Shareholders challenge South Financial merger

Staff Report
Published June 22, 2010

Five shareholders filed suit Friday challenging the pending merger of The South Financial Group into TD Bank Financial Group.

The plaintiffs say the Greenville-based institution and its board of directors ignored a fiduciary responsibility to shareholders, who would receive 28 cents per share under the current agreement. Plaintiffs also say proxy documents filed with the Securities and Exchange Commission fail to disclose adequate information on the merger, among other complaints.

South Financial maintains that the merger is the best outcome for the bank and its shareholders.

Plaintiffs in the suit are G.A. Milner III, W. Gordon Parrott III, Harold D. Enloe, Wade Brodie and John H. Robison. Milner, Parrott, Enloe and Brodie are S.C. residents; Robison lives in North Carolina.

They seek class status and a jury trial and want the court to direct the bank to obtain another transaction agreement that is more beneficial to shareholders.

Defendants named in the suit include The South Financial Group, TD Bank Financial Group, Toronto-Dominion Bank and members of the South Financial’s board of directors.

In a statement, South Financial President and CEO Lynn Harton called the lawsuit meritless.

“TSFG’s board and management thoroughly explored the potential avenues to maximize shareholder value in the face of this very challenging economic environment,” Harton stated. “We engaged the best professional advisers and benefited from their sound, reasoned advice. The TD transaction is the result of this exhaustive examination. It is the best option for our shareholders, and we stand by the chosen path.”

TD Bank announced in May that it agreed to purchase South Financial for about $192 million and cover about $1 billion in future losses on the South Financial portfolio. Under the agreement, South Financial shareholders would receive $61 million in cash or TD common stock. Shareholders would receive either 28 cents per share or 0.004 shares of TD common stock for each share of South Financial stock owned.

To shareholders, that price represents a 59% discount on the price at which South Financial stock closed the day before the merger announcement: 68 cents a share.

“Despite this great disparity and apparent unfairness to TSFG shareholders, the proxy (on the merger, filed with the SEC) fails to provide any financial analysis to explain or support this price and instead attempts to justify the proposed transaction by pointing to recent concerns regarding TSFG’s capitalization.”

Since the beginning of 2008, South Financial has lost nearly $1.4 billion. In April, the company entered into a consent order with the Federal Deposit Insurance Corp. that required South Financial to raise capital and rid its books of troubled assets or risk being placed in federal receivership. 

Plaintiffs, however, point to recent earnings reports and claim South Financial was poised for a turnaround. South Financial lost $85.8 million in the first quarter, down from $90.8 million during the same quarter last year and from $193.9 in the fourth quarter.

The merger still requires shareholder and regulatory approval. A shareholder meeting has not been scheduled but one is expected sometime in August.

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