As filed with the Securities and Exchange Commission on February 5, 2004
Registration No. 333-111967
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------------------
SHORE BANCSHARES, INC.
(Exact name of issuer as specified in its charter)
Maryland 52-1974638
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
18 East Dover Street, Easton, Maryland 21601, (410) 822-1400
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------
W. Moorhead Vermilye
18 East Dover Street, Easton, Maryland 21601, (410) 822-1400
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
-----------------------
Copy to:
Abba David Poliakoff, Esquire David Baris, Esquire
Andrew D. Bulgin, Esquire Kennedy, Baris & Lundy, LLP
Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC 4701 Sangamore Road
233 East Redwood Street Suite P15
Baltimore, Maryland 21202 Bethesda, MD 20816
(410) 576-4280 (301) 229-3400
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commissioner, acting pursuant to said Section
8(a), may determine.
Midstate Bancorp, Inc.
120 W. MAIN STREET
P.O. BOX 266
FELTON, DELAWARE 19943
-------------------------------
TELEPHONE (302) 284-4600
FAX (302) 284-9791
Notice of Special Meeting of Stockholders
To the Stockholders of Midstate Bancorp, Inc.:
We will hold a special meeting of stockholders of Midstate Bancorp, Inc.
on Tuesday, March 16, 2004 at 5:30 p.m., local time, at Felton Community Fire
Hall, Main Street, Felton, Delaware 19943 for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger dated as of November 12, 2003 by and between Shore
Bancshares, Inc. and Midstate Bancorp, Inc., as amended on January
15, 2004, and the consummation of the transactions contemplated
thereby, including the merger of Midstate Bancorp with and into
Shore Bancshares upon the terms and subject to the conditions set
forth in the merger agreement.
2. To transact such other business as may properly come before the
special meeting or any adjournments or postponements of the special
meeting.
The members of the Midstate Bancorp board of directors have unanimously
adopted a resolution declaring the merger and the merger agreement advisable and
recommend that stockholders vote "FOR" approval of the merger and the merger
agreement.
Midstate Bancorp stockholders have appraisal rights under Delaware law in
the merger. To perfect your appraisal rights, you must strictly comply with the
procedures in Sections 262 of the Delaware General Corporation Law, attached as
Appendix C to the proxy statement/prospectus. Failure to strictly comply with
these procedures will result in the loss of these appraisal rights.
We have described the merger and the merger agreement in more detail in
the proxy statement/prospectus, which you should read in its entirety before
voting. A copy of the merger agreement is attached as Appendix A to the proxy
statement/prospectus. Only stockholders of record at the close of business on
February 2, 2004 are entitled to notice of and to vote at the meeting or any
adjournments or postponements of the meeting. The affirmative vote of holders of
a majority of the Midstate Bancorp common stock outstanding on February 2, 2004
is necessary to approve the merger and the merger agreement. If that vote is not
obtained, the merger cannot be completed.
All stockholders are cordially invited to attend the special meeting. To
ensure your representation at the special meeting please complete and promptly
mail your proxy in the enclosed postage-paid envelope. This will not prevent you
from voting in person, but will help to secure a quorum and avoid added
solicitation costs. Your proxy may be revoked at any time before it is voted. If
your shares are not registered in your own name, you will need additional
documentation from the record holder to vote personally at the meeting.
Your vote is important.
Whether or not you plan to attend the meeting, please complete, sign, date
and promptly return the enclosed proxy card in the enclosed postage-paid
envelope.
By Order of the board of directors
W. Edwin Kee, Jr.
Chairman, Board of Directors
Proxy Statement of Prospectus of
Midstate Bancorp, Inc. Shore Bancshares, Inc.
Relating to Relating to 85,688
Special Meeting of Stockholders Shares of Common Stock
The Board of Directors of Midstate Bancorp, Inc. has approved an Agreement
and Plan of Merger, as amended, that contemplates the merger of Midstate Bancorp
with and into Shore Bancshares, Inc. This agreement, as amended, is referred to
in this proxy statement/prospectus as the "merger agreement". As a result of the
merger, The Felton Bank will become a wholly-owned subsidiary of Shore
Bancshares.
If the merger is approved, each share of Midstate Bancorp common stock
outstanding immediately prior to the effective time of the merger will be
converted into (i) $31.00 in cash plus (ii) between 0.8513 and 0.9015 shares of
Shore Bancshares common stock, depending upon the price of Shore Bancshares
common stock prior to the merger, except that cash will be paid in lieu of
fractional shares. The number of shares of Shore Bancshares common stock into
which each share of Midstate Bancorp common stock will be converted will be
calculated as follows:
Average Shore Bancshares Shares of Shore Bancshares Common Stock Received
Common Stock Price (per Midstate Bancorp share)
- -------------------------------------------------------------------------------------
$30.95 or less 0.9015
$30.96 to $31.94 $27.90 divided by Shore Bancshares Stock Price
$31.95 to $39.05 0.8732
$39.06 to $40.04 $34.10 divided by Shore Bancshares Stock Price
$40.05 or greater 0.8513
The price of Shore Bancshares common stock for these purposes will be the
average of the daily closing bid and closing ask quotations of Shore Bancshares
common stock as reported on The Nasdaq SmallCap Market for each of the 20
consecutive trading days ending five days before the merger. Shore Bancshares
common stock is listed under the symbol "SHBI" on the Nasdaq SmallCap Market.
Based on the average of the daily closing bid and closing ask quotations
for each of the 20 consecutive trading days ending on February 3, 2004, or
$37.63 per share, Shore Bancshares estimates that it will pay approximately $2.9
million in cash and issue approximately 82,998 shares of Shore Bancshares common
stock to Midstate Bancorp stockholders in the merger. Those shares will
represent approximately 1.5% of the outstanding Shore Bancshares common stock
after the merger.
The merger requires the receipt of bank regulatory approvals by Shore
Bancshares and the approval of the merger agreement and the merger by the
holders of a majority of the outstanding shares of Midstate Bancorp common
stock. Midstate Bancorp's Board of Directors has scheduled a meeting of Midstate
Bancorp stockholders to vote on the merger and the merger agreement.
This proxy statement/prospectus includes detailed information about the
time, date and place of the stockholders meeting. Please carefully review this
document. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE
SECTION ENTITLED "RISK FACTORS" ON PAGE 14 OF THIS DOCUMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES TO BE ISSUED UNDER THIS
DOCUMENT, OR DETERMINED IF THIS DOCUMENT IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF SHORE
BANCSHARES COMMON STOCK ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS
OF ANY BANK OR SAVINGS ASSOCIATION, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
This document is dated February __, 2004 and is first being mailed to
stockholders on or about February 13, 2004.
This proxy statement and prospectus incorporates important business and
financial information about Shore Bancshares that is not included in or
delivered with this document.
This information is available without charge to you upon your written or
oral request. You may obtain documents incorporated by reference in this proxy
statement/prospectus by requesting them in writing or by telephone from Shore
Bancshares at the following address and phone number: Shore Bancshares, Inc., 18
East Dover Street, Easton, Maryland 21601, Attention: Treasurer (410) 822-1400.
If you would like to request documents, please do so by March 9, 2004 to receive
them before the special meeting.
See "Where You Can Find More Information" on page 72 and "Incorporation of
Certain Information by Reference" on page 73 for further information.
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE MERGER........................................1
SUMMARY ......................................................................4
The Companies.............................................................4
The Merger................................................................5
Federal Income Tax on Shares Received in the Merger.......................9
A Warning About Forward-Looking Statements................................9
Share Price Data..........................................................9
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA..........................10
SUMMARY HISTORICAL FINANCIAL DATA............................................11
FORWARD-LOOKING STATEMENTS...................................................13
RISK FACTORS.................................................................14
Because the Market Price of Shore Bancshares Common Stock may
Fluctuate, You Cannot be Sure of the Value of the Merger
Consideration that You Will Receive......................................14
Shore Bancshares' Activities May Be Limited, And it May be
Required To Restructure its Operations, if Felton Bank is Not
Well Managed After the Merger............................................14
Midstate Bancorp Stockholders May Incur Federal Income Tax...............15
The Stock of Shore Bancshares is Not Heavily Traded......................15
The Stock of Shore Bancshares is Not Insured.............................16
Earnings May be Adversely Affected by Unsuccessful Integration
of the Companies.........................................................16
Earnings Could be Adversely Affected by Unanticipated Costs..............16
Shore Bancshares' Future Depends on the Successful Growth of
its Subsidiaries.........................................................17
The Majority of Shore Bancshares' Business is Concentrated in
Maryland; A Significant Amount of Shore Bancshares' Business
is Concentrated in Real Estate Lending...................................17
i
The Banks May Experience Loan Losses in Excess of their Allowances.......17
Interest Rates and Other Economic Conditions Will Impact
Results of Operation.....................................................18
The Ability of Shore Bancshares to Pay Dividends is Limited..............18
The Market Value of Shore Bancshares' Investments Could Decline..........19
The Banking Industry is Heavily Regulated; Significant
Regulatory Changes Could Adversely Affect Shore Bancshares'
Operations...............................................................19
Shore Bancshares May be Adversely Affected by Recent Legislation.........20
Shore Bancshares Operates in a Competitive Market........................20
Shore Bancshares May be Subject to Claims................................21
Shore Bancshares May Not be Able to Keep Pace with
Developments in Technology...............................................21
Shore Bancshares' Articles of Incorporation and Bylaws and
Maryland Law May Discourage a Corporate Takeover.........................21
SPECIAL MEETING OF MIDSTATE BANCORP STOCKHOLDERS.............................22
Date, Place, Time and Purpose............................................22
Record Date, Voting Rights, Quorum and Required Vote.....................22
Voting and Revocability of Proxies.......................................23
Solicitation of Proxies..................................................23
Appraisal Rights.........................................................23
THE MERGER...................................................................26
General..................................................................26
The Companies............................................................26
Background of the Merger.................................................27
Reasons for the Merger...................................................30
Opinion of Midstate Bancorp's Financial Adviser..........................33
Material Federal Income Tax Consequences of the Merger...................38
Backup Withholding and Information Reporting.............................40
ii
Accounting Treatment.....................................................40
Regulatory Approvals.....................................................40
Interests of Certain Persons in the Merger...............................41
Resale of Shore Bancshares Common Stock..................................41
DESCRIPTION OF THE MERGER AGREEMENT..........................................42
Time of Completion.......................................................42
Consideration to be Received in the Merger...............................42
Exchange of Certificates.................................................44
Representations and Warranties...........................................46
Conduct of Business Pending the Merger and Certain Covenants.............47
Exclusive Dealing........................................................49
Conditions to Completion of the Merger...................................49
Termination..............................................................50
Employee Benefit Matters.................................................51
Expenses.................................................................52
Indemnification and Related Matters......................................52
CERTAIN OTHER AGREEMENTS AND INFORMATION.....................................52
Affiliate Undertakings...................................................52
Supplemental Agreements..................................................52
Beneficial Ownership of Common Stock.....................................53
DESCRIPTION OF SHORE BANCSHARES CAPITAL STOCK................................54
General..................................................................54
Common Stock.............................................................55
Preferred Stock..........................................................55
COMPARISON OF STOCKHOLDER RIGHTS.............................................56
Authorized Capital Stock.................................................56
iii
Voting Rights............................................................56
Dividends................................................................57
Liquidation..............................................................57
Classification of Stock..................................................58
Number of Directors......................................................58
Election of Directors....................................................58
Removal of Directors.....................................................58
Vacancies on the Board of Directors......................................58
Notice of Stockholder Nominations of Directors and Stockholders
Proposals................................................................59
Special Meetings.........................................................61
Notice of Meetings.......................................................61
Quorum...................................................................62
Stockholder Action Without a Meeting.....................................62
Preemptive Rights........................................................62
Standard of Conduct of Directors.........................................62
Limitations on Director Liability........................................63
Indemnification..........................................................64
Mergers, Share Exchanges and Sales of Assets.............................65
Amendments to the Charter................................................66
Amendments to the Bylaws.................................................67
Voting on Certain Interested Transactions................................67
Stockholder Inspection Rights, Stockholder Lists.........................68
Business Combinations....................................................68
Control Share Statute....................................................70
LEGAL MATTERS................................................................71
EXPERTS .....................................................................71
iv
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS.................................71
OTHER BUSINESS...............................................................72
WHERE YOU CAN FIND MORE INFORMATION..........................................72
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................73
APPENDIX A..................................................................A-1
APPENDIX B..................................................................B-1
APPENDIX C..................................................................C-1
v
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. What companies are party to the merger?
