This article appeared originally in Minnesota Lawyer’s sister publication, Finance & Commerce.
The Otto Bremer Trust, majority owner of Bremer Bank since their respective foundings, believes it has no choice but to sell the bank if it wants to stay on the right side of federal tax laws.
The trust made that argument in a court filing Monday answering a lawsuit filed last month by Bremer Financial Corp. to block a sale. The bank and seven of its board members sued the three remaining members, who also are the trustees for Otto Bremer Trust, claiming that they had violated confidentiality, fiduciary duty and the trust’s own charter documents in attempting to unseat the other board members and force a sale.
Key to the dispute is an argument over the value of the bank. The trust is required to distribute at least 5% of the market value of its assets each year, and according to the bank’s complaint, nearly 90% of the trust’s assets are made of Bremer Financial stock. That annual disbursement is driven largely by the bank’s shareholder dividends, which totaled $76.4 million in 2018, including $70.3 million to the trust.
If the bank’s valuation were to increase, so too would the amount the trust must distribute each year to hit the 5% threshold set by the tax code. In its complaint, bank leaders accuse the trustees of suddenly inflating the bank’s value to create such an outcome to justify a sale. But in their response, the trustees argue it is the Bremer Financial that indirectly caused the bank’s valuation to jump when they entertained merger talks with another institution in April and May.
According to the counterclaim, “management of BFC pursued a potential merger of equals with another institution without the knowledge or prior approval of the BFC board,” the first time the Trust had considered a sale in the previous 30 years. Although the proposal in the end was not pursued, the trustees claim the transaction would have valued Bremer Financial well above the value its shares held on the trust’s balance sheet. A subsequent unsolicited acquisition offer put the value even higher.
“If the fair market value of BFC is much higher than previously estimated, OBT will need to dramatically increase its charitable distributions in order to comply with the mandatory 5% minimum distribution rule,” the trustees argue, noting simply increasing Bremer Bank’s annual dividend is unlikely to solve the problem due to federal banking regulations. “Given the values recently ascribed to BFC, it would be impossible for BFC to pay dividends at a level that would be sufficient to enable OBT to comply with the mandatory 5% minimum distribution rule over a sustained period of time.”
It is that dilemma, as well as ongoing changes in the banking industry, that create the “unforeseen circumstances” under which the trust is permitted by its original charter to sell its bank shares. Bremer Financial in its suit seeks to block the trust from selling shares to outside investors in order to win additional support to replace the current board of directors, arguing that no such unforeseen circumstances exist.
The trustees also deny that they are motivated in the proposed sale by self-interest, as alleged, and note they have agreed to freeze their compensation, including investment management fees, for two years after any merger or acquisition of the bank.
Via a spokesperson, the trust declined to say what it believes the market value of Bremer Financial is but shared an industry note by financial services firm Stephens dated Nov. 1 that estimated the bank could be worth $2.1 to $2.3 billion in a sale. That would be more than double the share value cited by the trust in its most recent annual report. The trust is attempting to sell shares to outside investors to win a voting majority on the board at a price that would imply a valuation of $1.44 billion for Bremer Financial.
Asked to comment, a Bremer Financial spokesperson pointed to BremerForward.com, a website where bank leaders are posting information about the lawsuit and what it calls “myths and facts” about the case.
“There have been no new developments that would justify, much less require, the outsized market value changes claimed by OBT,” according to BremerForward. “The OBT trustees want to sell BFC for their own reasons and are citing legal requirements as a pretext.”
The trust also is seeking, via a counterclaim, an injunction forcing Bremer Financial to honor the sale of its shares and schedule a shareholder meeting, as well as unspecified damages for any diminution of the Bremer Financial shares held by the trust.
Barring a settlement between the parties, the case will likely come down to a court interpreting the 1944 Trust Instrument governing when and how the trust can sell its share of the bank, said Blake Nelson, a business attorney with Hellmuth & Johnson in Edina. The strongest argument made by the trustees, he said, is that merger interest has forced them to reevaluate the value of the bank to the point of imperiling the trust’s compliance with the tax code.
“What the trust is saying is they now can’t turn a blind eye to the signals they’ve received about a potential value in an acquisition,” Nelson said. “Once they opened up the Pandora’s box of talking about selling, whoever started that conversation, it’s like they can’t unhear it. They can’t unring the bell.”
Court records show the case originally was scheduled for trial in January 2021, but that date has been cancelled. No further hearings in the case have yet been scheduled.