When a CEO Merger Bonus Rears its Head, Questions About Merger Ethics Come Into Play in Illinois CU Merger

ARLINGTON, Va. – Could a large lump payment to a credit union CEO have led to his credit union choosing one merger partner over another? That is the one of the questions arising as, on September 20, the 4,700 members of the $24 million Progress Credit Union, headquartered in Warrenville, Illinois, voted to merge with the $541 million Corporate America Family Credit Union, headquartered in Elgin, Illinois. The merger passed with the approval of 93% of the members voting. But critics, including a credit union whose merger offer had been rejected, have questioned whether as many members would have supported the deal if they had known Progress CU CEO John Landi may have been offered, and may have accepted, a generous personal financial offer from CAFCU to “facilitate” the merger, an offer CAFCU made to another credit union CEO whose credit union had been a potential merger partner a scant six months earlier. On March 18, 2004 CAFCU sent a letter to Lori Peters, the president of the $17 million Valley Bell Credit Union, offering a one time $250,000 bonus if she would serve as a “merge facilitator” in a proposed merger with CAFCU. CAFCU also offered Peters a position with a 10% salary increase or a five year consulting position with annual compensation of $25,000 for each of the five years. The bottom line, had Peters accepted the offer and taken the consultancy position, would have been $375,000 as a bonus for doing what, she said, she would have done anyway if she had believed the merger would have been in the best interest of her members. “I was really surprised and frankly offended,” Peters said of the offer. “And a little heartsick really that this might be the way mergers would be conducted among credit unions which, after all, are owned by their members.” For their part, neither Corporate America nor Progress’ leadership would say how much of a bonus Landi had been offered for his work in the merger and Progress has prevailed in a lawsuit which would have revealed that amount, among other information. In a joint statement both credit unions have acknowledged that Landi was offered a “stay bonus” for remaining on board after the merger was complete, though attendees at the merger meeting reported that credit union officials told Progress members Landi did not need to stay as a condition of the bonus. Even if Landi was offered the same amount of money, and accepted it, neither the regulations of the Illinois Department of Financial and Professional Regulation nor the NCUA would speak to the situation, though the Illinois regulator will routinely review the merger of two state chartered credit unions, according to Department spokeswoman Clare Thorpe. One Problem With The Money Peters reported that she didn’t have a lot of experience with mergers and that in her 29 years Valley Bell had been in serious merger discussions only once before, though there had been “feelers” on numerous occasions. “Never in any of my discussions about mergers has anyone offered me that kind of money,” Peters said, “and it was especially galling because that money would not have belonged to me, it would have been my members’ money. Maybe it’s just me, but I couldn’t do that.” Experts on mergers and merger guidebooks, such as the Complete Guide To Mergers, published by the Credit Union Executives Society, noted that it is not unusual for special dividends drawn from the retained earnings of the merged credit union to be paid out to the members whose credit union was merging, for a variety of reasons. But none of the merger sources reported being familiar with large bonuses being paid to individual members of a merging credit union, much less to its officers. In fact, the CUES Guide would appear to caution against the practice. In a small section called,” A Word on Personal Gain in Merger Transactions” the guide noted: “In accordance with the Duty of Loyalty, directors, volunteers, and senior management must avoid using their positions solely to gain an economic benefit out of a merger transaction or, for that matter, any business transaction involving the credit union,” the Guide said. “Regulatory agencies, such as the NCUA, are particularly concerned about impermissible personal gain in transactions related to the business of a credit union.” The Guide noted that this did not preclude the senior management of a merged credit union from accepting reasonable compensation for their efforts, and used the example of severance or other payments for senior management employees that will not be employed with the continuing credit union after the merger. But the Guide advised caution even here: “Even so, keep in mind that a director, volunteer or senior management employee should always avoid direct or indirect participation in the deliberation or determination of any credit union transaction affecting his or her pecuniary interest,” the Guide advised. “It all depends on the board,” said Paul Simons, CEO of Credit Union One, a $390 million credit union headquartered in Rantoul, Illinois. “That’s really what it comes down to, and as long as the board knows about what is going on, they protect the fiduciary interests of the members.” Simons said his credit union had been involved in numerous mergers over the years, but mostly they had been situations where the merging credit union had needed to do so in order to survive, he said. But other deal observers were not as restrained in their comments. Richard Garabedian, a partner with the Washington DC law firm of Luse, Gorman, Pomerenk and Schick, called the payments offered to Peters and perhaps Landi “outrageous.” “In my opinion the proposed payment appears to be excessive,” said Garabedian, whose practice specializes in credit unions changing charters to those of mutual banks or merging into mutual banks. “If these were two mutual savings association, the Office of Thrift Supervision would vigorously object to the payment as a sale of control. I would estimate it is probably four to five times her annual compensation. If it were otherwise subject to the golden parachute limitations in the Internal Revenue Code it would likely be considered an excessive parachute payment.” Another Problem with the Money For its part, the $60 million Northstar credit union wants to know if a big cash payment to Landi had anything to do with Progress rejecting its merger offer. Corporate America’s offer to Peters came to light as part of a lawsuit filed by Bernie Niewoehner, a Progress member and Northstar Credit Union executive, on September 12 in the 18th Judicial Circuit Court. The lawsuit alleged the possible improper payment on the part of CAFCU and asked for copies of minutes of board meetings to determine whether such a payment was offered or made. Niewoehner, who is director of financial services for Northstar CU, headquartered in Warrenville, Illinois, acknowledged that his complaint and drive for transparency could be seen as sour grapes. But he and Northstar maintain they offered Progress a deal as attractive as the one CAFCU offered, and would have further distributed any bonus dividend to Progress’ members and not to any one employee, had their offer been accepted. According to Lloyd Fredendall, NorthStar’s CEO, his credit union’s rejected merger proposal would have served Progress CU’s membership well. He noted in a press statement that both Northstar and CAFCU have overlapping community charters. Furthermore, according to Mr. Fredendall, NorthStar has historically and continually been able to offer its membership lower rates on auto loans, on certain credit cards, and on certain home equity lines than has CAFCU. “Under the circumstances, given CAFCU’s apparent prior attempt to facilitate a merger by offering a substantial monetary bonus to a merger target executive, one might wonder if CAFCU has done the same thing here, and if Progress Credit Union’s management was swayed against NorthStar’s membership-oriented merger offer because it did not contain any similar incentive,” Fredenall. But a sitting circuit judge on September 17 ruled that the courts in Illinois lacked the authority to demand a credit union make its records available to its members, according to Frank Tighe, an attorney for Niewoehner, and with the vote already held it is unclear whether Niewohner or NorthStar will appeal. “It comes down to fiduciary duty,” Tighe said, “and whether this board acted to protect their credit union members’ best interest.” -