A. Shore Bancshares and Midstate Bancorp have signed a definitive merger
agreement, which, as amended, is attached as Appendix A, whereby Midstate
Bancorp will merge with and into Shore Bancshares. Midstate Bancorp is the
parent company of The Felton Bank, and Shore Bancshares is the parent company of
The Talbot Bank of Easton, Maryland, The Centreville National Bank of Maryland,
The Avon-Dixon Agency, LLC, Elliott Wilson Insurance, LLC, Mubell Finance, LLC,
Wye Financial Services, LLC, and Shore Pension Services, LLC. After the merger,
Talbot Bank, Centreville National Bank, and Felton Bank will continue to operate
as separate banks. When we refer to "we", "us", or "our" in this proxy
statement/prospectus, we mean Shore Bancshares, Inc., Midstate Bancorp, Inc..
and, as the context requires, their subsidiaries.
Q: What will I receive in the merger?
A: If the proposed merger is consummated, each share of Midstate Bancorp common
stock outstanding immediately prior to the effective time of the proposed merger
will be converted into the right to receive $31.00 in cash plus between 0.8513
and 0.9015 shares of Shore Bancshares common stock, depending on the price of
Shore Bancshares common stock prior to the merger, except that cash will be paid
in lieu of fractional shares. The exact number of shares of Shore Bancshares
common stock and the exact amount of cash in lieu of fractional shares that you
will receive in the proposed merger will be determined based on a formula set
forth in the merger agreement and described in this document. There is a table
on page 43 that sets forth the per share stock consideration that would be
received by Midstate Bancorp stockholders based on a range of assumed average
closing bid and ask quotations of Shore Bancshares common stock. Notwithstanding
the foregoing, if the value of all shares of Shore Bancshares common stock to be
issued as described above would not constitute at least 40% of the aggregate
merger consideration to be received by all Midstate Bancorp stockholders, then
Shore Bancshares will increase the number of shares to be issued, and
proportionately decrease the amount of cash to be paid, to Midstate Bancorp
stockholders to satisfy this 40% threshold. Shore Bancshares common stock is
listed on the Nasdaq SmallCap Market under the symbol "SHBI".
Q: Why did the companies decide to merge?
A: The members of the boards of directors of both companies believe that the
merger is advisable and in the best interests of their respective stockholders.
In reaching its decision, the board of Shore Bancshares sought to increase its
market presence on the Delmarva Peninsula by expanding into Delaware. The
Midstate Bancorp board believed the merger would strengthen Felton Bank by
permitting it to use and take advantage of the resources of a strong and
established financial holding company. Both boards relied on a number of factors
in reaching their decisions, which are more fully described in this proxy
statement/prospectus. See "The Merger--Reasons for the Merger" beginning on page
30.
- 1 -
Q: Should I send in my stock certificates?
A: No. You should not send in your stock certificates at this time. Midstate
Bancorp stockholders will exchange their Midstate Bancorp common stock
certificates for cash and/or Shore Bancshares common stock certificates after we
complete the merger. Instructions for exchanging Midstate Bancorp common stock
certificates will be sent to you promptly after the merger is completed.
Q: What do I need to do now?
A: After you have carefully read this proxy statement/prospectus, mail your
signed proxy card in the enclosed postage-paid envelope. The instructions on the
accompanying proxy card will give you more information on how to vote by mail.
This will enable your shares to be represented at the Midstate Bancorp special
meeting. If you fail to return a proxy card or abstain from voting, the effect
will be a vote against the merger.
Q: If my shares are held in "street name" by my broker or other custodian, will
my broker or custodian vote my shares for me?
A: Your broker or custodian will not be able to vote your shares without
instructions from you. You should instruct your broker or custodian to vote your
shares, following the directions your broker or custodian provides. Your failure
to instruct your broker or custodian to vote your shares will result in your
shares not being voted, and the effect will be a vote against the merger.
Q: Can I change my vote after I have submitted my proxy with voting
instructions?
A: Yes. There are three ways you can change your vote. First, you may send a
written notice to the person to whom you submitted your proxy stating that you
would like to revoke your proxy. Second, you may complete and submit a new proxy
card by mail or submit your proxy with new voting instructions. The proxy dated
latest and actually received by Midstate Bancorp before the stockholders'
meeting will be your vote. Any earlier dated proxy will be revoked. Third, you
may attend the Midstate Bancorp special meeting and vote in person. Any earlier
dated proxy will be revoked. Simply attending the meeting without voting,
however, will not revoke your proxy. If you have instructed a broker to vote
your shares, you must follow directions you will receive from your broker to
change or revoke your proxy.
Q: What vote is required to approve the merger?
A: To complete the merger, holders of a majority of the outstanding shares of
Midstate Bancorp common stock entitled to vote at the stockholders' meeting must
approve the merger and the merger agreement. As of the record date (February 2,
2004), directors and executive officers of Midstate Bancorp and their affiliates
beneficially owned 5,740 shares of Midstate Bancorp common stock, which
represented 5.90% of the Midstate Bancorp common stock outstanding on that date.
As of the same date, Shore Bancshares owned 3,510 shares of Midstate Bancorp
common stock, or 3.61% of the Midstate Bancorp common stock outstanding on that
- 2 -
date, and no director or executive officer of Shore Bancshares, or any affiliate
of such director or executive officer (other than Shore Bancshares),
beneficially owned any shares of Midstate Bancorp common stock.
Q: May dissenting stockholders seek appraisal rights in the merger?
A: Midstate Bancorp stockholders have appraisal rights under Delaware law in the
merger. To perfect your appraisal rights, you must strictly comply with the
procedures in Sections 262 of the Delaware General Corporation Law, a copy of
which is attached to this proxy statement/prospectus as Appendix C. Failure to
strictly comply with these procedures will result in the loss of these appraisal
rights. See "Special Meeting of Midstate Bancorp Stockholders--Appraisal Rights"
on page 23.
Q: When do you expect to complete the merger?
A: We presently expect to complete the merger in the first quarter of 2004.
However, we cannot assure you of when or if the merger will occur. We must first
obtain the approval of the holders of Midstate Bancorp common stock and state
and federal bank regulators. We have filed applications with the Board of
Governors of the Federal Reserve System (this agency is sometimes referred to in
this document as the "Federal Reserve Board"), the Maryland Commissioner of
Financial Regulation, and the Delaware State Bank Commissioner.
Q: Who should I call if I have questions related to the merger?
A: Midstate Bancorp stockholders should call Thomas Evans at (302) 284-4600 with
any questions about the merger and the related transactions.
Q: Where can I find more information about Shore Bancshares?
A: Shore Bancshares files reports and other information with the Securities and
Exchange Commission ("SEC"). You may read and copy this information at the SEC's
public reference facilities in Washington, D.C. Please call the SEC at
1-800-SEC-0330 for information about these facilities. This information is also
available at the SEC's Internet site (http://www.sec.gov). Shore Bancshares also
maintains an Internet site (http://www.shbi.net) on which these reports and the
other information may be found. You can also request copies of these documents
from Shore Bancshares. See "Where You Can Find More Information" on page 72 and
"Incorporation of Certain Information by Reference" on page 73.
- 3 -
SUMMARY
This brief summary highlights selected information from this proxy
statement/prospectus. This summary may not contain all of the information that
is important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should carefully read this
entire document, as well as the additional documents to which we refer you,
including the merger agreement. We encourage you to read the merger agreement in
its entirety, as it is the legal document that governs the proposed merger and
the other transactions contemplated by the merger agreement. Also, we
incorporate by reference important business and financial information about
Shore Bancshares. See "Incorporation of Certain Information by Reference" on
page 73 on how to obtain copies of these documents. Each item in this summary
makes references to the page or pages where that subject is discussed in more
detail.
The Companies
Shore Bancshares, Inc. (see page 26)
18 East Dover Street
Easton, Maryland 21601
(410) 822-1400
Shore Bancshares is a Maryland corporation registered as a financial
holding company and a bank holding company under the Bank Holding Company Act of
1956, as amended. Shore Bancshares is the parent of two bank subsidiaries, The
Talbot Bank of Easton, Maryland and The Centreville National Bank of Maryland.
Talbot Bank is a Maryland-chartered commercial bank that was acquired in 2000
when Talbot Bancshares, Inc. merged with and into Shore Bancshares. Talbot Bank
has banking offices in the Maryland counties of Talbot and Dorchester.
Centreville National Bank is a national banking association with its main office
in Centreville, Maryland. Centreville National Bank has offices in the Maryland
counties of Caroline, Kent, and Queen Anne's. Shore Bancshares is also the
parent of two insurance producer subsidiaries, The Avon-Dixon Agency, LLC, and
Elliott Wilson Insurance, LLC, one insurance premium finance company, Mubell
Finance, LLC, and an investment adviser, Wye Financial Services, LLC, all of
which are Maryland limited liability companies. Another subsidiary, Shore
Pension Services, LLC, is currently inactive.
At September 30, 2003, Shore Bancshares had total assets of approximately
$710.9 million, total loans of approximately $458.7 million, total deposits of
approximately $591.8 million and approximately $81.6 million in stockholders'
equity. The deposits associated with the bank subsidiaries of Shore Bancshares
are insured by the Federal Deposit Insurance Corporation.
- 4 -
Midstate Bancorp, Inc. (see page 27)
120 West Main Street
Felton, Maryland 19943
(302) 284-4600
Midstate Bancorp, Inc. is a Delaware corporation registered as a bank
holding company under the Bank Holding Company of 1956, as amended. The sole
subsidiary of Midstate Bancorp is The Felton Bank, a Delaware commercial bank.
Felton Bank began operations in 1908 and engages in both the commercial and
consumer banking business through two offices in Kent County, Delaware. The
deposits associated with Felton Bank are insured by the Federal Deposit
Insurance Corporation.
