Community Bank Directors: Are You Really Protecting Your Shareholders' Money?
Every bank director knows they have a duty to shareholders.
But when it comes time to sell your bank, that duty gets put to the ultimate test.
Here's the uncomfortable truth:
Many directors think they're doing right by shareholders when they're actually falling short of their legal responsibilities.
Your Three Sacred Duties as a Director
As a bank director, you have three main jobs when someone wants to buy your bank.
These aren't suggestions—they're legal requirements.
1) Good Faith: Your Heart Must Be in the Right Place
Good faith means every decision you make should benefit the bank and its shareholders—not yourself.
This sounds obvious, but it's easier to mess up than you think.
Maybe one buyer offers you a sweet consulting deal after the sale.
Another buyer promises to keep all current management in place.
These perks might cloud your judgment.
Making honest mistakes is okay.
Making decisions that help you instead of shareholders?
That's bad faith, and it can land you in legal trouble.
2) Duty of Care: Do Your Homework
You can't just show up to meetings and vote yes on whatever management recommends.
You need to ask tough questions and dig into the details.
Before approving any sale, you should understand:
- Why this buyer instead of others?
- Is the price fair compared to similar bank sales?
- Can this buyer actually complete the deal?
- What other options does the bank have?
You're allowed to rely on experts, your investment banker, lawyers, and management team.
But you still need to ask questions and think critically about their advice.
3) Loyalty: The Bank Comes First
This is where many directors struggle.
Loyalty means putting the bank's interests ahead of your own personal interests.
Maybe you're worried about losing your director fees.
Maybe you have a loan at the bank you're concerned about.
Maybe you just like being important in your community.
All of these are natural feelings.
But they can't drive your decisions about selling the bank.
How to Protect Yourself (And Your Shareholders)
Smart directors take specific steps to show they're meeting their duties.
Here's your playbook:
Get a Fairness Opinion
Have your investment banker write a formal opinion that says the sale price is fair.
This isn't just nice to have—it's essential protection for the board.
Consider All Your Options
Don't just compare different buyers.
Ask the big question:
Should you even sell at all?
Maybe growing the bank, buying another bank, or merging with a similar-sized bank would create more value for shareholders.
Look for Better Deals
Just because you have one good offer doesn't mean you should stop there.
Make sure your sale agreement lets you consider better offers if they come along (these are called "fiduciary outs").
Check the Buyer's Track Record
Can they actually complete the deal?
Do they have the money?
Will regulators approve them?
A buyer who can't close is worthless, no matter how high their offer.
Stay Independent from Management
Your CEO might have different motivations than shareholders.
Maybe they're getting a great job with the buyer, or maybe they're trying to protect employees.
These aren't bad things, but they're not your primary concern as a director.
Document Everything
Keep detailed records of every discussion, every question you asked, and every factor you’ve considered.
If someone challenges your decision later, these records prove you did your job properly.
Know Your Shareholders Before You Need To
Different shareholders want different things.
Some need cash now.
Others prefer stock in the acquiring bank.
Some are patient investors; others are looking for an exit.
Before anyone makes an offer on your bank, you should know:
- Who owns large chunks of your stock?
- Are founding families still involved, or do they just own shares?
- Do shareholders need money now, or can they wait for long-term growth?
- Would they prefer cash or stock in the acquiring bank?
- Are there any stock options or transfers happening soon?
These answers will help you evaluate offers and avoid shareholder surprises.
The Questions That Keep Directors Up at Night
Here are the conversations you should have with your fellow directors before you need them:
About ownership:
Do a few families or individuals control most of the stock?
How will they react to a sale?
About timing:
Has the bank been valued recently?
Do shareholders know what their stock is worth?
About expectations:
What concerns came up at the last annual meeting?
Are shareholders happy with the bank's direction?
About paperwork:
When did you last review your shareholder agreements and bylaws?
Are there any surprises hiding in there?
When Management and Shareholders Want Different Things
This is the trickiest part of your job.
Sometimes what's best for management isn't best for shareholders.
Example:
Buyer A offers $50 per share and promises to keep all current management.
Buyer B offers $55 per share but plans to replace the CEO.
Your duty is clear—you represent shareholders, not management.
But that doesn't make the decision easy, especially when you work closely with that CEO.
This is exactly why you need independent advice and why you need to document your decision-making process.
The Bottom Line
Being a bank director during a sale isn't just about showing up and voting.
You have real legal duties that require real work.
The good news?
When you follow these guidelines, you protect both yourself and your shareholders.
You can sleep well knowing you did everything possible to get shareholders the best deal.
The shareholders who invested in your bank trusted you with their money.
When someone wants to buy that bank, it's time to prove that trust was well-placed.
Your Action Plan
1) Review your duties: Make sure every director understands good faith, care, and loyalty
2) Know your shareholders: Update your records and understand what they want
3) Get expert help: Line up investment bankers and lawyers before you need them
4) Document everything: Start keeping detailed board meeting minutes now
5) Plan for independence: Decide how the board will stay independent from management during a sale process
Remember:
It's called "fiduciary duty" for a reason.
Your shareholders are counting on you to put their interests first, especially when the stakes are highest.
There are no shortcuts or hacks in building the confidence needed for major strategic decisions.
Just proven approaches centered around preparation:
This approach will:
- Inform your strategic planning
- Guide your resource allocation
- Clarify your priorities
- Define your value proposition
This is how savvy bank leaders operate.
They build valuable institutions through preparation, allowing them to choose the optimal path forward on their own timeline – whether that's continued independence or a strategic transaction.
I’ll see you next week.
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