Magazine article American Banker

Suit Charges Bad Faith in Napa Deal

Magazine article American Banker

Suit Charges Bad Faith in Napa Deal

Article excerpt

Former shareholders of Napa Community Bank in California are suing the bank's parent, Capitol Bancorp Ltd. of Lansing, Mich., claiming Capitol paid too little for their shares when it acquired them in June.

Capitol founded Napa in 2002. As it usually does with a start-up bank, Capitol provided 51% of the start-up cash and raised the rest from local investors. After three years Capitol typically buys out the minority shareholders for around 150% of book value.

(Capitol chairman and chief executive Joseph D. Reid last week received American Banker's Innovator of the Year Award in recognition of the company's business model.)

In this case the locals say that they should have gotten more and that Capitol and Mr. Reid conspired to pay less than what Napa was worth.

On June 30 the $3.5 billion-asset Capitol bought out most of the remaining Napa shareholders by exchanging their stock for Capitol stock. Napa shareholders got roughly half of a Capitol share for each share they owned, which worked out to a purchase price of about $15.90. (A minority group of shareholders refused to sell, but Capitol controlled roughly 90% of the shares, which gave it control of the bank.) Two of the shareholders who sold filed a class action on Nov. 23, naming all Napa shareholders who sold to Capitol as plaintiffs. The complaint says that Napa was a solid performer that had received higher offers and had been appraised at a higher value than what Capitol was offering.

The plaintiffs allege that there was no binding agreement that they had to accept 150% when they exchanged Napa shares for Capitol shares but claim that Capitol said there was.

A Capitol spokeswoman said, in general, Capitol tells potential investors that it has typically paid 150% of book value to minority shareholders but it always makes clear that the price could change over the course of three years.

John F. Friedemann, a lawyer with Friedemann Goldberg LLP of Santa Rosa, Calif., said it is not clear yet how many former shareholders had joined or would join the suit. His firm represents the plaintiffs. He declined to comment further, saying that the filing speaks for itself.

Capitol said in an e-mailed statement that it and its officers "deny all allegations of wrongdoing made in this suit, consider the allegations groundless and without merit, and intend to vigorously defend against this action."

Capitol has opened more than three dozen banks, and generally gives them autonomy while providing back-office support.

Napa was organized as a California state bank in March 2002. Since the end of that year its assets have more than doubled, to $78 million, and through the first half of this year it had already earned more than it did in all of 2004. …

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