SHUMAKER, LOOP & KENDRICK, LLP
NORTH COURTHOUSE SQUARE
1000 JACKSON
David J. Mack TOLEDO, OHIO 43624-1573 OTHER OFFICE LOCATIONS:
(419) 321-1396 TELEPHONE (419) 241-9000 CHARLOTTE
dmack@slk-law.com FAX (419) 241-6894 COLUMBUS
___________ TAMPA
November 2, 2005
VIA EDGAR SUBMISSION, E-MAIL & OVERNIGHT COURIER
Mr. Jeffrey B. Werbitt
Attorney Advisor
United States Securities and Exchange Commission
Division of Corporation Finance
Office of Mergers and Acquisitions
100 F Street, N.E.
Washington, D.C. 20549
RE: MERCHANTS BANCORP, INC.
Schedule 13E-3
Filed September 6, 2005
SEC File No. 5-80876
Preliminary Proxy Statement on Schedule 14A
Filed September 6, 2005
SEC File No. 0-49771
Dear Mr. Werbitt:
On behalf of Merchants Bancorp, Inc. and in response to your comment
letter dated October 17, 2005, this correspondence is being provided
contemporaneously with the revised filing of the above referenced submissions.
The following responses are numbered in accordance with your comment letter. All
references to page numbers refer to page numbers as they appear in the
black-lined document provided to your office by e-mail as a supplement to the
Company's revised EDGAR Submission. The black-lined document does not include
Exhibit 99.2 to the Schedule 13E-3, which materials have not been altered in
response to your comment letter.
1. Following the proposed transactions, the Company will have outstanding
Common Stock held of record by approximately 226 shareholders and Series A
Preferred Stock ("Preferred Stock") held of record by as many as 280
shareholders. Under Section 12(g)(5) of the Exchange Act, the Common Stock
and the Preferred Stock would be deemed to constitute a single "class" of
equity securities for purposes of Section 12(g) if they are of
"substantially similar character and the holders of which enjoy
substantially similar rights and privileges." As more fully discussed below,
based on an analysis of the terms of the respective securities and the
purposes of the Exchange Act, it is our view that the Common Stock and the
Preferred Stock are not substantially similar for purposes of Section
12(g)(5) and, consequently, deregistration of the Common Stock under the
Exchange Act should not be prohibited.
Mr. Jeffrey Werbitt
November 2, 2005
Page 2 of 8
A comparison of the respective characteristics of the Common and Preferred
Stock are set forth in the table below, with a more comprehensive
description of the various terms of each class of security provided in the
accompanying proxy materials.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------
TERM COMPARISON CHART
---------------------
- ----------------------------------------------------------------------------------------------------------
TERM COMMON STOCK SERIES A PREFERRED STOCK
- ----------------------------------------------------------------------------------------------------------
Voting Rights One vote on all matters per share; None
cumulative voting in the election of
directors
- ----------------------------------------------------------------------------------------------------------
Preemptive Rights None None
- ----------------------------------------------------------------------------------------------------------
Dividend Rights As declared by the board out of funds As declared by the board out of funds
legally available therefore; no legally available therefore; preference
dividend payable unless first paid to to holders of Common
holders of Series A Preferred
- ----------------------------------------------------------------------------------------------------------
Conversion Rights None None
- ----------------------------------------------------------------------------------------------------------
Transfer Rights Freely transferable Freely transferable insofar as
transfer would not increase record
ownership
- ----------------------------------------------------------------------------------------------------------
Liquidation Rights Subordinated to holders of Series A Preference over holders of Common -
Preferred Holders are entitled to receive the
"Principal Amount" of $23.00 per
share prior to any distribution to
holders of Common Stock
- ----------------------------------------------------------------------------------------------------------
Callability Not callable Callable at Company's option after
5th year following issuance or in
connection with a "Change in Control"
event
- ----------------------------------------------------------------------------------------------------------
Antidilution Rights None Adjustments tied to adjustments in
the number of outstanding Common
Shares
- ----------------------------------------------------------------------------------------------------------
Term Perpetual Term Series A Preferred mature on the 20th
anniversary following the date of
issuance, at which time all holders
thereof will receive the principal
amount of $23.00 per share
- ----------------------------------------------------------------------------------------------------------
</Table>
Section 12(g)(5) provides that, for purposes of Section 12(g), the term
"class" includes "all securities of an issuer which are of substantially
similar rights and privileges". Because the combined number of record
holders of the Company's Common and Series A Preferred Stock will exceed
500 following the proposed transaction, if the Common Stock and the
Preferred Stock were deemed to constitute a single "class" of equity
security within the meaning of Section 12(g)(5) of the Exchange Act,
Merchants would continue to be subject to the requirements of Section 12(g)
of the Exchange Act and deregistration of its Common Stock would not be
permitted.