At September 30, 2003, Midstate Bancorp had total assets of approximately
$51.5 million, total loans of approximately $32.3 million, total deposits of
approximately $47.4 million and approximately $3.1 million in stockholders'
equity.
The Merger
The merger agreement is attached to this proxy statement/prospectus as
Appendix A. We encourage you to read the merger agreement, as it is the legal
document that governs the merger between Midstate Bancorp and Shore Bancshares.
Upon completion of the merger, Midstate Bancorp will merge with Shore
Bancshares, and Midstate Bancorp will cease to exist as a separate company.
Shares of Midstate Bancorp Common Stock Will Be Exchanged For Cash and
Shares of Shore Bancshares Common Stock (page 42). You will receive $31.00 in
cash plus between 0.8513 and 0.9015 shares of Shore Bancshares common stock for
each share of Midstate Bancorp common stock you own, except that you will
receive cash in lieu of fractional shares. The number of shares of Shore
Bancshares common stock received will depend on the average of the daily closing
bid and closing ask quotations of Shore Bancshares common stock as reported on
The Nasdaq SmallCap Market for each of the 20 consecutive trading days ending
five days before the merger. Notwithstanding the foregoing, if the value of all
shares of Shore Bancshares common stock to be issued as described above would
not constitute at least 40% of the aggregate merger consideration to be received
by all Midstate Bancorp stockholders, then Shore Bancshares will increase the
number of shares to be issued, and proportionately decrease the amount of cash
to be paid, to Midstate Bancorp stockholders to satisfy this 40% threshold.
Meeting to be Held March 16, 2004; Record Date (page 22). The Midstate
Bancorp meeting will be held at 5:30 p.m. on Tuesday, March 16, 2004 at Felton
Community Fire Hall, Main Street, Felton, Delaware 19943. At the meeting,
Midstate Bancorp stockholders will be asked to consider and vote on a proposal
to approve the merger by approving and adopting the merger agreement. If you
held shares of Midstate Bancorp common stock at the close of business on
February 2, 2004, you are entitled to vote on the proposed merger and any other
matters considered at the meeting or any adjournments or postponements of the
meeting.
- 5 -
Required Vote (page 22). For the proposed merger to be approved, a
majority of the outstanding shares of Midstate Bancorp common stock entitled to
be voted at the meeting must vote in favor of the proposal to approve the
proposed merger by approving and adopting the merger agreement. Each share is
entitled to one vote on each matter to be voted on at the Midstate Bancorp
meeting. As of the record date, there were 405 registered stockholders of
Midstate Bancorp holding 97,360 shares of Midstate Bancorp common stock. Of
these shares, 5,740 shares were owned by directors and executive officers of
Midstate Bancorp and their affiliates and 3,510 shares were owned by Shore
Bancshares. No shares of Midstate Bancorp common stock are held by directors and
executive officers of Shore Bancshares or their affiliates (other than Shore
Bancshares).
The stockholders of Shore Bancshares are not required to approve the
proposed merger. The board of directors of Shore Bancshares approved the
proposed merger and the merger agreement on November 5, 2003.
Midstate Bancorp Recommends Stockholder Approval (page 22). The Midstate
Bancorp board of directors has determined that the proposed merger is advisable
and in the best interests of Midstate Bancorp and the Midstate Bancorp
stockholders. The members of the Midstate Bancorp board of directors unanimously
approved the merger agreement and the proposed merger and recommend that
Midstate Bancorp stockholders vote FOR the proposal to approve the merger
agreement and the proposed merger.
No Solicitation (page 49). Midstate Bancorp has agreed that, until the
completion of the proposed merger, it will not directly or indirectly take any
specified actions with respect to any acquisition proposal. However,
notwithstanding these restrictions, Midstate Bancorp may, if necessary to comply
with its fiduciary obligations and subject to other qualifications and
conditions, furnish information and engage in discussions or negotiations in
response to unsolicited acquisition proposals.
Merger Consideration Is Fair to Stockholders, According to Financial
Advisers (page 33). In deciding to approve the proposed merger, the Midstate
Bancorp board of directors received and considered the opinion dated November
11, 2003 of RP Financial, LC, its financial adviser, as to the fairness to the
stockholders of Midstate Bancorp of the merger consideration from a financial
point of view as of that date. The opinion of RP Financial, LC is not a
recommendation as to how any Midstate Bancorp stockholder should vote with
respect to the proposal to approve the proposed merger. This opinion was updated
as of the date of this proxy statement/prospectus, and you should read it in its
entirety to understand the assumptions made, matters considered and limitations
of the review undertaken by RP Financial, LC in providing its opinion. The
updated opinion of RP Financial, LC is attached as Appendix B. RP Financial, LC
will receive total fees of approximately $20,000 for its services as financial
adviser to Midstate Bancorp in connection with the proposed merger.
- 6 -
Benefits to Certain Midstate Bancorp Officers and Directors in the Merger
(pages 41 and 52). Some of Midstate Bancorp's directors and officers have
interests in the proposed merger that are different from, or in addition to,
your and their interests as stockholders. Shore Bancshares will enter into an
employment agreement with Thomas Evans, who will continue to serve as President
and Chief Executive Officer of Felton Bank, and Midstate Bancorp will accelerate
Mr. Evans unvested right to receive shares of Midstate Bancorp common stock
prior to the proposed merger. W. Edwin Kee, Jr. will be appointed to serve on
the Shore Bancshares board of directors after the proposed merger. Additionally,
Shore Bancshares will continue to indemnify directors and executive officers
(both current and former) of Midstate Bancorp and Felton Bank under certain
circumstances and will maintain a directors and officers insurance policy with
respect to these individuals.
Conditions to the Merger (page 49). The proposed merger will not be
completed unless we satisfy several conditions, including:
o approval of the merger agreement and proposed merger by Midstate
Bancorp stockholders;
o the absence of legal restraints that prevent the completion of the
proposed merger;
o the absence of any governmental actions initiated or pending against
us with respect to the proposed merger;
o termination of all restrictive agreements between Midstate Bancorp
and/or Felton Bank and their banking regulators;
o receipt of a legal opinion from Shore Bancshares' legal counsel that
the proposed merger will be tax-free, except to the extent of any
cash received by Midstate Bancorp stockholders in the proposed
merger and cash received by dissenters;
o the continuing accuracy of our representations in the merger
agreement;
o the performance of our duties and obligations as set forth in the
merger agreement;
o the continuing effectiveness of the registration statement filed
with the SEC; and
o the receipt of certain bank regulatory approvals.
We may not waive any conditions that are required by law to complete the
proposed merger, including the requirements for stockholder approval, the
requirements for regulatory approval and that the registration statement be
effective on the closing date of the proposed merger. Unless prohibited by law,
either Midstate Bancorp or Shore Bancshares may waive a condition that has not
been satisfied and complete the proposed merger. Neither Midstate Bancorp nor
Shore Bancshares intends to waive any material condition to the proposed merger.
- 7 -
Termination and Amendment of the Merger Agreement (page 50 and page 51).
We can mutually agree at any time to terminate the merger agreement without
completing the proposed merger. Either of us can also terminate the merger
agreement if, among other reasons:
o any required approval, consent or waiver is finally denied;
o the other party materially breaches any of its representations,
warranties or agreements under the merger agreement or the proposed
merger, and this breach is not cured within 30 days;
o the proposed merger is not completed by July 31, 2004; or
o Midstate Bancorp fails to obtain stockholder approval.
Midstate Bancorp can terminate the merger agreement if the average of the
closing bid and ask quotations for the 20 trading day period ending on the fifth
day preceding the proposed merger falls below $26.63 per share and Shore
Bancshares does not agree to pay additional cash or shares of Shore Bancshares
common stock to Midstate Bancorp stockholders who would otherwise be entitled to
receive shares of Shore Bancshares common stock in the proposed merger.
Shore Bancshares can terminate the merger agreement if Midstate Bancorp's
independent auditor is unable to issue an unqualified opinion of its audit of
the consolidated financial statements of Midstate Bancorp for calendar year
2003.
At any time before the completion of the proposed merger, we may amend the
merger agreement in any way. After the merger agreement is approved by
stockholders of Midstate Bancorp and subject to applicable law, we may also
amend the merger agreement in any way unless the amendment would reduce the
amount or change the form of merger consideration, in which case Midstate
Bancorp stockholders must approve the amendment.
Regulatory Approvals We Must Obtain for the Merger (see page 40). We
cannot complete the proposed merger unless it is approved by the Federal Reserve
Board, the Delaware State Bank Commissioner, and the Maryland Commissioner of
Financial Regulation. We have filed applications with these agencies seeking
their approval. The U.S. Department of Justice has input into this approval
process. Unless shortened by the Federal Reserve Board, we cannot complete the
proposed merger until 30 days after the Federal Reserve Board approves the
proposed merger. Although we do not know of any reason why we cannot obtain
these regulatory approvals in a timely manner, we cannot be certain that we will
obtain them, or when we will obtain them.
Effect of Merger on Rights of Midstate Bancorp Stockholders (see page 56).
The rights of Midstate Bancorp's stockholders are governed by Delaware law and
Midstate Bancorp's Certificate of Incorporation and Bylaws. After completion of
the proposed merger, the rights of the former Midstate Bancorp stockholders
receiving Shore Bancshares common stock in the
- 8 -
proposed merger will be governed by Maryland law and Shore Bancshares' Amended
and Restated Articles of Incorporation and its Amended and Restated Bylaws.
Although Maryland law and these governing documents are similar in many ways to
Delaware law and Midstate Bancorp's Certificate of Incorporation and Bylaws,
there are some substantive and procedural differences that will affect the
rights of such Midstate Bancorp stockholders.
Dissenters' Rights of Appraisal (page 23). If the proposed merger is
completed, Midstate Bancorp stockholders who do not vote for or consent to the
adoption of the merger agreement and who otherwise comply with Sections 262 of
the Delaware General Corporation Law will be entitled to appraisal rights under
Delaware law. A copy of Section 262 of the Delaware General Corporation Law is
attached as Appendix C.
Federal Income Tax on Shares Received in the Merger (page 38)
As a condition to closing of the proposed merger, we will receive an
opinion of Shore Bancshares' tax counsel concluding, among other things, that
the proposed merger will qualify as a reorganization under Section 368(a)(1)(A)
of the Internal Revenue Code. For federal income tax purposes, no gain or loss
generally will be recognized by a Midstate Bancorp stockholder on the exchange
of shares of Midstate Bancorp common stock for shares of Shore Bancshares common
stock. Midstate Bancorp stockholders will recognize gain or loss for federal
income tax purposes on the exchange of shares of Midstate Bancorp common stock
for cash. This includes the $31.00 in cash to be received by all Midstate
Bancorp stockholders in exchange for each share of Midstate Bancorp common
stock, any cash received in lieu of fractional shares, and any cash paid upon
exercise of dissenters' rights. Tax matters are very complicated and the tax
consequences of the proposed merger to you will depend on your personal
circumstances. We urge you to consult your own tax advisors to understand fully
the tax consequences to you.
