Plaintiff First Citizens Bancshares, Inc. (“First Citizens”) has moved to enjoin a shareholder rights plan implemented by Defendant KS Bancorp, Inc. (“KS Bancorp”), a private corporation, arguing that KS Bancorp’s plan violates North Carolina law by discriminating against only certain shares of stock within a larger class of shares.
KS Bancorp is a small, privately held, regional bank with nine locations in North Carolina. It has 1,309,001 shares of common stock outstanding. In the spring of 2017, KS Bancorp’s board of directors (the “KS Board”) approved a plan to convert KS Bancorp into a subchapter S corporation. Implementing the plan would have required KS Bancorp to buy out many of its shareholders. After First Citizens learned of the plan, it made several offers to purchase KS Bancorp’s shares at values significantly higher than the trading price of the shares. The KS Board rejected First Citizens’s final offer, pursuant to which First Citizens offered to purchase KS Bancorp’s shares for $35 per share, on September 11, 2017. The KS Board withdrew its S-corp conversion plan in October 2017.
In December 2017, First Citizens obtained permission from the Board of Governors of the Federal Reserve to purchase 80% of KS Bancorp’s outstanding common stock. The permission expired in March 2018, but could be extended at the Federal Reserve’s discretion. First Citizens began purchasing shares of KS Bancorp stock from shareholders at $35 per share, and had purchased 52,300 shares by February 9, 2018. On that date, KS Bancorp announced that it had adopted a shareholder rights plan (the “Plan”), also known as a “poison pill,” and a share repurchase program. If any shareholder obtains more than 15% of KS Bancorp’s common stock, the Plan permits the KS Board to activate the rights, enabling all existing shareholders to purchase additional shares of common stock for 50% of their market price, subject to KS Bancorp’s right to exchange some or all of the common-stockholders’ rights at the rate of one right for one share of common stock. However, the Plan also provides that, upon its activation, the rights of the shareholder that obtains more than 15% of KS Bancorp’s common stock become null and void.
First Citizens stopped purchasing shares upon learning of the shareholder rights plan and filed this action against KS Bancorp, its CEO, and the KS Board on February 15, 2018. First Citizens seeks a declaratory judgment that the Plan is unlawful under sections 55-6-01 and 55-6-24(b) of the General Statutes, and also brings claims for breach of fiduciary duty and permanent injunction. First Citizens’ Motion for Preliminary Injunction is currently before the court.
- First Citizens has standing to bring this action, because N.C. Gen. Stat. § 55-3-04(b)(1) provides that “a corporation’s power to act may be challenged . . .[i]n a proceeding against the corporation to enjoin the act.” Op. ¶ 25 (quoting N.C. Gen. Stat. § 55-3-04(b)(1) (2017)).
- N.C. Gen. Stat. § 55-6-01(a) provides that all shares of stock within the same share class must have the same preferences, limitations, and relative rights as those of other shares within the same class, unless they are divided into series in the articles of incorporation.
- KS Bancorp is not a “public corporation” as defined under N.C. Gen. Stat. 55-1-40(18a).
- “Only public corporations . . . are authorized to adopt poison pill shareholder plans that ‘preclude or limit,’ ‘invalidate or void,’ or otherwise discriminate between the rights attached to shares within the same class of stock.” Op. ¶ 33 (quoting N.C. Gen. Stat. 55-6-24).
- “[S]hares cannot be practically separated from shareholders rights arising out of those shares.” Op. ¶ 38.
- First Citizens would suffer irreparable harm if KS Bancorp is permitted to use “an illegal device” to dilute First Citizen’s ownership stake, simultaneously impairing other shareholder’s opportunity to sell their shares to First Citizens at a favorable price. Op. ¶ 48 (citing Asarco, Inc. v. Court, 611 F.Supp 468 (D.N.J. 1985)).
- The equities narrowly weigh in favor of enjoining the Plan. Any equities arising from KS Bancorp’s legitimate interest in maintaining itself as an independent entity and representing its shareholders in a hostile takeover are “effectively negate[d]” by KS Bancorp’s attempt to use an unlawful mechanism to support that interest. Op. ¶ 49. Also, KS Bancorp’s articles of incorporation require approval of 75% of the outstanding shares, providing a certain level of protection from a hostile takeover.
First Citizens’ Motion for Preliminary Injunction: GRANTED
Defendants are ENJOINED and PROHIBITED from taking any action under the Plan or adopting any similar plans while the litigation is pending.
For more detail, you can read the full opinion HERE.
Cite: First Citizens Bancshares, Inc. v. KS Bancorp, Inc., No. 18 CVS 2022, 2018 WL 1457547 (N.C. Super. Ct. Mar. 21, 2018).