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Parshall v. HCSB Financial Corp.

United States District Court, D. South Carolina, Florence Division

July 24, 2017

Paul Parshall, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
HCSB Financial Corporation, Michael S. Addy, Clay D. Brittain, III, Gerald R. Francis, Jan H. Hollar, James C. Nesbitt, John T. Pietrzak, D. Singleton Bailey, and United Community Banks, Inc., Defendants.

          ORDER DENYING EMERGENCY MOTION FOR PRELIMINARY INJUNCTION

          R. Bryan Harwell United States District Judge.

         This matter is before the Court on Plaintiff Paul Parshall's Emergency Motion for Preliminary Injunction whereby Plaintiff seeks to enjoin a stockholder vote scheduled for July 27, 2017, relating to the merger of Defendants HCSB Financial Corporation (“HCSB”) and United Community Banks, Inc. (“UCBI”). See ECF No. 8. The Court held a hearing on July 21, 2017, and orally denied the motion at the end of the hearing. See ECF No. 28. The Court now issues the following Findings of Fact and Conclusions of Law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure. To the extent that any Findings of Fact constitute Conclusions of Law, or vice-versa, they shall be so regarded.[1]

         Findings of Fact[2]

         On June 16, 2017, Plaintiff filed a complaint naming as defendants HCSB, HCSB's Board of Directors (who are named as individual defendants), and UCBI. See ECF No. 1. Plaintiff alleges in his complaint that (1) “[t]his action stems from a proposed transaction announced on April 20, 2017, ” pursuant to which HCSB will be acquired by UCBI; (2) on April 19, 2017, HCSB's Board of Directors caused HCSB to enter into an agreement and plan of merger with UCBI, and pursuant to the terms of the Merger Agreement, stockholders of HCSB will receive 0.005 shares of UCBI per share of HCSB; (3) “[o]n May 17, 2017, defendants filed a Form S-4 Registration Statement (the ‘Registration Statement') with the United States Securities and Exchange Commission (‘SEC') in connection with the Proposed Transaction”; and (4) “[t]he Registration Statement omits material information with respect to the Proposed Transaction, which renders the Registration Statement false and misleading” and violates Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (“the Exchange Act”). Id. at ¶¶ 1-4.

         On July 14, 2017, Plaintiff filed the instant Emergency Motion for Preliminary Injunction and attached a copy of the Registration Statement. See ECF No. 8. He seeks to preliminary enjoin the stockholder vote on the proposed transaction challenged in this action scheduled for this Thursday, July 27, 2017, pursuant to which HCSB will be acquired by UCBI through a wholly-owned subsidiary. Id. He seeks to enjoin the stockholder vote pending what he claims are necessary corrective disclosures by Defendants.[3] Id. Defendants have filed responses in opposition with attached exhibits, including several declarations. See ECF Nos. 24 & 26.

         Plaintiff argues the Registration Statement is materially misleading and incomplete and omits material information, to wit: (1) the financial projections prepared by HCSB (and UCSB) and relied upon by HCSB's financial advisor, Hovde Group, LLC (“Hovde”); (2) potential conflicts of interest affecting Hovde, financial advisor to the Board; and (3) terms of a nondisclosure agreement (“NDA”) executed by another bidder and Plaintiff's concerns about the potential presence of a standstill provision preventing the competing bidder from making a topping bid. ECF No. 8-1 at 9, 14. At the hearing, Plaintiff's counsel appeared to be satisfied with HCSB's response and evidence indicating there was no standstill provision in the NDA. Regardless, as explained in this Order, Plaintiff has not met his burden of proof for purposes of this motion as to any of these allegations or arguments.