In the present case, the characteristics of the Common Stock, on the one
and, and the Preferred Stock, on the other hand, differ in certain
significant respects. With respect to
Mr. Jeffrey Werbitt
November 2, 2005
Page 3 of 8
dividends, holders of Preferred Stock are entitled to receive preferential
cash dividends and to participate pari passu with the shares of Common
Stock in the payment of dividends on the Common Stock. In connection with a
liquidation, holders of Preferred Stock are entitled to receive the
Principal Amount of their investment prior to any liquidating distributions
to holders of Common Stock. The shares of Common Stock possess voting
rights with one vote per Common Share, while the shares of Preferred Stock
have no voting rights. In addition, the Common Stock is perpetual, while
the Preferred Stock has a term of 20 years, at the completion of which all
holders thereof will receive the Principal Amount of their investment.
Finally, shares of Common Stock held by non-affiliates are freely
transferable, while shares of Preferred Stock are subject to certain
restrictions on transfer designed to keep the record number of holders
thereof at the initial level.
We believe that the distinctions between the rights and privileges enjoyed
by the holders of the Common and Preferred Stock are such that these two
classes of securities do not meet the "substantially similar" tests set
forth in Section 12(g)(5) of the Exchange Act. Accordingly, the Common
Stock and the Preferred Stock are separate classes of equity securities for
purposes of determining whether registration under Section 12(g) of the
Exchange Act would be required.
The staff of the Commission has consistently taken "no-action" positions in
the past with respect to determining whether securities with different
voting rights amount to separate classes for purposes of Section 12(g) of
the Exchange Act. In that regard, the Commission has found in numerous
instances that where securities possess different rights with respect to
voting, such securities amount to separate classes of securities under
Section 12(g)(5). See R.H. Macy & Co. (September 1988); Crawford & Co.
(March 25, 1991); Jevic Transportation, Inc. (March 12, 1999); and Turner
Broadcasting Systems, Inc. (February 6, 1990). Similarly, the staff took a
no-action position in favor of an issuer where significant differences
existed in separate classes of securities with respect to profit and loss
shares and guaranty against losses, differences regarding cash
distributions, priority upon liquidation, voting and other participation in
decision-making, withdrawal rights, and transferability. See Bear, Stearns
& Co. (August 2, 1982). A no-action position also was taken by the staff in
favor of an issuer that treated two classes of its common stock as separate
classes of securities for purposes of Section 12(g) of the Exchange Act
where one class had a dividend preference and the other class had greater
voting rights per share. See Motorola Inc. (January 31, 1972). Finally, the
Commission has also deemed securities to be of separate classes where the
major differences between the classes of units related to the allocation of
the profits and losses and distributions. See Cal-American Income Liberty
Fund II (September 1, 1975).
Mr. Jeffrey Werbitt
November 2, 2005
Page 4 of 8
As described above, the rights and privileges of the holders of the Common
Stock are dissimilar from those of the holders of Preferred Stock with
respect to dividends, liquidation, voting, transfer, redemption and term.
Consequently, based upon the differing terms of these securities and the
authority outlined above, we believe that the Common Stock is not
substantially similar to the Preferred Stock, and that they are separate
classes of equity securities within the meaning of sections 12(g)(1) and
12(g)(5) of the Exchange Act.
2. Additional language is provided under the "Introduction" portion of the
Schedule 13E-3/A indicating that shareholders owning between 100 and 1,500
shares are permitted to determine the amount of their Common Shares as to
which they elect to receive cash and/or shares of Series A Preferred Stock.
3. A table indicating the pro forma beneficial ownership of 5% and greater
beneficial owners is provided on pages 5 and 72 of the Preliminary Proxy
Statement. The only 5% and greater beneficial owners of the Common Stock of
the Company (both pre and post transaction) are also each members of the
Company's Board of Directors.
4. Language more thoroughly addressing the treatment with respect to
dividends, particularly the Company's year-end dividend, has been included
on pages 34 and 51 of the Preliminary Proxy Statement.
