply to the appropriate authorities to charter an interim bank which is owned wholly by the holding company; and (3) the directors of both the original bank and the interim bank agree to merge or consolidate the two banks, subject to the approval of the Comptroller of the Currency (Comptroller), thereby forming the surviving bank. In this type of merger or consolidation agreement, shareholders of the existing bank exchange their shares for shares in the holding company.
Dissenting shareholders of the existing bank are entitled to the protections afforded by 12 U.S.C. Sec. 215(d); they must be paid the appraised value of the shares they formerly owned and receive any excess over that value generated by an auction of the shares of the consolidated banking association which they would have received but for their dissent. The nondissenting shareholders of the original bank become the owners of all stock in the holding company, which in turn owns all of the stock of the surviving bank.
The board of First National I chose the reverse triangular merger method of changing ownership because of the tax advantages it offered. If the holding company acquired at least 80% of the stock in the surviving bank, the exchange would be tax free. Because 25% of the shareholders in First National I indicated they would dissent from the consolidation plan, the exchange would have been fully taxable if a traditional tender offer had been used. The reverse triangular merger enabled the board to eliminate the dissenters so that the bank holding company would be able to acquire all the stock in the surviving bank, and avoid any tax liability on the exchange for the shareholders.
To implement the reverse triangular merger, a majority of the directors applied to the Federal Reserve Board for prior approval of the formation of a bank holding company. On July 20, 1981 these same directors formed a Texas corporation, Kilgore First Bancorp, Inc. (Bancorp) for the express purpose of acquiring and holding all the outstanding stock of the surviving bank. The directors then secured a charter for an interim or "phantom" bank, New Kilgore First State Bank (First State), from the Commissioner of the Texas Banking Department on May 18, 1982. First State was formed only to serve the interim function of a controlled subsidiary needed to execute the reverse triangular merger. The Federal Reserve Bank of Dallas approved Bancorp's application to become a bank holding company on January 19, 1982.
The directors presented their plan of consolidation to the shareholders of First National I in a proxy statement that was accompanied by a prospectus of Bancorp on September 30, 1982. The Federal Deposit Insurance Corporation and the Comptroller approved the consolidation five days later.
Plaintiffs voted against the consolidation at the October 22 meeting, thereby becoming dissenting shareholders within the provisions of 12 U.S.C. Sec. 215(b)-(d), which governs the consolidation of national or state banks with national banks. On March 16, 1983 the Comptroller, pursuant to section 215(d), gave notice of his intent to cause an appraisal of the shares of First National I held by the dissenters. These individuals were later paid the appraised value of their First National I stock which was $279.69 per share. Bancorp subsequently scheduled a public auction of its stock to comply with the second potential payment requirement of section 215(d).
Prior to the auction date plaintiffs filed suit against Bancorp and the surviving bank, Kilgore First National Bank (First National II), challenging the results of the Comptroller's appraisal, as well as the propriety of his action in making the appraisal at all. They also sought a temporary restraining order and a preliminary injunction to stop the scheduled auction of Bancorp stock, contending that section 215(d) required the auction of First National II stock.
The district court granted the temporary restraining order against the auction on July 26, 1983, but on November 22, 1983, the court denied the requested preliminary injunction and dissolved the temporary restraining order. Plaintiffs appealed that order to this court.
Bancorp chose not to proceed with the sale. Plaintiffs later moved for partial summary judgment on their claim that section 215(d) required the auction of First National II stock instead of Bancorp shares. The district court certified to this court its denial of the motion. Plaintiffs filed this appeal based on that certification which we have accepted. 28 U.S.C. Sec. 1292(b).
The only issue before us is the application of the following portion of 12 U.S.C. Sec. 215(d) to the consolidation described in Part I of this opinion.
Within thirty days after payment has been made to all dissenting shareholders as provided for in this section the shares of stock of the consolidated banking association which would have been delivered to such dissenting shareholders had they not requested payment shall be sold by the consolidated banking association at an advertised public auction .... If the shares are sold at public auction at a price greater than the amount paid to the dissenting shareholders the excess in such sale price shall be paid to such shareholders.
Our resolution of this question necessarily will dispose of plaintiffs' appeal from the denial of their request for a preliminary injunction against the sale of Bancorp stock.
Plaintiffs maintain that the reorganization should be viewed as involving two steps: (1) the consolidation of First National I and First State into First National II and (2) the exchange of First National II shares for Bancorp shares. They insist that they dissented to the first step, the consolidation. Bancorp was not involved in this part of the transaction. According to their argument, if the plaintiffs had not dissented at this point, they would have received shares in the surviving bank, First National II, not Bancorp. Therefore, section 215(d) requires the auction of First National II shares, not stock in Bancorp. Moreover, they contend, the statute requires auction of the shares of a national "consolidated banking association." Bancorp, they point out, is a Texas corporation, not a national banking association.
Defendants reply that the reorganization, as set forth in the Agreement and Plan of Consolidation approved by the majority of shareholders in First National I and by the Comptroller, was a one-step transaction: shareholders of First National I tendered their stock in exchange for Bancorp shares. They admit that Bancorp is not a national banking association as described in the statute, but urge us to focus instead on the later phrase "[shares] which would have been delivered to such dissenting shareholders had they not requested payment ...." Those shareholders who did not dissent to this transaction received Bancorp shares.
There is no basis in fact for plaintiffs' claim that they would have received First National II stock but for their dissent. No...
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