         Plaintiff owns two one-hundred thousandths of a percent (only 0.00002%) of the outstanding shares of HCSB. He purchased $11 in stock on November 3, 2016, which converts to less than one share of UCBI stock under the proposed merger. See ECF No. 26-3. While he has brought this case as a putative class action, no class has been certified, and Plaintiff has presented no evidence that he represents the interests (adequately or otherwise) of other shareholders. No affidavit or declaration from Plaintiff or any other shareholder has been submitted alleging the Registration Statement was misleading or contained material omissions. In his motion, Plaintiff seeks to enjoin the shareholders from voting on the merger with UCBI that is currently valued at approximately $66 million, even though HCSB shareholders have already returned proxies demonstrating overwhelming support for the proposed merger, far in excess of the threshold of outstanding shares needed for approval. The sole basis for the extraordinary relief Plaintiff seeks is that the Final Proxy (i.e., the Registration Statement), which is sixty-one pages long with fifty pages of attachments and refers to voluminous other public information, is allegedly inadequate under Sections 14(a) and 20(a) of the Exchange Act.

         In support of his position, Plaintiff relies solely on arguments of counsel, his memorandum, and the filed Registration Statement. Plaintiff was not present at the hearing, and no declaration or affidavit from Plaintiff was submitted. However, HCSB submitted the declaration of Defendant Jan Hollar, who is the CEO of HCSB. See ECF No. 26-5. Ms. Hollar states the following: (1) to her knowledge, no shareholder other than Plaintiff has contacted HCSB and suggested that the proxy disclosures are misleading or inadequate, or that he or she needs more information in order to decide how to vote on the proposed transaction; (2) as of July 20, 2017, the holders of 339, 821, 636 (or 83.86%) of the 405, 232, 383 outstanding shares of HCSB voting common stock have delivered their proxies, and of those voting so far, 99.96% of shares have been voted in favor of the proposed merger, which represents a shareholder approval rate well in excess of the 66.7% (or two-thirds) required to approve the merger under South Carolina law; (3) as of July 20, 2017, the holders of all 90, 531, 557 outstanding shares of HCSB non-voting common stock had delivered their proxies, and of those voting so far, 100.0% of all shares have been voted in favor of the proposed merger, which is substantially higher than the simple majority of non-voting shareholder approval needed under South Carolina law; (4) in addition to the SEC's review of the Registration Statement/Preliminary Proxy, the proposed merger has been approved by the state banking regulators in both Georgia and South Carolina; (5) the proposed merger applications have also been approved by the FDIC and the Board of Governors of the Federal Reserve System; (6) there is no higher priced alternative to the merger with UCBI and no other bidders have come forward since the announcement of the merger with UCBI; (7) HCSB entered into a NDA dated January 25, 2017, with Institution A, and this agreement did not include a standstill or any other provision which would have precluded or limited Institution A's ability to submit a topping bid or any other merger offer; (8) after reviewing all relevant expenses and obligations related to the proposed merger, Ms. Hollar has determined that a thirty-day delay in vote would likely cost HCSB more than $420, 000 that would otherwise not be incurred if the vote proceeded as scheduled (and if the delay is longer, the cost will be even higher); (9) a delay of the shareholder vote would result in delaying the consummation of the transaction and would impose other significant logistical problems and expenses upon HCSB and its employees; (10) a delay of the HCSB shareholder vote would have an adverse impact on the public, including consumers of HCSB's banking services; (11) the HSCB Board determined in good faith exercise of their business judgment that the merger with UCBI represented the best opportunity to maximize shareholder value, and postponing the shareholder vote could jeopardize the merger and present some risk of the transaction not being consummated; (12) HCSB stockholders could be further harmed because a delay in the vote may result in a reduction in share value of the stock of either HCSB or UCBI and endanger the premium to HCSB shareholders sought to be achieved by the merger; (13) an injunction would create uncertainty among HCSB's shareholders, customers, and employees and potentially hinder HCSB's operations if bank employees or customers leave HCSB in the wake of such uncertainty and instability; and (14) HCSB has already incurred substantial expenses related to the proposed merger, most of which would not be recoverable if this merger opportunity is lost. Id. at 1-3.

