Two Sides Face Off in Crown Bancorp Proxy War

Crown Bancorp management calls it an illegal, well-orchestrated takeover attempt. A group of dissident shareholders describes it as a broad-based effort to save a money-losing bank holding company.

One side decries the involvement of Canadian financier Milton Sorokin, who was chairman of California Heritage Bank before it was seized by regulators last fall. The dissidents, many of whom have close business and personal ties to Sorokin, counter that Sorokin and others have the resources to infuse as much as $2.5 million of much-needed capital into Crown, holding company for the Bank of Coronado and Capital Bank of Carlsbad.

Management charges that the dissidents have made sweetheart tender offers to a small, selected group of Crown shareholders. The dissidents maintain that no such tender offers have been made, that they’ve accumulated their shares legally.

Welcome to the Crown Bancorp proxy fight of 1986--the juiciest San Diego corporate control fight so far this year and Crown’s second consecutive annual mud-slinging show.

Proxy fights are often nasty and always expensive; more importantly, they can leave deep financial scars at small companies.

And Crown--with assets of $60.4 million, a loss of $2.5 million last year and its two subsidiaries operating under regulatory provisos--can hardly afford more scarring.

“Whoever wins will lose,” suggested one participant.

Two legal suits have been filed so far: Crown has filed a $10-million lawsuit against former Capital Bank President Ed Schmidt, a leader of the dissident group, and dissident shareholder Michael Saywitz, a close business associate of Sorokin’s, last week filed a derivative shareholders’ class-action suit, asking that Crown not be allowed to use corporate funds in its lawsuit against Schmidt.

On Monday, Schmidt filed a cross-complaint against Crown, charging defamation and asking for $10 million in damages.

So why all the fuss over this little company based on the quaint little island of Coronado? After all, it was awash in red ink last year, regulators want it to increase capital, and it is in violation of terms of a $1.5-million loan owed to an unaffiliated bank for expenses related to the opening in 1984 of Capital Bank. The loan is secured by company stock and is now considered due on demand.

Despite its problems--and there has been more than a year of public controversy, including several board member resignations--Crown and its subsidiaries remain attractive.

First, Crown’s two subsidiaries can hoist community-based banners--a boast that, despite the flood of hometown bank failures in the last three years, is still important.

Second, banks represent attractive pools of funds to real estate developers and syndicators, and some of the backers of the current proxy fight are involved in real estate syndications and investments. This certainly is true for Saywitz and Sorokin, who have tried for some time to invest in a financial institution that would give them an avenue for many of their real estate investments and clients.

Third, banks remain centers of tangible and intangible power, and that lure is often irresistible. Egos, players on both sides acknowledge, have played no small role in the current fight.

Those factors certainly were at play last week, as both sides huddled--in one face-to-face meeting and subsequent telephone discussions--in an attempt to hammer out a compromise and avoid a proxy fight.

The dissident group, represented by Saywitz, met with Crown Chairman Dr. Phillip Akre, and proposed that a new slate of directors be named at Crown’s Aug. 1 annual meeting. The new slate would consist of three dissidents and four management-backed directors.

The only unresolved issue was if Crown President Michael Justice--who owns no stock in the company--and Schmidt would be nominated from each side.

Schmidt was runner-up for Justice’s job last fall, and tension between the two remains high. Insiders on the dissident group maintain that Schmidt is willing to not run for election if it means a compromise can be reached. (Federal law requires that the president of a bank sit on its board of directors. That regulation does not apply to a bank holding company, according to bank industry sources.)

The Schmidt-Saywitz group reportedly has accumulated enough support to vote nearly a majority of Crown proxies, which is one reason that Crown officials delayed the annual meeting from June 30 until next month, according to sources inside and outside the company.

Given their support, it would appear that, in one form or another, the dissident group will be well represented on Crown’s board--either by compromise or outright election.

Crown’s defense against the bloodless takeover is its contention that the dissidents have garnered proxies illegally, and that their actions should have been approved by regulators.

But the state Department of Banking has ridden the fence on the issue. A memo written last month by banking regulators acknowledged that Schmidt had gathered more than 10% of Crown’s proxies, and explained that no one can acquire “control” of a bank without first filing the required documentation.

Crown officials maintain that the letter implies that Schmidt is indeed acquiring control, while Schmidt and his attorney insist it did not.

Unless a compromise is reached soon, many of the behind-the-scenes machinations in the proxy fight will come to light: Depositions are scheduled to begin Thursday in Crown’s suit against Schmidt.