5. Language indicating the relevant aspects of the new class of Series A
Preferred Stock has been included in the Notice to Shareholders and the
Cover Page of the Preliminary Proxy Statement, as well as on pages 22, 50
and 69 of the Preliminary Proxy Statement.
6. Language regarding the availability and exercise of dissenters' rights of
appraisal has been included on the Cover Page of the Preliminary Proxy
Statement.
7. Additional language is provided on the Cover Page of the Preliminary Proxy
Statement and on pages 3, 10, 49 and 68 of the Preliminary Proxy Statement
which indicates that shareholders owning between 100 and 1,500 shares are
permitted to determine the amount of their Common Shares as to which they
elect to receive cash and/or shares of Series A Preferred Stock.
8. A table showing a comparison of the rights of Common and Series A Preferred
Stock has been included on page 3 of the Preliminary Proxy Statement, and
additional language more thoroughly describing the terms of the Series A
Preferred Stock has been added on page 2 thereof.
9. Language describing the reasons for the structure of this transaction has
been included on page 2 of the Preliminary Proxy Statement.
Mr. Jeffrey Werbitt
November 2, 2005
Page 5 of 8
10. Language describing the accounting treatment has been included on page 7 of
the Preliminary Proxy Statement.
11. Language indicating the position of MBI Merger Sub as to the fairness of
the transaction has been included on page 45 of the Preliminary Proxy
Statement.
12. A table indicating the pre and post transaction beneficial ownership of
directors and executive officers (as well as 5% or greater beneficial
owners) is provided on pages 5 and 72 of the Preliminary Proxy Statement.
Officers and directors will not be impacted by this transaction other than
as discussed in the Preliminary Proxy Statement.
13. Language clarifying the availability of dissenters' rights of appraisal to
all shareholders has been included on page 5 of the Preliminary Proxy
Statement.
14. A summary regarding the procedures for perfecting dissenters' rights of
appraisal has been included on page 6 of the Preliminary Proxy Statement.
15. The referenced language currently addresses the material tax consequences
to security holders. Due to the complexity of the Internal Revenue Code and
regulations promulgated thereunder, individual tax treatment may vary from
shareholder to shareholder depending on their individual circumstances.
16. The Company has determined that shareholders owning more than 100 but fewer
than 1,500 shares shall be permitted to change their election as to the
receipt of the Cash Consideration or Series A Preferred Stock at any time
prior to the date of the special meeting of shareholders. Both the Notice
of the Special Meeting and page 50 of the Preliminary Proxy Statement have
been modified accordingly.
17. The Preliminary Proxy Statement has been revised to state that the proxy
will remain valid only in connection with adjournments of the special
meeting of shareholders.
18. The disclosure beginning on page 13 of the Preliminary Proxy Statement has
been modified to more clearly indicate the Board's deliberative role
regarding the going-private transaction.
19. The preliminary analysis is provided as Exhibit 99.3 to the Company's Form
13E-3/A, and language more thoroughly describing the contents of this
report has been included on page 14 of the Preliminary Proxy Statement.
20. The section of the Preliminary Proxy Statement captioned "Background of the
Merger Proposal" (beginning on page 12) includes discussion regarding all
such meetings, negotiations and contacts. Language regarding the Company's
timing of the proposed transaction has been included on pages 12 and 14 of
the Preliminary Proxy Statement.
Mr. Jeffrey Werbitt
November 2, 2005
Page 6 of 8
Language regarding the Company's engagement of Austin Associates in
connection with the going-private transaction has been included on page 14
of the Preliminary Proxy Statement.
21. Language elaborating on the Board's deliberative process with respect to
establishing the relevant shareholder groupings and its determination not
to provide the option between cash and Series A Preferred Stock to holders
of 100 or fewer shares of Common Stock has been included on page 16 of the
Preliminary Proxy Statement.
22. Language elaborating on the Board's deliberative process with respect to
establishing the amount of the Cash Consideration and Principal Amount of
the Series A Preferred Stock has been included on page 17 of the
Preliminary Proxy Statement.
23. Discussion regarding why the Board determined not to pursue a sale of the
Company in lieu of the going-private transaction has been included on page
19 of the Preliminary Proxy Statement.
24. Language regarding certain alternatives for persons holding their Common
Stock in "street name" has been included on pages 23 and 24 of the
Preliminary Proxy Statement.
25. The relevant language has been deleted from the materials.
26. The bases for Austin Associates' projections pursuant to its discounted
cash flow analysis are provided on page 28 of the Preliminary Proxy
Statement.