A Warning About Forward-Looking Statements (page 13)
We make statements in this proxy statement/prospectus and in the documents
delivered and incorporated by reference that are forward-looking. You can
identify these statements by our use of words like "may," "will," "expect,"
"anticipate," "estimate," "continue," or similar expressions. Forward-looking
statements represent our judgment about the future and are not guarantees of our
future performance. Certain risks and uncertainties could cause our actual
operating results and financial position to differ materially from our
projections. We caution you not to place undue reliance on forward-looking
statements. Such forward-looking statements represent our estimates and
assumptions only as of the date of this proxy statement/prospectus.
Share Price Data (page 10)
Shore Bancshares common stock is publicly traded and quoted on The Nasdaq
SmallCap Market under the Symbol "SHBI". Midstate Bancorp common stock is not
traded on any exchange, and no established trading market exists for its common
stock.
- 9 -
The closing price of shares of Shore Bancshares common stock on November
11, 2003, the last full trading day prior to the date we publicly announced the
proposed merger, was $42.17. The closing price of shares of Shore Bancshares
common stock on February 4, 2004, the latest practicable date prior to the date
of this proxy statement/prospectus, was $37.05. The last sale of Midstate
Bancorp common stock known to Midstate Bancorp was on September 30, 2003 and
involved the sale of 500 shares at $30.00 per share. There may be other trades
of which Midstate Bancorp is not aware. This trade does not necessarily
represent the market value of Midstate Bancorp common stock.
Because the market price of Shore Bancshares common stock can fluctuate,
the market value of the Shore Bancshares common stock that Midstate Bancorp's
stockholders will receive in the proposed merger may increase or decrease before
the effective date of the proposed merger. Midstate Bancorp's stockholders are
urged to obtain current market quotations for Shore Bancshares common stock.
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The table below sets forth the last sales prices as reported by Nasdaq for
Shore Bancshares common stock on the dates indicated, and the equivalent per
share value for Midstate Bancorp common stock, giving effect to the proposed
merger as of the same dates. Shore Bancshares common stock is listed on The
Nasdaq SmallCap Market under the symbol "SHBI". Midstate Bancorp common stock is
not traded on any exchange, and no established trading market exists for its
common stock.
Closing Price Historical Price Midstate Bancorp
Shore Bancshares Midstate Bancorp Equivalent
Common Stock Common Stock(3) Per Share Value(4)
------------------------------------------------------------
November 11, 2003(1) $42.17 $30.00 $66.90
February 4, 2004(2) $37.05 $30.00 $63.35
----------
(1) Trading date preceding the date of public announcement of the proposed
merger.
(2) Trading date preceding the date of this proxy statement/prospectus.
(3) There is currently no market value for the shares of Midstate Bancorp
being acquired. The price listed above represents, to the knowledge of
Midstate Bancorp, the price at which shares of Midstate Bancorp common
stock were last sold.
(4) This amount assumes that the stated closing price of Shore Bancshares
common stock represents the average of the closing bid and ask quotations
for the 20 days ending five days before the merger. The actual bid and ask
quotations are subject to market fluctuations.
- 10 -
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data of Shore
Bancshares. Shore Bancshares' historical financial data for each of the annual
periods presented have been derived from its audited consolidated financial
statements previously filed with the SEC. Shore Bancshares' historical financial
data for the nine months ended September 30, 2003 and 2002 has been derived from
its quarterly reports on Form 10-Q previously filed with the Commission. In the
opinion of the management of Shore Bancshares, the data for interim periods
includes all normal recurring adjustments necessary for a fair presentation of
results for those periods. Operating results for the nine months ended September
30, 2003 for Shore Bancshares are not necessarily indicative of the results that
may be obtained for the entire year ended December 31, 2003.
The summary historical financial data set forth below does not purport to
be complete. Further information about Shore Bancshares is presented in the
financial statements incorporated by reference in this proxy
statement/prospectus. See "Incorporation of Certain Information by Reference" on
page 73.
- 11 -
Nine months ended
September 30, Years Ended December 31,
(Dollars in thousands, except
per shares data) 2003 2002 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Interest income $ 25,608 $ 27,314 $ 36,306 $ 38,938 $ 39,480 $ 35,435 $ 34,058
Interest expense 7,535 9,567 12,438 17,061 17,888 16,039 15,386
-------------------------------------------------------------------------------------
Net interest income 18,073 17,747 23,868 21,877 21,592 19,396 18,672
Provision for credit losses 235 277 356 226 437 240 240
-------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 17,838 17,470 23,512 21,651 21,155 19,156 18,432
Noninterest income 7,713 3,895 5,968 2,646 3,104 2,138 1,660
Noninterest expenses 14,316 11,480 15,960 12,026 11,904 10,961 10,634
-------------------------------------------------------------------------------------
Income before taxes 11,235 9,885 13,520 12,271 12,355 10,333 9,458
Income taxes 4,063 3,500 4,730 4,277 4,398 3,528 3,224
-------------------------------------------------------------------------------------
NET INCOME $ 7,172 $ 6,385 $ 8,790 $ 7,994 $ 7,957 $ 6,805 $ 6,234
=====================================================================================
PER SHARE DATA:
Net income - basic $ 1.33 $ 1.19 $ 1.64 $ 1.50 $ 1.50 $ 1.28 $ 1.16
Net income - diluted 1.31 1.18 1.62 1.49 1.48 1.27 1.15
Dividends paid 0.49 0.45 0.60 0.60 0.52 0.45 0.40
Book value (at end of period) 15.16 14.24 14.52 13.31 12.21 11.00 10.58
Tangible book value
(at end of period) (1) 13.75 12.94 13.08 13.03 11.91 10.67 10.22
FINANCIAL CONDITION
(at end of period):
Assets $710,852 $636,623 $654,066 $582,403 $553,097 $518,217 $ 483,308
Deposits 591,762 527,339 545,192 487,470 464,485 436,021 403,237
Total loans, net of unearned
income and allowance for credit
losses 454,577 432,762 435,422 388,516 378,307 341,800 301,629
Stockholders' equity 81,551 76,500 78,028 70,971 65,024 58,485 56,188
PERFORMANCE RATIOS (for the period ended):
Return on average assets 1.43% 1.39% 1.42% 1.42% 1.52% 1.37% 1.37%
Return on average stockholders' equity 11.97% 11.63% 11.79% 11.70% 12.98% 11.85% 11.16%
Net interest margin 3.90% 4.15% 4.12% 4.15% 4.40% 4.18% 4.40%
Efficiency ratio(2) 55.52% 53.05% 53.49% 49.04% 48.20% 50.90% 52.30%
Dividend payout ratio 36.84% 37.82% 36.60% 40.00% 34.97% 35.34% 34.39%
Average stockholders' equity to
average total assets 11.97% 11.96% 12.00% 12.16% 11.68% 11.53% 12.25%
(1) Total stockholders' equity, net of goodwill and other intangible
assets, divided by the number of shares of common stock outstanding
at year end.
(2) Noninterest expenses as a percentage of total revenue (net interest
income plus total noninterest income). Lower ratios indicate
improved productivity.
- 12 -
FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains and incorporates by reference
statements that are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate, among
other things, to information or assumptions about earnings per share, capital
and other expenditures, dividends, financing plans, capital structure, cash
flows, future economic performance, operating income improvements, cost savings
and management's plans, goals and objectives for future operations. These
forward-looking statements generally may be identified by their reference to a
future period or periods or by the use of forward-looking terminology such as
"may," "will," "intend," "should," "expect," "anticipate," "believe,"
"estimate," "continue," the negatives of those terms or similar expressions. You
should understand that forward-looking statements are estimates reflecting the
judgment of management of Midstate Bancorp and Shore Bancshares, not guarantees
of future performance. These statements are subject to risks, uncertainties and
assumptions, including, but not limited to:
o combining the businesses of Midstate Bancorp and Shore Bancshares
may cost more than we expect;
o integrating the businesses of Midstate Bancorp and Shore Bancshares
and retaining key personnel may be more difficult than we expect;
o our revenues after the proposed merger may be lower than we expect,
or our operating costs may be higher than we expect;
o expected cost savings from the proposed merger may not be fully
realized or may not be realized within the expected time frame;
o growth in business and/or customers after the proposed merger may be
different than we expect;
o there may be increases in competitive pressure among financial
institutions;
o changes in the interest rate environment may reduce interest
margins;
o general economic conditions, either nationally or in the region in
which the combined company will be doing business, or conditions in
securities markets, may be less favorable than we currently
anticipate;
o legislation or regulatory changes may adversely affect our business;
o technological changes may be more difficult or expensive than
anticipated; or
- 13 -
o other risks and uncertainties described in "Risk Factors" or in the
other SEC filings of Shore Bancshares.
Should one or more of these risks or uncertainties affect the business of
Midstate Bancorp and Shore Bancshares or should underlying assumptions prove
incorrect, actual results, performance or achievements in future periods could
differ materially from those expressed in, or implied by, these forward-looking
statements.
RISK FACTORS
In addition to the other information provided or incorporated by reference
in this proxy statement/prospectus, you should consider the following factors
carefully in evaluating whether to vote in favor of the proposed merger. You
should also refer to "Forward-Looking Statements" on page 13.
Because the Market Price of Shore Bancshares Common Stock May Fluctuate, You
Cannot be Sure of the Value of the Merger Consideration that You Will Receive
Upon completion of the proposed merger, each share of Midstate Bancorp
common stock outstanding immediately prior to the effective time of the proposed
merger will be converted into the right to receive $31.00 in cash and a number
of shares of Shore Bancshares common stock, all as provided under the terms of
the merger agreement. The value of the shares of Shore Bancshares common stock
to be received by Midstate Bancorp stockholders will be based on the average
closing bid and closing ask quotations of Shore Bancshares common stock during
the 20 trading day valuation period ending on the fifth calendar day prior to
the completion of the proposed merger. The average bid and ask quotations may
vary from the closing bid and ask quotations of Shore Bancshares common stock on
the date the proposed merger was announced, on the date that this document is
mailed to Midstate Bancorp stockholders, or on the date of the special meeting
of Midstate Bancorp stockholders. Stock price changes may result from a variety
of factors, including general market and economic conditions, changes in our
respective businesses, operations and prospects, and regulatory considerations.
Many of these factors are beyond our control. Accordingly, at the time of the
Midstate Bancorp special meeting, you will not be able to determine the number
of shares of Shore Bancshares common stock you would receive upon completion of
the proposed merger.
Shore Bancshares' Activities May be Limited, and it May be Required to
Restructure its Operations, if Felton Bank is Not Well Managed After the Merger.
As of the date of this proxy statement/prospectus, Felton Bank is not a
"well managed" depository institution, as defined under the regulations of the
Federal Reserve Board. These laws require the depository institutions owned by a
financial holding company to be and remain, among other things, well managed. A
financial holding company that fails to meet this requirement is prohibited from
engaging in any further financial activities without prior approval and must
enter into an agreement with the Federal Reserve Board to address compliance.
