By Philip Smith

How many stockholders should we have? That question may be one that you have never really thought about. In the scores of planning retreats I facilitate for financial institutions every year, I often find that very little attention has ever been given to developing a stockholder strategy. However, it is one of the most crucial elements for a board to consider because it impacts so many other areas. As a result, boards should specifically set a stockholder strategy both in terms of the number and type of stockholders they want to have. 

One of the key issues that is impacted by a stockholder strategy is the decision to be a public institution or a private institution. An institution that has more than 500 stockholders becomes subject to SEC reporting obligations, Sarbanes-Oxley compliance and other requirements. As a result, institutions that do not want these extra regulatory burdens need to develop a stockholder strategy to maintain their stockholder base below the SEC reporting threshold. If an organization accidentally exceeds 500 stockholders, it must substantially reduce its stockholder base to below 300 stockholders in order to eliminate those obligations! 

A mistake many organizations make is to increase their stockholder base beyond 500 stockholders and become a public company for the purpose of attempting to create liquidity in the stock by being on a public exchange such as NASDAQ or the Over-The-Counter Bulletin Board. Arguably, though, unless an institution has 2,000 to 3,000 stockholders, it will not generate enough market transactions to create any more liquidity than a private company that adopts strategies that create its own liquidity through stock repurchase transactions. In essence, don’t be slightly public. If you are going to be a public company, then develop a stockholder strategy to have 2,000 to 3,000 stockholders to generate the liquidity necessary to make such a status a good business decision. 

If your organization already is public and there is a desire to eliminate public status, a stockholder strategy should be developed to reduce the stockholder base either over time through stock repurchase transactions or to accomplish a substantial reduction in a single transaction (often called a “going private transaction”). Many banks are now adopting a stockholder strategy that is focused on substantial consolidation of the stockholder base so that the organization becomes or remains private or has fewer than 100 stockholders and can take advantage of Subchapter S status. A consolidation strategy as it relates to your stockholder base is often undertaken through voluntary stock repurchase transactions with your existing stockholder base, a reverse stock split or a transaction specifically to reduce the number of stockholders. While there are often “political” issues associated with reducing a stockholder base, it is a legal transaction and often produces great economic benefits to the organization and enhances value. 

Organizations should not confuse asset growth and size with having a larger stockholder base. An organization with a small stockholder base can still grow its assets and be a large organization provided it has an appropriate capital strategy as well. If your organization has a long-term strategy of being a public company with several thousand stockholders, then your capital raising focus should be on public markets and new stockholders. However, if the board intends to remain private, then such a strategy requires creative sources of capital raising either through debt of the bank holding company, trust preferred securities or raising capital through new stock issuances to existing stockholders. In short, the board’s capital strategy ought to work hand-in-hand with its stockholder strategy. 

More organizations are also looking at who their stockholders are. Transactions can be undertaken to eliminate smaller stockholders, out-of-state stockholders or stockholders who do not do business with the organization. While that may not seem very politically correct, in most circumstances, a legal transaction can be structured to eliminate those stockholders who may be less loyal to the organization, thereby continuing to promote and preserve independence for the organization. Therefore, all organizations should develop a stockholder strategy in conjunction with their overall strategic plan. 

<back to March 2008 Directors Digest>