27. Language more thoroughly discussing the determination of the fair value of
the Company's Common Stock, and the weighting of the various valuation
methodologies used to determine that amount, has been included on page 31
of the Preliminary Proxy Statement.
28. The Financial Fairness disclosure has been revised (e.g. pages 26 and 27 of
the Preliminary Proxy Statement) to clarify that Austin Associates created
its projections with respect to its Discounted Cash Flow Analysis based
upon the 2005 Budget of Merchants Bancorp, Inc., the material components of
which Budget are provided on page 28 of the Preliminary Proxy Statement.
The 2005 Budget was developed by the Company and provided to Austin
Associates for purposes of preparing its analysis. The Company has
indicated that its Budget calculations have, in all material respects, been
prepared in accordance with GAAP.
29. Language highlighting the enhancement in voting rights to remaining holders
of Common Stock has been included on page 35 of the Preliminary Proxy
Statement.
30. The section of the Preliminary Proxy Statement captioned "Recommendation of
Our Board of Directors," beginning on page 37, has been revised to more
thoroughly address the Board's deliberations regarding its recommendation
to shareholders. With respect to matters of financial fairness, the
discussion indicates the consideration by the Board of all factors
discussed under the section of the Preliminary Proxy Statement captioned
"Financial
Mr. Jeffrey Werbitt
November 2, 2005
Page 7 of 8
Fairness." The discussion under that section indicates the consideration of
the going concern value of the Company (i.e. the discounted cash flow
analysis), historic market prices, and a derivative of net book value (i.e.
the net asset value calculation). The "Financial Fairness" section (page 31
of the Preliminary Proxy Statement) indicates that greater consideration
was given to the discounted cash flow analysis than to either of the other
two measures.
31. The sections of the Preliminary Proxy Statement captioned "Recommendation
of Our Board of Directors" and "Position of MBI Merger Sub, Inc. as to the
Fairness of the Merger" have been revised to address the fairness of the
transaction to each indicated subset of unaffiliated shareholders.
32. Discussion regarding the substantive fairness of the Series A Preferred
Stock has been included on pages 38 and 39 of the Preliminary Proxy
Statement.
33. The sections of the Preliminary Proxy Statement captioned "Recommendation
of Our Board of Directors" has been revised to include a more thorough
analysis of the extent to which the Company's beliefs as to fairness are
based on the factors described in Instruction 2 of Item 1014 of Regulation
M-A, paragraphs (c), (d) and (e) of Item 1014 of Regulation M-A, and Item
1015 of Regulation M-A. This discussion does include an analysis as to why
the Company deemed it unnecessary to structure the transaction to require
the approval of at least a majority of unaffiliated shareholders, or to
retain an unaffiliated representative to act on behalf of such shareholders
in negotiating the terms of the transaction or preparing the report as to
fairness.
34. The relevant section has been revised to include the discussion of the
benefits and detriments that had formerly been included in the section
captioned "Recommendation of Our Board of Directors." In addition, any
particular factors indicated in Comment 34 that were not included in this
discussion have been added.
35. The Company will finalize arrangements for financing immediately prior to
filing its Definitive Proxy Statement and Form 13E-3/A with the Commission.
In addition, the Company has negotiated the terms for this line of credit,
and those terms are now described more thoroughly on page 48 of the
Preliminary Proxy Statement. If necessary, the Company can finance the
transaction with its own liquidity and capital resources with no material
impact on its financial condition. In this instance, the Preliminary Proxy
Statement and the pro forma financial statements would be modified
accordingly.
36. The relevant section has been revised.
37. The Form 10-K has been included as an Appendix to the Preliminary Proxy
Statement and will be delivered to shareholders with the definitive
materials.
Mr. Jeffrey Werbitt
November 2, 2005
Page 8 of 8
38. The relevant language regarding forward incorporation has been deleted.
39. The pro forma ratios have been included on page 58 of the Preliminary Proxy
Statement.
40. The Proxy Card has been revised accordingly.
In connection with this response, the Company herby acknowledges the following:
- it is responsible for the adequacy and accuracy of the disclosure in its
filings;
- staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
- the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
If you have any questions or require additional information with respect to
this filing, please call me directly at 419.321.1396.
Sincerely,
/s/ David J. Mack
David J. Mack
Enclosure
cc: Paul W. Pence, Jr., President
Merchants Bancorp, Inc.
Rick Maroney, Principal
Austin Associates, LLC
Thomas C. Blank, Esq.
Shumaker, Loop & Kendrick, LLP