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Marianne Monty et al v. George S. Leis et al

March 30, 2011


Super. Ct. No. 1340306 Santa Barbara County Superior Court County of Santa Barbara Denise de Bellefeuille, Judge

The opinion of the court was delivered by: Gilbert, P.J.


Corporate shareholders approve an amendment to a corporation's articles to increase the number of authorized shares. Thereafter the corporation enters into an investment agreement that gives an investor shares of common and preferred stock. The agreement provides that the preferred stock would convert to many more additional shares of common stock. Issuance of these additional shares would require an amendment to the articles.

May the investor use its majority shares after the agreement is signed to amend the articles to allow it to issue to itself these additional shares? We conclude that it may.

Two shareholders in a failing bank sought a preliminary injunction to prevent an investment agreement from closing. The agreement would add $500 million to the bank's capital. The trial court denied the preliminary injunction. While the matter was on appeal, the transaction closed, rendering the petition for injunction moot. Nevertheless, the shareholders claim the questions raised are still at issue between the parties. We examine the issues raised by the shareholders and conclude they have no merit. We affirm.


Pacific Capital Bancorp is the parent company of Pacific Capital Bank, a regional bank headquartered in Santa Barbara. George S. Leis is a member of the bank's board of directors. (Pacific Capital Bancorp and its directors are collectively "PCB" herein except where the context indicates otherwise.) Marianne Monty and James Clem (collectively "Monty") are shareholders of PCB. PCB shares are traded on the NASDAQ exchange.

PCB suffered losses in the real estate loan market that resulted in a write-down of the value of its assets and lowered earnings. The Office of the Comptroller of the Currency (OCC) and the Federal Reserve Bank (FRB) imposed a number of conditions on PCB. One condition was that PCB must significantly improve its capital position no later than September 8, 2010. Failure to meet the condition would place PCB at risk of being seized by federal regulators and liquidated.

In August 2009, PCB issued a proxy statement for a proposal to amend its articles of incorporation. The proposal was to increase its authorized common stock from 100 million to 500 million shares. The shareholders approved the share increase in September 2009.

On April 29, 2010, PCB entered into an investment agreement with Ford Financial Fund, LP ("Ford"). The agreement required Ford to provide $500 million in new capital to PCB. Upon closing the transaction, Ford would receive 225 million shares of common stock and 455,000 shares of convertible preferred stock. The issuance of both the common and preferred stock were well within the 500 million shares of common and the one million shares of preferred authorized by PCB's articles at the time the investment agreement was made. Thus issuance of the stock would not require an amendment of PCB's articles.

PCB's articles authorize "blank check" preferred stock. This authorizes the board to subject the stock to any rights and conditions the board may deem proper. Pursuant to the investment agreement, the 455,000 shares of preferred stock issued to Ford would convert to 2.275 billion shares of common stock. Ford would own between 80 and 91 percent of PCB's stock, depending on how many existing shareholders exercised the right to purchase common stock. The issuance of 2.275 billion shares of common stock would require an amendment of the articles of incorporation.

A condition of the investment agreement was that PCB reach an agreement with the United States Department of the Treasury which held shares of PCB preferred stock. The agreement was not reached until July 26, 2010.

Because PCB was facing a September 8, 2010 deadline, it decided to proceed without a vote of the then-current shareholders. Ordinarily NASDAQ rules would require a vote for such a transaction. PCB obtained an exemption from NASDAQ on the ground that the potential delay in obtaining shareholder approval would threaten the financial viability of the company.

PCB's plan was to issue the 225 million shares of common stock to Ford on the closing date. Those shares had been previously authorized by the shareholders. The 225 million shares would give Ford a majority of PCB's stock. Only a simple majority is necessary to amend the articles. After obtaining the 225 million shares, Ford alone would vote immediately to amend the articles to authorize the issuance of 2.275 billion shares of common stock required by ...

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