During this corrective period, the Federal Reserve Board may impose any
conditions and restrictions on
- 14 -
the business of the financial holding company that it deems appropriate. If the
financial holding company is unable to comply with the well managed requirement
within 180 days after falling out of compliance, then it may be required to
divest its interest in one or more of its depository institutions. Management of
Shore Bancshares has developed a strategy to address Felton Bank's management
deficiencies after the proposed merger and will work with the Federal Reserve
Board and other appropriate regulatory agencies during the merger application
process to establish a plan to bring Shore Bancshares into compliance after the
proposed merger. Although management of Shore Bancshares believes that it can
correct these deficiencies within 180 days after the effective date of the
proposed merger, there can be no guarantee that it will meet this timeline. If
Shore Bancshares is not able to correct the deficiency within 180 days after the
proposed merger, then the financial activities of its subsidiaries, including
insurance producer activities, may be restricted or prohibited and Shore
Bancshares may be required to either divest itself of Felton Bank, merge Felton
Bank into one of its other depository institutions, or otherwise restructure its
operations. It is not possible to predict the impact that any of these steps
would have on the business, financial performance, or profitability of Shore
Bancshares and its subsidiaries.
Midstate Bancorp Stockholders May Incur Federal Income Tax
Midstate Bancorp stockholders may incur federal income tax on shares
received in the proposed merger if the proposed merger does not qualify as a
tax-free reorganization. We have structured the proposed merger to qualify as a
tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code
of 1986. The tax-free reorganization rules contemplate that Midstate Bancorp
stockholders will not recognize gain or loss on shares of Midstate Bancorp
common stock exchanged for shares of Shore Bancshares common stock. However,
Midstate Bancorp stockholders will recognize gain or loss on their shares to the
extent they receive cash from Shore Bancshares in the proposed merger. Midstate
Bancorp stockholders receiving cash will recognize gain equal to the lesser of
(i) the amount of cash received in the proposed merger; and (ii) the built-in
gain of such holder in the Midstate Bancorp stock surrendered. Built-in gain
means the excess of the fair market value of Midstate Bancorp stock surrendered
over its adjusted basis. Although the Internal Revenue Service has not provided
a ruling on the matter, we will obtain a legal opinion that the proposed merger
qualifies as a tax-free reorganization. This opinion neither binds the IRS nor
prevents the IRS from adopting a contrary position. If the proposed merger fails
to qualify as a tax-free reorganization, Midstate Bancorp stockholders who
receive shares of Shore Bancshares common stock in exchange for their shares of
Midstate Bancorp common stock would recognize gain or loss on each share
surrendered in the amount of the difference between (i) the fair market value of
Shore Bancshares stock received pursuant to the proposed merger; and (ii) the
adjusted basis in Midstate Bancorp stock surrendered in exchange for such Shore
Bancshares stock.
The Stock of Shore Bancshares is Not Heavily Traded
The common stock of Shore Bancshares is listed on the Nasdaq Small Cap
Market and is not heavily traded. Stock that is not heavily traded can be more
volatile than stock trading in an active public market. Factors such as Shore
Bancshares' financial results, the introduction of
- 15 -
new products and services by Shore Bancshares or its competitors, and various
factors affecting the banking industry generally may have a significant impact
on the market price of Shore Bancshares' common stock. Management cannot predict
the extent to which an active public market for Shore Bancshares common stock
will develop or be sustained in the future. In recent years, the stock market
has experienced a high level of price and volume volatility, and market prices
for the stock of many companies have experienced wide price fluctuations that
have not necessarily been related to their operating performance. Therefore,
Shore Bancshares' stockholders may not be able to sell their shares at the
volumes, prices, or times that they desire.
The Stock of Shore Bancshares is Not Insured
Investments in the shares of Shore Bancshares common stock are not
deposits and are not insured against loss by the government.
Earnings May be Adversely Affected by Unsuccessful Integration of the Companies
Shore Bancshares may not successfully integrate and manage the operations
of Midstate Bancorp and Shore Bancshares, which could adversely affect future
earnings. Midstate Bancorp has agreed to merge into Shore Bancshares. If Shore
Bancshares cannot successfully manage the Talbot Bank, Centreville National
Bank, and Felton Bank, it will reduce the operating results of Shore Bancshares.
The risks of this acquisition include the following:
o management will have to divert time to integrate the businesses;
o Shore Bancshares may encounter unexpected problems or risks
associated with its operations, personnel, technology or credit;
o Shore Bancshares may lose the customers and employees of Felton
Bank;
o the assimilation of new operations, sites and personnel could divert
resources from regular banking operations; and
o Shore Bancshares may have trouble instituting and maintaining
uniform standards, controls, procedures and policies.
Earnings Could be Adversely Affected by Unanticipated Costs
Unanticipated costs relating to the proposed merger could reduce Shore
Bancshares' future earnings per share. We believe that we have reasonably
estimated the likely costs of integrating the operations of Midstate Bancorp and
Shore Bancshares, and the incremental costs of operating as a combined company.
However, it is possible that unexpected transaction costs such as taxes, fees or
professional expenses or unexpected future operating expenses such as increased
personnel costs or increased taxes, as well as other types of unanticipated
adverse developments, could have a material adverse effect on our results of
operations and financial
- 16 -
condition. If unexpected costs are incurred, the proposed merger could adversely
affect Shore Bancshares earnings per share.
Shore Bancshares' Future Depends on the Successful Growth of its Subsidiaries
Shore Bancshares' primary business activity for the foreseeable future
will be to act as the holding company of Talbot Bank, Centreville National Bank,
and, if the proposed merger is completed, Felton Bank, as well as its other
subsidiaries. Therefore, Shore Bancshares' future profitability will depend on
the success and growth of these subsidiaries. In the future, part of Shore
Bancshares' growth may come from buying other banks and buying or establishing
other companies. Such entities may not be profitable after they are purchased or
established, and they may lose money, particularly at first. A new bank or
company may bring with it unexpected liabilities, bad loans, or bad employee
relations, or the new bank or company may lose customers.
The Majority of Shore Bancshares' Business is Concentrated in Maryland; A
Significant Amount of Shore Bancshares' Business is Concentrated in Real Estate
Lending
Immediately after the proposed merger, most of Shore Bancshares'
customers, including most of the loan customers of its bank subsidiaries, will
be Maryland residents. Therefore, a decline in local economic conditions may
have a greater effect on Shore Bancshares' earnings and capital than on the
earnings and capital of larger financial institutions whose loan portfolios are
geographically diverse. Further, Talbot Bank, Centreville National Bank, and
Felton Bank make many real estate secured loans, which are in greater demand
when interest rates are low and economic conditions are good. Even when economic
conditions are good and interest rates are low, these conditions may not
continue. Additionally, the market values of the real estate securing these
loans may deteriorate, and Shore Bancshares may lose money if a borrower fails
to repay a real estate loan.
The Banks May Experience Loan Losses in Excess of their Allowances
The risk of credit losses on loans varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the value and marketability of the collateral for the loan. Management
bases the allowance for loan losses upon, among other things, historical
experience, an evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Based upon such factors, management
makes various assumptions and judgments about the ultimate collectability of the
loan portfolio and provides an allowance for loan losses based upon a percentage
of the outstanding balances and for specific loans when their ultimate
collectability is considered questionable. If management's assumptions and
judgments prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses, or if the bank regulatory authorities require Shore
Bancshares or its bank subsidiaries to increase their respective allowance for
loan losses as a part of their examination process, our earnings and capital
could be significantly and adversely affected. Although management uses the best
information available to make determinations with respect to the allowance for
loan losses, future
- 17 -
adjustments may be necessary if economic conditions differ substantially from
the assumptions used or adverse developments arise with respect to our
non-performing or performing loans. Material additions to the allowance for loan
losses of one of Shore Bancshares' bank subsidiaries would result in a decrease
in that bank's net income and capital, and could have a material adverse effect
on Shore Bancshares.
Interest Rates and Other Economic Conditions Will Impact Results of Operation
Results of operations for financial institutions, including Shore
Bancshares and its subsidiaries, may be materially and adversely affected by
changes in prevailing economic conditions, including declines in real estate
values, rapid changes in interest rates and the monetary and fiscal policies of
the federal government. Shore Bancshares' profitability is in part a function of
the spread between the interest rates earned on assets and the interest rates
paid on deposits and other interest-bearing liabilities (i.e., net interest
income), including advances from the Federal Home Loan Bank of Atlanta. Interest
rate risk arises from mismatches (i.e., the interest sensitivity gap) between
the dollar amount of repricing or maturing assets and liabilities and is
measured in terms of the ratio of the interest rate sensitivity gap to total
assets. More assets repricing or maturing than liabilities over a given time
period is considered asset-sensitive and is reflected as a positive gap, and
more liabilities repricing or maturing than assets over a given time period is
considered liability-sensitive and is reflected as negative gap. An
asset-sensitive position (i.e., a positive gap) could enhance earnings in a
rising interest rate environment and could negatively impact earnings in a
falling interest rate environment, while a liability-sensitive position (i.e., a
negative gap) could enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment. Fluctuations
in interest rates are not predictable or controllable. Shore Bancshares has
attempted to structure its asset and liability management strategies to mitigate
the impact on net interest income of changes in market interest rates, but there
can be no assurance that these attempts will be successful in the event of such
changes.
The Ability of Shore Bancshares to Pay Dividends is Limited
Holders of shares of Shore Bancshares common stock are entitled to
dividends if, when, and as declared by Shore Bancshares' Board of Directors out
of funds legally available for that purpose. Although the Board of Directors has
declared cash dividends in the past, the current ability to pay dividends is
largely dependent upon the receipt of dividends from its subsidiaries. Federal
and state laws impose restrictions on the ability of banks to pay dividends.
Additional restrictions are placed upon Shore Bancshares by the Maryland General
Corporation Law and the policies of federal regulators, including the Federal
Reserve Board's November 14, 1985 policy statement, which provides that bank
holding companies should pay dividends only out of the past year's net income,
and then only if their prospective rate of earnings retention appears consistent
with their capital needs, asset quality, and overall financial condition. In
general, future dividend policy is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including the future
earnings, capital requirements, regulatory constraints, and Shore Bancshares'
financial condition.
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The Market Value of Shore Bancshares' Investments Could Decline
As of September 30, 2003, Shore Bancshares and Midstate Bancorp had
classified 89% and 100%, respectively, of their investment securities as
available-for-sale pursuant to Statement of Financial Accounting Standards No.
115 ("SFAS 115") relating to accounting for investments. SFAS 115 requires that
unrealized gains and losses in the estimated value of the available-for-sale
portfolio be "marked to market" and reflected as a separate item in
stockholders' equity (net of tax) as accumulated other comprehensive income. In
the case of Shore Bancshares, its remaining investment securities are classified
as held-to-maturity in accordance with SFAS 115, and are stated at amortized
cost.
In the past, gains on sales of investment securities have been a
significant source of income for Midstate Bancorp. There can be no assurance
that future market performance of the combined investment portfolio will enable
Shore Bancshares to realize income from sales of securities. Stockholders'
equity will continue to reflect the unrealized gains and losses (net of tax) of
these investments. There can be no assurance that the market value of Shore
Bancshares' investment portfolio will not decline, causing a corresponding
decline in stockholders' equity.
