These shareholder complaints are typically raised in the following situations, which can be described as types of insider trading: (1) the bank is being or will be reorganized into a holding company form of ownership and incident to or preceding the reorganization either officers or directors of the bank, or a bank holding company organized or controlled by such persons, acquire or offer to purchase shares of stock of the bank; or (2) an officer or director of the bank makes a cash offer to purchase shares representing control of the bank.

In those situations, the most significant disclosure problem has been the failure of the stock purchaser to inform the shareholders of "firm offers" that the bank may have received in the previous 18 months regarding a merger or a purchase of the bank's stock. The existence of any previous "firm offers" that were communicated to the bank would constitute material insider information. If the bank's officers or directors or a company organized or controlled by such persons seeks to purchase shares of the bank, information regarding any prior firm offer known to the purchaser must be disclosed.

The term "firm offer" is not specifically defined under the federal or state securities disclosure requirements. However, it is the position of the Commissioner of Securities that disclosure of previous "firm offers" regarding the merger or purchase of shares for cash cannot be avoided because the bank's board of directors has not approved it, considered or acted upon any such offer, or because negotiations regarding any such offer have been stalled or broken off. Rather, the regulatory position taken is that the disclosure requirement is to be broadly construed whenever insiders or corporations controlled by insiders are involved in purchasing stock from the bank's shareholders. If there is a question as to whether a "firm offer" has been made--including situations in which a verbal offer has been presented to the bank's board of directors but has not been reduced to writing--the decision as to whether or not disclosure is warranted should come down on the side of providing disclosure.

A separate disclosure problem arises in bank merger, acquisition or stock purchase situations, namely the disclosure of any salary increases, consulting contracts or severance benefits paid or to be paid to any officers or directors of the bank. This disclosure issue exists regardless of whether the purchaser is a bank officer, director, or a company organized or controlled by such person. In these situations, bank shareholders need that information to evaluate any position taken or recommendation made by the bank's officers or directors as to whether a cash purchase offer, a merger or a holding company reorganization transaction is fair to shareholders. This information is material to the shareholder's analysis of management's position.

Although the securities of banks are exempt from registration under Wisconsin securities laws, nevertheless, the antifraud provisions of the Wisconsin Uniform Securities Law contained in Wis. Stat. s. 551.41​ are applicable to offers and sales of all securities, including those of banks. Specifically, sub. (2) of the Wisconsin antifraud section provides that it is unlawful for any person in connection with the offer, sale or purchase of any security.

To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading.

In the enforcement actions brought by the Office of Commissioner of Securities, the Commissioner took the position that the failure to provide disclosures regarding previous firm offers was a fraudulent practice under this section. The Commissioner of Securities noted that court cases under both federal and state securities law have established a duty of corporate insiders (officers or directors) to disclose "firm offer" information whenever the insiders, or a corporation controlled by insiders, seek to purchase stock or other securities from the corporation's shareholders.

Consequently, whenever directors of a bank are involved in any of these situations, they should insure that the disclosure materials utilized include all information regarding "firm offers" involving merger or purchase of stock of the bank during the preceding 18 months. Such disclosures may be provided in the proxy materials relating to the shareholders' meeting held pursuant to Wis. Stat. s. 180.04(6) for the purpose of obtaining the shareholder approval required to enable the corporation to acquire more than 10% of a bank's stock.

Also, this office has the following suggestion with regard to the other disclosure area involving compensation arrangements. Whenever the board of directors of a bank takes any position or makes any recommendations as to whether a cash purchase offer, a merger or a holding company reorganization is fair to shareholders and, as part of the transaction, any officer or director of the bank will receive special compensation benefits, information regarding those benefits must be set forth in the disclosure materials provided to shareholders.

We trust that this information will be of assistance to you in performing your fiduciary obligations as board members to shareholders when material events occur affecting your bank that involve these kinds of situations.