         Additionally, HCSB submitted declarations of various shareholders who own millions of shares of HCSB common stock and who have significant holdings in HCSB. See ECF No. 26-8. Specifically, HCSB submitted declarations from: (1) David Volk, who serves as the principal of Castle Creek Capital Partners VI, LP, which owns approximately 22.19% of all HCSB common shares outstanding; (2) Ben Mackovak, who serves as the managing member of Strategic Value Investors LP, which owns 6.07% of all HCSB common shares outstanding; (3) Michael Rosinus, who serves as a senior advisor for Tricadia Capital Management, LLC, which owns approximately 4.49% of all HCSB common shares outstanding; and (4) John J. Lyons, who serves as the managing principal of Commerce Street Keefe Ventures Fund III, LP, which owns approximately 4.49% of all HCSB common shares outstanding. Id. All four declarants state that (1) they have studied the proposed merger between HCSB and UCBI, concluded the disclosures in the Proxy Statement are fully adequate, and do not need any further information in order to decide whether to vote in favor of the merger; (2) they are in favor of the proposed merger, have delivered their proxy cards with instructions to vote all their shares in favor of the merger, want the vote to proceed and the merger to close as soon thereafter as possible, and would be very disappointed and believe it would be detrimental to the HCSB shareholders if the vote or consummation of the merger is delayed or the opportunity lost; and (3) they have reviewed Plaintiff's complaint, do not believe Plaintiff represents their interests in connection with the proposed merger or the issues raises in the pleading, do not find the disclosure issues raised by Plaintiff are material to them in deciding whether to vote for or against the merger in light of the total mix of information disclosed in the Proxy Statement and the publicly available information, and would be very disappointed with any delay of the shareholder vote or consummation of the merger because of any issues raised in Plaintiff's lawsuit. Id.

         UCBI has submitted the declaration of Christian Zych, who is UCBI's Senior Vice President, Director of Mergers & Acquisitions and Management Reporting and who has been involved in the pending transaction with HCSB. ECF No. 24-1 at ¶ 3. Zych states that as disclosed in the Proxy Statement, Hovde has not provided any investment banking or financial advisory services to UCBI; and in fact, Hovde has never provided any investment banking or financial advisory services to UCBI. Id. at ¶ 4. Zych further avers that regarding any internal management projections prepared by UCBI, UCBI did not provide any of its internal forecasts or projections to HCSB's management, board of directors, or Hovde, including in connection with UCBI's offer to acquire HCSB or the subsequent negotiation and review of the merger agreement. Id. at ¶ 5. Finally, Zych avers that to the extent UCBI prepares any internal forecasts or projections, UCBI regards this information as confidential and as a matter of course does not publicly disclose such forecasts or projections. Id. at ¶¶ 6-7.

         As explained in more detail below, the Court finds that Plaintiff has not met his burden of proof with regard to each of the elements for a preliminary injunction, and that his request must therefore be denied.

         Conclusions of Law

         I. Preliminary Injunction Standard

         Federal Rule of Civil Procedure 65 establishes the procedure for federal courts to grant preliminary injunctions. See Fed. R. Civ. P. 65. Because of the extraordinary nature of injunctive relief, the United States Supreme Court has admonished that preliminary injunctions “may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” Winter, 555 U.S. at 22.

         A plaintiff seeking a preliminary injunction must establish all four of the following criteria: (1) that the plaintiff is likely to succeed on the merits, (2) that the plaintiff is likely to suffer irreparable harm in the absence of preliminary injunctive relief, (3) that the balance of equities tips in the plaintiff's favor, and (4) that the injunction is in the public interest. League of Women Voters of N. Carolina v. N. Carolina, 769 F.3d 224, 236 (4th Cir. 2014) (citing Winter, 555 U.S. at 20). A plaintiff must make a clear showing that it is likely to succeed on the merits of its claim. Winter, 555 U.S. at 20-22. Likewise, a plaintiff must make a clear showing that it is likely to be irreparably harmed absent injunctive relief. Id. Only then may the court consider whether the balance of equities tips in the plaintiff's favor. Real Truth About Obama, Inc. v. Fed. Election Comm'n, 575 F.3d 342, 346-47 (4th Cir. 2009), vacated on other grounds, 559 U.S. 1089 (2010), reissued in part, 607 F.3d 355 (4th Cir. 2010), overruling Blackwelder Furniture Co. of Statesville v. Seilig Mfg. Co., 550 F.2d 189 (4th Cir. 1977). Finally, the court must pay particular regard to the public consequences of employing the extraordinary relief of injunction. Id. at 347.

         II. ...


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