Management of Shore Bancshares believes that several factors will affect
the market values of Shore Bancshares' investment portfolio. These include, but
are not limited to, changes in interest rates or expectations of changes, the
degree of volatility in the securities markets, inflation rates or expectations
of inflation and the slope of the interest rate yield curve (the yield curve
refers to the differences between shorter-term and longer-term interest rates; a
positively sloped yield curve means shorter-term rates are lower than
longer-term rates). Also, the passage of time will affect the market values of
our investment securities, in that the closer they are to maturing, the closer
the market price should be to par value. These and other factors may impact
specific categories of the portfolio differently, and management cannot predict
the effect these factors may have on any specific category.
The Banking Industry is Heavily Regulated; Significant Regulatory Changes Could
Adversely Affect Shore Bancshares' Operations
The operations of Shore Bancshares and those of Talbot Bank, Centreville
National Bank, and Felton Bank are and will be affected by current and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. Shore Bancshares is subject to supervision by
the Federal Reserve Board. Talbot Bank is subject to supervision and periodic
examination by the Maryland Commissioner and the Federal Deposit Insurance
Corporation; Centreville National Bank is subject to supervision and periodic
examination by the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation; and Felton Bank is subject to supervision and
periodic examination by the Delaware State Bank Commissioner and the Federal
Deposit Insurance Corporation. Banking regulations, designed primarily for the
safety of depositors, may limit a financial institution's growth and the return
to its investors by restricting such activities as the payment of dividends,
mergers with or acquisitions by other institutions, investments, loans and
interest rates, interest rates paid on deposits, expansion of branch offices,
and the offering of securities or trust services. Shore
- 19 -
Bancshares' bank subsidiaries are also subject to capitalization guidelines
established by federal law and could be subject to enforcement actions to the
extent that the banks are found by regulatory examiners to be undercapitalized.
It is not possible to predict what changes, if any, will be made to existing
federal and state legislation and regulations or the effect that such changes
may have on Shore Bancshares' future business and earnings prospects, as well as
those of its bank subsidiaries. Management also cannot predict the nature or the
extent of the effect on Shore Bancshares' business and earnings of future fiscal
or monetary policies, economic controls, or new federal or state legislation.
Further, the cost of compliance with regulatory requirements may adversely
affect Shore Bancshares' ability to operate profitably.
Shore Bancshares May be Adversely Affected by Recent Legislation
The Gramm-Leach-Bliley Act ("GLBA") was signed into law on November 12,
1999. Among other things, GLBA repeals restrictions on banks affiliating with
securities firms. It also permits bank holding companies that become financial
holding companies to engage in additional financial activities, including
insurance and securities underwriting and agency activities, merchant banking,
and insurance company portfolio investment activities that are currently not
permitted for bank holding companies. GLBA may have the result of increasing the
competition Shore Bancshares faces from larger banks and other companies. It is
not possible to predict the full effect that GLBA will have on Shore Bancshares.
In addition, recent changes in other federal banking laws facilitate
interstate branching and merger activity among banks. Such changes may result in
an even greater degree of competition in the banking industry, and Shore
Bancshares may be brought into competition with institutions with which it does
not presently compete. From time to time other changes are proposed to laws
affecting the banking industry, and these changes could have a material effect
on Shore Bancshares' business and prospects. Shore Bancshares' future
profitability may be adversely affected by increased competition resulting from
this legislation.
Shore Bancshares Operates in a Competitive Market
Shore Bancshares and its subsidiaries operate in a competitive
environment, competing for loans, deposits, and customers with commercial banks,
savings associations and other financial entities. Competition for deposits
comes primarily from other commercial banks, savings associations, credit
unions, money market and mutual funds and other investment alternatives.
Competition for loans comes primarily from other commercial banks, savings
associations, mortgage banking firms, credit unions and other financial
intermediaries. Competition for other products, such as insurance and securities
products, comes from other banks, securities and brokerage companies, insurance
companies, insurance agents and brokers, and other nonbank financial service
providers in Shore Bancshares' market areas. Many of these competitors are much
larger in terms of total assets and capitalization, have greater access to
capital markets, and/or offer a broader range of financial services, such as
trust services, than those offered by Shore Bancshares and its subsidiaries. In
addition, banks with a larger capitalization and financial intermediaries not
subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the needs of larger customers. Finally, Shore
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Bancshares' growth and profitability will depend upon its ability to attract and
retain skilled managerial, marketing and technical personnel. Competition for
qualified personnel in the financial services industry is intense, and there can
be no assurance that Shore Bancshares will be successful in attracting and
retaining such personnel.
Shore Bancshares May be Subject to Claims
Shore Bancshares and Midstate Bancorp may from time to time be subject to
claims from their respective customers for losses due to alleged breaches of
fiduciary duties, errors and omissions of employees, officers and agents,
incomplete documentation, their failure, or the failure of their subsidiaries,
to comply with applicable laws and regulations, or many other reasons. Also, the
employees of Shore Bancshares, Midstate Bancorp, and/or their subsidiaries may
knowingly or unknowingly violate laws and regulations. Management of Shore
Bancshares and/or Midstate Bancorp may not be aware of any violations until
after their occurrence. This lack of knowledge may not insulate Shore
Bancshares, Midstate Bancorp or their subsidiaries from liability. As a result
of the proposed merger, Shore Bancshares will assume the liabilities of Midstate
Bancorp. This means that customers of Midstate Bancorp and/or Felton Bank may
sue Shore Bancshares after the proposed merger for the types of losses described
above relating to the business conducted by Midstate Bancorp and/or Felton Bank
prior to the proposed merger. Claims and legal actions may result in legal
expenses and liabilities that may reduce Shore Bancshares' profitability and
hurt its financial condition.
Shore Bancshares May Not be Able to Keep Pace with Developments in Technology
Shore Bancshares, its subsidiaries, Midstate Bancorp, and Felton Bank, use
various technologies in their respective businesses, including
telecommunication, data processing, computers, automation, internet-based
banking, and debit cards. Technology changes rapidly. Shore Bancshares' ability
to compete successfully with other banks and non-banks may depend on whether it
can exploit technological changes. Shore Bancshares may not be able to exploit
technological changes, and any investment it does make may not make it more
profitable.
Shore Bancshares' Articles of Incorporation and Bylaws and Maryland Law May
Discourage a Corporate Takeover
Shore Bancshares' Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws contain certain provisions designed to enhance the
ability of the board of directors to deal with attempts to acquire control of
Shore Bancshares. These provisions provide for the classification of the board
of directors into three classes; directors of each class generally serve for
staggered three-year periods. No director may be removed except for cause and
then only by a vote of at least two-thirds of the total eligible stockholder
votes. In addition, Maryland law contains anti-takeover provisions that apply to
Shore Bancshares. Although these provisions do not preclude a takeover, they may
have the effect of discouraging a future takeover attempt which would not be
approved by the board of directors, but pursuant to which stockholders might
receive a substantial premium for their shares over then-current market prices.
As a result, stockholders who might desire to participate in such a transaction
might not have the opportunity
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to do so. Such provisions will also render the removal of the board of directors
and of management more difficult and, therefore, may serve to perpetuate current
management. As a result of the foregoing, such provisions could potentially
adversely affect the market price of Shore Bancshares common stock.
SPECIAL MEETING OF MIDSTATE BANCORP STOCKHOLDERS
Date, Place, Time and Purpose
The boards of directors of Shore Bancshares and Midstate Bancorp are
sending you this proxy statement/prospectus and proxy form to use at the special
meeting. At the special meeting, the Midstate Bancorp board of directors will
ask you to vote on a proposal to approve the merger agreement and the proposed
merger. Midstate Bancorp will bear the costs of soliciting proxies for the
special meeting, except that Midstate Bancorp and Shore Bancshares will share
equally the costs associated with printing and mailing this proxy
statement/prospectus. The special meeting will be held at Felton Community Fire
Hall, Main Street, Felton, Delaware 19943, on Tuesday, March 16, 2004 at 5:30
p.m., local time.
Record Date, Voting Rights, Quorum and Required Vote
Midstate Bancorp has set the close of business on February 2, 2004 as the
record date for determining the holders of Midstate Bancorp common stock
entitled to notice of and to vote at the special meeting. Only Midstate Bancorp
stockholders at the close of business on the record date are entitled to notice
of and to vote at the special meeting. There must be at least a majority of
Midstate Bancorp's outstanding shares present in person or by proxy at the
special meeting for the vote on the proposed merger to occur. Approval of the
merger agreement and the proposed merger will require the affirmative vote of at
least a majority of Midstate Bancorp's outstanding shares entitled to vote at
the meeting. Abstentions from voting will have the same effect as voting against
the merger agreement.
The Midstate Bancorp board of directors recommends a vote "FOR" the merger
agreement and the proposed merger.
As of the record date, there were 97,360 shares of Midstate Bancorp common
stock outstanding and entitled to vote at the special meeting held by 405
stockholders of record. Of these shares, 5,740 shares were beneficially owned by
directors and executive officers of Midstate Bancorp and their affiliates, which
represented 5.90% of the shares of Midstate Bancorp common stock outstanding on
that date. Additionally, Shore Bancshares owned 3,510 shares of Midstate Bancorp
common stock as of the record date, or 3.61% of the shares of Midstate Bancorp
common stock outstanding on that date. No director or executive officer of Shore
Bancshares (other than Shore Bancshares) owned shares of Midstate Bancorp as of
the record date.
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Voting and Revocability of Proxies
You may vote in person at the special meeting or by proxy. To ensure your
representation at the special meeting, we recommend you vote by proxy even if
you plan to attend the special meeting. If a broker or other custodian holds
your shares of Midstate Bancorp common stock, you must contact the broker or
custodian and provide voting instructions. Your failure to instruct your broker
or custodian to vote your shares will result in your shares not being voted, and
the effect will be a vote against the proposed merger.
You can always change your vote at the special meeting. Voting
instructions are included on your proxy form. If you properly complete and
timely submit your proxy, your shares will be voted as you have directed. You
may vote for, against, or abstain with respect to the approval of the proposed
merger. If you are the record holder of your shares and submit your proxy
without specifying a voting instruction, your shares will be voted "FOR"
approval of the merger agreement. You may revoke your proxy before it is voted
by:
o filing with the Corporate Secretary of Midstate Bancorp a duly
executed revocation of proxy;
o submitting a new proxy with a later date; or
o voting in person at the special meeting.
If you have instructed a broker to vote your shares, you must follow
directions you will receive from your broker to change or revoke your proxy.
Attendance at the special meeting will not, in and of itself, constitute a
revocation of a proxy. All written notices of revocation and other communication
with respect to the revocation of proxies should be addressed to: Midstate
Bancorp, Inc., 120 West Main Street, P.O. Box 266, Felton, Delaware 19943,
Attention: Corporate Secretary.
Solicitation of Proxies
Proxies are being solicited by and on behalf of the Midstate Bancorp board
of directors, and Midstate Bancorp will bear the costs of its solicitation of
proxies, except that Midstate Bancorp and Shore Bancshares will share equally
the costs of printing and mailing this proxy statement/prospectus. Solicitations
may be made by mail, telephone, or personally by directors, officers and
employees of Midstate Bancorp, none of whom will receive additional compensation
for performing these services. In addition, Midstate Bancorp will make
arrangements with brokerage firms and other custodians, nominees and fiduciaries
to send proxy materials to their principals and will reimburse these parties for
their expenses.
