According to a lawsuit, the board of Orrstown Financial Services Inc., the parent company of Orrstown Bank, changed its bylaws to protect incumbents and freeze out the preferred candidate of an insurgent shareholder.
Orrstown’s board members breached their fiduciary duties and deprived investors of “core shareholder rights” when they passed “draconian director qualifications” last November, activist investment group PL Capital Group said in the complaint, filed Jan. 7 in federal court for Pennsylvania’s Middle District.
The new rules require board members to live within 50 miles of Orrstown’s Shippensburg headquarters and prohibit them from serving on any other bank board, PL Capital said. The incumbent board members grandfathered themselves an exemption from the restrictions, PL Capital said.
The rules were a direct reaction to PL Capital taking a stake in Orrstown and its plans to nominate one of its two principals, Richard Lashley, to Orrstown’s board, the suit said.
“The Orrstown Board enacted these Entrenchment Bylaws for the sole purpose to exclude the PL Capital Group and Lashley from exercising their shareholder rights to seek election,” it said.
Orrstown spokesman Mark Bayer deferred comment on the lawsuit until after Orrstown releases its earnings report next week.
PL Capital has offices in Illinois and New Jersey; it is the nation’s fourth-most-active “shareholder activist firm,” according to a 2011 study posted on its website.
The firm initiated its investment in Orrstown in February, the lawsuit says. In October, PL Capital filed notice with the U.S. Securities and Exchange Commission that it had bought 6.4 percent of Orrstown’s stock and intended to monitor the company’s performance “and where needed, to assert PL Capital Group’s stockholder rights.”
In all, PL Capital said it owns 6.9 percent of Orrstown’s stock, making it the bank’s largest shareholder. The suit says the company specializes in investing long term in community banks and thrift institutions.
Company boards are allowed to implement anti-takeover measures, “but there’s a limit,” said Lance Cole, a professor and director of the Center for Government Law and Public Policy Studies at Penn State Dickinson School of Law.
Such measures must be in the corporation’s best interest, Cole said. If they merely protect incumbent board members, “then the courts are likely to strike them down,” he said.
Federal bank regulators have rejected similar residency restrictions, the lawsuit said.
Orrstown has been trying to put itself back on track after reporting millions of dollars in loan losses beginning in 2011. It is under federal and state consent orders to improve risk management and its loan portfolio. It made a number of senior executive changes last year and announced two selloffs of distressed loan packages to private investors.
In May, a class-action suit with the Southeastern Pennsylvania Transportation Authority accused Orrstown of committing securities fraud, misleading investors about a 2010 stock offering.