EverTrust Financial Group shareholders are scheduled to vote this week on a proposal to merge the Everett bank with giant KeyCorp.
However, the merger is being challenged in court by a limited partnership that has been involved in lawsuits over three other proposed corporate mergers this year.
Freeport Partners LLC has filed suit in Snohomish County Superior Court seeking to block the EverTrust-KeyCorp deal on the grounds that the bank’s top officers failed in their duty to shareholders by selling to KeyCorp without considering other bids for the bank.
They did this because they will receive special consideration not available to public shareholders, the suit alleges.
Freeport Partners is seeking class-action status for the lawsuit. So far, no hearings have been scheduled in the case.
EverTrust shareholders will meet Thursday in Everett to vote on the $190.5 million proposal. To be approved, the holders of two-thirds of the voting shares must approve the merger. If they do, EverTrust will be merged into KeyCorp’s Northwest subsidiary, putting an end to both the 88-year-old bank and months of behind-the-scenes negotiations that started in January after EverTrust’s directors decided they could no longer compete as an independent institution.
The deal is expected to close in the fourth quarter, provided it is approved by state and federal regulators.
According to documents mailed to shareholders and filed with federal regulators in August, EverTrust ran into trouble in late 2003, when profits were hurt by unexpected early payoffs of large numbers of loans. That, and fears of rising interest rates, pushed share prices down 25 percent.
In January, the bank’s board decided to bring in a consultant to study long-term options, including a sale. Shortly afterward, a financial institution identified only as Bank A approached the board with a merger offer. In March, a second potential buyer, Bank B, emerged.
Talks with Bank A continued through March and into April, but the two sides couldn’t reach a deal and agreed to end talks.
In April, EverTrust’s consultants contacted seven potential merger candidates, including Bank B and KeyCorp. Talks with both began in April.
In May, four more banks made unsolicited offers to buy out EverTrust. One of the four, identified in the documents as Bank C, was judged a suitable partner, and EverTrust’s board started talks with it.
But on May 21, KeyCorp made its initial offer – a cash and stock combination of $180 million to $195 million. Bank B made its offer the same day – an all-stock deal worth $160.5 million. And a few days later, Bank C proposed two deals, an all-stock transaction worth $143.8 million or a cash-and-stock deal worth $153.7 million.
At that point, EverTrust’s board rejected the Bank C proposal and soon entered into exclusive talks with KeyCorp, which led to the final offer of $194.7 million in cash. The EverTrust board met June 24 and decided to accept the deal.
In the documents, EverTrust managers defend the sale. KeyCorp is paying slightly more than $25.60 a share for EverTrust stock -20 percent higher than the highest-ever closing price for stock prior to the merger announcement and 30 percent higher than the average price of shares in the month leading up to the sale.
But it might have been higher, had the bank’s directors pushed harder for more offers, the Freeport Partners lawsuit claims.
In the suit, the partnership claims that EverTrust’s board could have worked a better sale price if it had sought an “auction,” bidding one suitor against another. The suit also objects to EverTrust’s agreement to pay KeyCorp $9.75 million if the merger fails. These actions are not in the best interests of common shareholders, the suit claims.
The suit accuses EverTrust officials of pursuing the KeyCorp deal because it will benefit them more than other shareholders.
The bank’s top officials stand to profit from the stock sale in ways the other shareholders won’t, according to documents filed with federal regulators. Along with getting cash for the shares they hold, board directors and top officers will be able to convert options to buy more EverTrust stock into cash.
Chief executive Michael Hansen, for example, will be able to exercise options on 269,587 shares, estimated to be worth $4.7 million, according to the regulatory filings.
Some top employees will get severance payments as well.
The Freeport Partners suit claims that EverTrust hasn’t done enough to disclose those facts, which were outlined in the Aug. 20 regulatory filing. The suit was filed Aug. 19.
Attorneys for both EverTrust and Freeport Partners did not return phone calls this week. Neither did an EverTrust spokesman.
However, in court documents, EverTrust attorneys say they “deny Freeport’s allegations and intend to vigorously contest” the lawsuit.
In the lawsuit, Freeport Partners claims to own shares of EverTrust. But the court documents provide little other information on the group.
A search of incorporation records shows there are two companies named Freeport Partners LLC – one in Florida and the other in Nevada.
Companies by that name have been active trying to block corporate mergers this year. In each case, Freeport Partners LLC has sued to stop a corporate merger, saying that the corporate directors involved had breached their duty to shareholders while receiving extra payments not available to other shareholders – accusations similar to those it’s making in the EverTrust case.
In June, Vans Inc., a maker of skateboarding shoes and clothing, announced it had settled a lawsuit with Freeport Partners that sought to block its merger with a subsidiary of VF Corp., the company that owns the Wrangler, Nautica, Lee and other clothing brands.
Just days later, however, a California Superior Court judge threw out a suit Freeport Partners had filed against Xicor, a California company that designs and sells circuits for computers and other electronics. Xicor’s board of directors had decided to sell the company to Intersil Corp.
Earlier in the month, Freeport Partners had interjected itself in the proposed merger of two pharmacy companies.
It sued directors of Baltimore-based NeighborCare – again alleging breaches of duty to shareholders – who had rejected a buyout offer from competitor Omnicare of Kentucky. In this case, Freeport Partners claimed NeighborCare’s top officials should have negotiated with Omnicare for a better deal for shareholders, rather than rejecting its $1.5 billion offer out of hand.
The suit still is pending, but there’s been no action since the initial filing, a NeighborCare spokeswoman said.
Reporter Bryan Corliss: 425-339-3454 or corliss@heraldnet.com.
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