The ongoing battle between Floyd, Virginia-based Cardinal Bankshares Corporation (Cardinal) and activist investor Douglas Schaller raises interesting questions with respect to whether an activist shareholder entity can wage a proxy contest to replace a majority of directors on the board of a bank holding company (BHC) without the activist entity being considered a BHC under the Bank Holding Company Act (BHCA).

Background

Cardinal is the holding company of the Bank of Floyd, which provides banking services in five counties of Virginia. Cardinal is publicly-traded and has a market capitalization of approximately $22 million.

In a February 7, 2011 Schedule 13D filing with the Securities and Exchange Commission (SEC), entities associated with Douglas Schaller (Schaller Equity Partners, Schaller Equity Management, Inc. and Schaller Investment Group Incorporated) disclosed an 8.3% ownership stake in Cardinal. Over the following 12-month period the Schaller entities filed several amended Schedule 13Ds, reflecting an ownership stake in Cardinal that eventually increased to 9.8%. Beginning in June 2011, Schaller and Cardinal engaged in a war of words, largely carried on in open letters and in the press. Schaller first pushed for Cardinal to explore a sale and later appeared to back off that position, instead arguing for management changes. Cardinal resisted Schaller and has maintained that Schaller is only interested in selling Cardinal. While the letters between Schaller and Cardinal are not the focus of this article, they make for interesting reading and can be found in SEC filings by Schaller and Cardinal.

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