Appraisal Rights
Pursuant to Section 262 of the Delaware General Corporation Law, any
Midstate Bancorp stockholder may dissent from the proposed merger and elect to
have the fair value of his or her
- 23 -
shares judicially determined and paid in cash, but only if the stockholder
complies with the provisions of Section 262.
The following is a brief summary of the statutory procedures that must be
followed by you to perfect your appraisal rights under Delaware law. THIS
SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW, A COPY OF
WHICH IS ATTACHED AS APPENDIX C TO THIS DOCUMENT.
To dissent from the proposed merger and demand appraisal, you must satisfy
the following conditions:
o deliver a written demand for appraisal of your shares to Midstate
Bancorp before the vote on the adoption of the merger agreement at
the special meeting;
o not vote in favor of or otherwise consent to the merger agreement
(the return of a signed proxy that does not specify a vote against
the merger agreement or a direction to abstain, will be voted in
favor of the merger agreement and constitute a waiver of your right
of appraisal); and
o continuously hold your Midstate Bancorp shares from the date of
making the demand through the time the proposed merger is completed.
If you fail to comply with any of these conditions and the proposed merger
becomes effective, you will be entitled to receive only the consideration
provided in the merger agreement. Failure to vote on the merger agreement will
not constitute a waiver of your appraisal rights. Voting against the merger
agreement will not satisfy the requirement of a written demand for appraisal.
All written demands for appraisal should be addressed to: Midstate
Bancorp, Inc., 120 West Main Street, P.O. Box 266, Felton, Delaware 19943,
Attention: Corporate Secretary. The demands must be received before the vote
concerning the merger agreement at the special meeting occurs, and should be
executed by, or on behalf of, the holder of record. If Midstate Bancorp shares
are owned of record in a fiduciary capacity, as by a trustee, guardian or
custodian, execution of a demand for appraisal should be made in that capacity.
If Midstate Bancorp shares are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand must be executed by or for all
joint owners. An authorized agent, including one for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, he or she is acting as agent for the record
owner. A record owner, such as a broker or trustee, who holds Midstate Bancorp
shares as a nominee for others may exercise his or her rights of appraisal with
respect to the shares held for one or more beneficial owners, while not
exercising such right for other beneficial owners. In that case, the written
demand should set forth the number of shares as to which the record owner
dissents. Where no number
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of shares is expressly mentioned, the demand will be presumed to cover all
shares of Midstate Bancorp shares in the name of that record owner.
Within 10 days after the merger, Shore Bancshares must give written notice
that the merger has become effective to each holder of Midstate Bancorp shares
who filed a written demand for appraisal and who did not vote in favor of the
merger agreement. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of the notice, demand in writing from Shore
Bancshares the appraisal of his or her Midstate Bancorp shares. Within 120 days
after the completion of the merger, either Shore Bancshares, or any Midstate
Bancorp stockholder who has complied with Section 262, may file a petition in
the Delaware Court of Chancery demanding a determination of the value of the
Midstate Bancorp shares held by all stockholders entitled to appraisal of their
shares. Shore Bancshares does not presently intend to file such a petition.
Because Shore Bancshares has no obligation to file such a petition, the failure
of a stockholder to do so within the period specified could nullify the
stockholder's previous written demand for appraisal.
If a petition for appraisal is duly filed by a stockholder and a copy is
delivered to Shore Bancshares, then Shore Bancshares will then be obligated
within 20 days of receipt of the copy to provide the Court of Chancery with a
duly verified list containing the names and addresses of all stockholders who
have demanded an appraisal of their shares and with whom agreement as to the
value of their shares has not been reached. After notice to these stockholders,
the Court of Chancery is empowered to conduct a hearing to determine which
stockholders are entitled to appraisal rights.
The Court of Chancery will then appraise the Midstate Bancorp shares,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger. When the value is determined, the
Court will direct the payment by Shore Bancshares of this value, with interest
thereon, simple or compound, if the Court so determines, to the stockholders
entitled to receive this money.
Stockholders of Midstate Bancorp who are considering seeking an appraisal
should bear in mind that the fair value of their Midstate Bancorp shares as
determined under Section 262 could be more than, the same as or less than the
merger consideration they are to receive pursuant to the merger agreement if
they do not seek appraisal of their shares.
Costs of the appraisal proceeding may be assessed against the stockholder
by the Court of Chancery as the Court deems equitable under the circumstances.
FAILURE TO COMPLY STRICTLY WITH THESE PROCEDURES WILL CAUSE YOU TO LOSE
YOUR APPRAISAL RIGHTS. CONSEQUENTLY, IF YOU DESIRE TO EXERCISE YOUR APPRAISAL
RIGHTS YOU ARE URGED TO CONSULT A LEGAL ADVISOR BEFORE ATTEMPTING TO EXERCISE
THESE RIGHTS.
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THE MERGER
General
The merger agreement provides for the merger of Midstate Bancorp with and
into Shore Bancshares. Shore Bancshares will be the surviving entity in the
proposed merger, and Felton Bank will become a Delaware bank subsidiary of Shore
Bancshares.
The Companies
Shore Bancshares, Inc.
18 East Dover Street
Easton, Maryland 21601
(410) 822-1400
Shore Bancshares is a Maryland corporation registered as a financial
holding company under the Bank Holding Company Act of 1956, as amended. Shore
Bancshares is the parent company of two bank subsidiaries, The Talbot Bank of
Easton, Maryland, a Maryland-chartered commercial bank, and The Centreville
National Bank of Maryland, a national banking association. Shore Bancshares is
also the parent company of two insurance producer subsidiaries, The Avon-Dixon
Agency, LLC, and Elliott Wilson Insurance, LLC, one insurance premium finance
company, Mubell Finance, LLC, and an investment adviser, Wye Financial Services,
LLC, all of which are Maryland limited liability companies. Another subsidiary,
Shore Pension Services, LLC, is currently inactive.
Talbot Bank was acquired by Shore Bancshares in 2000 when its parent bank
holding company, Talbot Bancshares, Inc., merged with and into Shore Bancshares.
Talbot Bank's main office is located at 18 East Dover Street, Easton, Maryland
21601. Talbot Bank began its operations in 1885 and is engaged in general
commercial and retail banking business serving individuals and businesses in the
Maryland counties of Talbot and Dorchester. Talbot Bank currently operates four
banking offices in Talbot County, which include three in Easton, Maryland and
one in St. Michael's, Maryland. Talbot Bank also operates a branch in Dorchester
County, Maryland in the City of Cambridge.
Centreville National Bank's main office is located at 109 North Commerce
Street, Centreville, Maryland 21617. Centreville National Bank has been doing
business in Maryland since 1876 and is engaged in both the commercial and
consumer banking business in the Maryland counties of Caroline, Kent, and Queen
Anne's. Centreville National Bank serves its customers through a network of
seven banking offices, including two offices in Centreville, Maryland, and one
in each of Chestertown, Chester, Denton, Hillsboro, and Stevensville, Maryland.
Centreville National Bank also owns one-third of the outstanding common stock of
The Delmarva Bank Data Processing Center, Inc., a Maryland corporation located
in Easton, Maryland. The Delmarva Bank Data Processing Center provides data
processing services to banks located in Maryland, Delaware, Virginia and the
District of Columbia, including Talbot Bank, Centreville National Bank, and
Felton Bank.
- 26 -
At September 30, 2003, Shore Bancshares had total assets of approximately
$710.9 million, total loans of approximately $458.7 million, total deposits of
approximately $591.8 million and approximately $81.6 million in stockholders'
equity. Shares of Shore Bancshares common stock trade on the Nasdaq SmallCap
Market under the symbol "SHBI". The deposits associated with the bank
subsidiaries of Shore Bancshares are insured by the Federal Deposit Insurance
Corporation.
Midstate Bancorp, Inc.
120 West Main Street
Felton, Maryland 19943
(302) 284-4600
Midstate Bancorp, Inc. is a Delaware corporation registered as a bank
holding company under the Bank Holding Company of 1956, as amended. The sole
subsidiary of Midstate Bancorp is The Felton Bank, a Delaware commercial bank.
Felton Bank began operations in 1908 and engages in both the commercial and
consumer banking business in Kent County, Delaware. Felton Bank serves its
customers through its main office in Felton, Delaware and one branch office in
Milford, Delaware.
At September 30, 2003, Midstate Bancorp had total assets of approximately
$51.5 million, total loans of approximately $32.3 million, total deposits of
approximately $47.4 million and approximately $3.1 million in stockholders'
equity. There currently is no public market for the shares of Midstate Bancorp
common stock. The deposits associated with Felton Bank are insured by the
Federal Deposit Insurance Corporation.
Background of the Merger
Management of Midstate Bancorp has periodically explored and assessed, and
has discussed with the Midstate Bancorp Board of Directors, strategic options
for Midstate Bancorp, including strategies to grow Midstate Bancorp's business
through business and marketing initiatives. These strategic discussions also
have included the possibility of business combinations involving Midstate
Bancorp and larger financial institutions, particularly in view of the need for
additional capital to fund the growth of The Felton Bank, its bank subsidiary,
increasing competition in Delaware, continuing consolidation and other
developments in the financial services industry. The board of directors from
time to time has engaged in discussions with various potential acquisition
partners, but these discussions were not fruitful and were terminated.
In December of 2002, and January and February of 2003, Midstate Bancorp
received unsolicited expressions of interest from several potential acquirers.
These expressions of interest were discussed by the Midstate Bancorp Board of
Directors and it was determined that all expressions of interest would be
handled similarly in that the parties expressing interest would be given basic
financial data on Midstate Bancorp and The Felton Bank to enable those potential
acquirers to make a formal offer. It was also determined that several logical
acquirers beyond
- 27 -
those that had contacted Midstate Bancorp would be contacted to determine if
they were interested in receiving the same information. One of these potential
acquirers was Shore Bancshares. In November 2000, Shore Bancshares had purchased
3,510 shares of Midstate Bancorp common stock in a private placement offering in
which Midstate Bancorp sold a total of 52,631 shares of common stock for $28.50
each.
Danielson Associates, Inc., a related interest of David Danielson, who is
both a director and a stockholder of Midstate Bancorp, assembled an information
package that could be provided to the interested parties. Based on review of the
information package, three parties expressed an interest in acquiring Midstate
Bancorp. One of the parties was Shore Bancshares, which, after reviewing the
financial and other information presented by Midstate Bancorp, agreed that a
merger between the two companies might present opportunities for the companies,
their affiliated entities, and their stockholders.
Since the merger of Shore Bancshares with Talbot Bancshares, Inc. in
December of 2000, management of Shore Bancshares has continued to express an
interest in expanding the company's footprint in and around Maryland's Eastern
Shore, including in Delaware. Mr. W. Moorhead Vermilye, President and Chief
Executive Officer of Shore Bancshares, believed that a merger with Midstate
Bancorp could present just such an opportunity and he believed that the proposal
should be presented to the full board of directors of Shore Bancshares for its
consideration.
A confidentiality agreement was executed on March 14, 2003 and the parties
thereafter held discussions regarding the financial condition and operations of
Shore Bancshares, Midstate Bancorp and Felton Bank, the potential structure,
terms and conditions of a merger between Shore Bancshares and Midstate Bancorp,
and related matters. Mr. Danielson also visited with all other interested
potential acquirers who had executed confidentiality agreements with Midstate
Bancorp and presented them with an Information Memorandum containing financial
and non-financial data on Midstate Bancorp to enable each interested party to
formalize an offer to acquire Midstate Bancorp.
On March 27, 2003, Mr. Vermilye presented the Shore Bancshares board with
the proposal to merge with Midstate Bancorp and thereby acquire a Delaware
commercial bank. Mr. Vermilye discussed his belief that Felton Bank and its
management had many of the same local, community-oriented ideals on which Talbot
Bank and Centreville National Bank base their businesses and explained that the
acquisition of Felton Bank would permit Shore Bancshares to enter the Delaware
banking market. After discussing these and other issues, the board of directors
authorized Mr. Vermilye to engage in further discussions with Mr. Danielson and
other representatives of Midstate Bancorp about a potential merger, and, if
fruitful, negotiate a non-binding letter of intent and conduct due diligence.
Following these informal discussions, Shore Bancshares submitted an offer
to acquire Midstate Bancorp. On April 10, 2003, Midstate Bancorp's Board fully
evaluated the three offers from the interested parties, including Shore
Bancshares, and based on that evaluation, it decided
- 28 -
to explore further the Shore Bancshares offer because it was, in its judgment,
the best offer received.
Following further discussions between Shore Bancshares and Midstate
Bancorp representatives, the parties executed a non-binding letter of intent on
April 1, 2003 and immediately began to negotiate a definitive acquisition
agreement for the merger of Midstate Bancorp with and into Shore Bancshares,
subject to the completion of due diligence examinations by each party of the
other.
Also in April of 2003, Thomas Evans, President and Chief Executive Officer
of Midstate Bancorp, and Mr. Danielson met with representatives of RP Financial,
LC to discuss the possible merger. Messrs. Evans and Danielson discussed the
Midstate Bancorp board of directors' desire to combine the two companies to
create increased stockholder value and to enable the combined companies to
further expand through acquisitions or new branches. On April 15, 2003, Midstate
Bancorp and RP Financial, LC executed an engagement letter for RP Financial, LC
to render a fairness opinion to the Midstate Bancorp board of directors.
On May 6, 2003, Susan E. Leaverton, Treasurer and Principal Accounting
Officer of Shore Bancshares, and a representative of Gordon, Feinblatt, Rothman,
Hoffberger & Hollander, LLC, legal counsel to Shore Bancshares, visited the main
office of Midstate Bancorp and conducted comprehensive due diligence of Midstate
Bancorp and its operations. Through this due diligence examination, it was
discovered that Midstate Bancorp and Felton Bank were subject to certain
agreements with their banking regulators restricting certain of their corporate
and business activities. These agreements were primarily the result of certain
problems associated with Felton Bank's credit card receivables line of business
and its capital position.
After considering these regulatory issues and discussing them with
representatives of Midstate Bancorp and with regulators, Mr. Vermilye
communicated his feelings to representatives of Midstate Bancorp that the credit
card receivables line of business involved risks and uncertainties that were not
favorable to an acquisition, and negotiations towards a merger were suspended
indefinitely on May 20, 2003.
In early October of 2003, Midstate Bancorp was able to negotiate an early
termination to the agreement governing this line of business. Midstate Bancorp
representatives then contacted Mr. Vermilye with this new development and
inquired as to whether Shore Bancshares remained interested in an affiliation.
After satisfying himself that the risks and uncertainties associated with the
credit card receivables line of business had been substantially eliminated, Mr.
Vermilye agreed to recommence the negotiation of a definitive merger agreement.
On November 5, 2003, the Shore Bancshares board of directors held a
special meeting at which members of senior management of Shore Bancshares
reviewed their discussions and negotiations with Midstate Bancorp regarding a
business combination, as well as the results of the due diligence examination of
Midstate Bancorp. Mr. Vermilye reviewed the board of directors' prior
discussions of possible strategic directions for Shore Bancshares, reviewed the
course of discussions with Midstate Bancorp and outlined the strategic rationale
for the proposed
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merger. Also at this meeting, the Shore Bancshares board of directors discussed
the terms of the merger and the agreements documenting the transaction. After
questions by, and discussion among, the members of the Shore Bancshares board of
directors, and after consideration of the factors described below in "Reasons
for the Merger--Shore Bancshares' Reasons for the Merger", the Shore Bancshares
board of directors voted unanimously to approve the merger agreement and the
transactions contemplated by that agreement.
On November 11, 2003, the Midstate Bancorp board of directors held a
special meeting to consider the proposed merger with Shore Bancshares. At this
meeting, members of senior management of Midstate Bancorp reviewed with the
board of directors the strategic investigation of Shore Bancshares that Midstate
Bancorp had conducted, the discussions and contacts with Shore Bancshares to
date, the historical performance and strategies of Shore Bancshares and Midstate
Bancorp, the business and financial prospects of Midstate Bancorp, the current
state of the industry, the prospects for small community banks in need of
additional capital, and the proposed plans for the growth and further
development of Midstate Bancorp's corporate business strategies. The board also
reviewed and discussed the business and financial position of Shore Bancshares
and the financial impact a merger with Shore Bancshares could have on the
financial position and business of Midstate Bancorp and Felton Bank. Finally,
the board discussed with representatives of Kennedy, Baris & Lundy, LLP, legal
counsel to Midstate Bancorp, the terms of the merger agreement.
After questions by, and discussion among, the members of the Midstate
Bancorp board of directors, RP Financial, LC, based on the financial analysis
described below under "The Merger--Opinion of Midstate Bancorp's Financial
Adviser", gave its opinion to the Midstate Bancorp board of directors that, as
of the date of the meeting, the merger consideration was fair, from a financial
point of view, to Midstate Bancorp and its stockholders. The board then
discussed the factors described below in "Reasons for the Merger--Midstate
Bancorp's Reasons for the Merger" and voted unanimously to approve the merger
agreement and the transactions contemplated by that agreement. The opinion of RP
Financial, LC will be updated as of the date of this proxy statement/prospectus.
Representatives of Midstate Bancorp and Shore Bancshares executed and
delivered the merger agreement on November 12, 2003, and on that same date we
issued a joint press release announcing the transaction. On January 15, 2004,
taking into consideration the provisions of applicable law relevant to the
proposed merger and other factors, we entered into an amendment to the merger
agreement to eliminate provisions calling for the separate treatment of Midstate
Bancorp stockholders holding fewer than 50 shares of Midstate Bancorp common
stock.
Reasons for the Merger
Shore Bancshares' Reasons for the Merger. Shore Bancshares' board of
directors believes that the proposed merger is in the best interests of Shore
Bancshares and its stockholders. In deciding to approve the proposed merger,
Shore Bancshares' board of directors considered a number of factors, including:
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o management's view that the acquisition of Midstate Bancorp would
further Shore Bancshares' goal of becoming a premier financial
services company on Maryland's Eastern Shore and the surrounding
area and would provide an attractive opportunity to expand into
Delaware;
o Midstate Bancorp's community banking orientation, which is
compatible with those of Shore Bancshares, Talbot Bank and
Centreville National Bank;
o the demographic, economic and financial characteristics of the
markets in which or near which Midstate Bancorp operates, including
existing and potential competition and history of the market areas
with respect to financial institutions; and
o the likelihood of regulators approving the proposed merger without
undue conditions or delay.
While Shore Bancshares' board of directors considered these and other
factors, the board of directors did not assign any specific or relative weights
to the factors considered and did not make any determination with respect to any
individual factor. Shore Bancshares' board of directors collectively made its
determination with respect to the proposed merger based on the conclusion
reached by its members, based on the factors that each of them considered
appropriate, that the proposed merger is in the best interests of Shore
Bancshares' stockholders. The terms of the proposed merger were the result of
arm's-length negotiations between representatives of Shore Bancshares and
representatives of Midstate Bancorp.
Midstate Bancorp's Reasons for the Merger and Recommendation of the Board
of Directors. The Midstate Bancorp board of directors believes that the proposed
merger is in the best interest of Midstate Bancorp and its stockholders.
Accordingly, the Midstate Bancorp board of directors has unanimously approved
the merger agreement and unanimously recommends that its stockholders vote "FOR"
the approval of the merger agreement and the transactions it contemplates.
In approving the merger agreement and the transactions it contemplates,
Midstate Bancorp's board consulted with Midstate Bancorp's management and
considered numerous factors, including the following:
o the current state of the businesses and financial condition of
Midstate Bancorp, the capital position and asset quality of Midstate
Bancorp, and the limitations of Midstate Bancorp's prospects for
significant future growth based on its current capital position;
o the fact that Shore Bancshares, as a publicly-traded and larger and
more diverse corporation, possesses greater access to capital and
managerial resources than Midstate Bancorp;
o the relationship of the merger consideration to book value of
Midstate Bancorp's common stock, including the fact that the merger
consideration would represent
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approximately 2.1 times the book value of Midstate Bancorp's common
stock prior to execution of the merger agreement;
o its belief that Shore Bancshares' prospects for future growth
exceeds that which the board projects Midstate Bancorp could achieve
independently;
o the fact that the shares of Shore Bancshares common stock are
publicly-traded on The Nasdaq SmallCap Market and that, therefore,
the proposed merger would provide greater liquidity to Midstate
Bancorp stockholders, whose investments currently are in a
privately-held company;
o a review of available research reports of third-party investment
analysts who cover Shore Bancshares;
o its belief that the wide range of products and services offered by
the Shore Bancshares family of entities will lead to cross-selling
opportunities for Felton Bank, increase customer loyalty, and
generally enhance Felton Bank's competitive position in the
community in which it operates;
o the effect of the proposed merger on the customers and employees of
Felton Bank and the communities in which it operates; and
o Shore Bancshares' long-term growth strategy on Maryland's Eastern
Shore and in the surrounding areas, including Delaware.
o The opinion of its financial adviser, RP Financial, LC, that the
merger consideration is fair to Midstate Bancorp stockholders from a
financial point of view.
o The expected treatment of the transaction as a reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code and that no gain
or loss generally would be recognized by a Midstate Bancorp
stockholder on the portion of the merger consideration representing
shares of Shore Bancshares common stock received in exchange for
shares of Midstate Bancorp common stock.
The above discussion of the information and factors considered by Midstate
Bancorp's board of directors is not intended to be exhaustive, but includes all
material factors considered by the board in arriving at its determination to
approve, and to recommend that the Midstate Bancorp's stockholders vote to
approve, the merger agreement and related transactions. The Midstate Bancorp
board of directors did not assign any relative or specific weights to the above
factors, and individual directors may have given differing weights to different
factors. The Midstate Bancorp board of directors unanimously recommends that
Midstate Bancorp's stockholders vote to approve the merger agreement and the
related transactions.
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Opinion of Midstate Bancorp's Financial Adviser
The fairness opinion provided by RP Financial, LC to Midstate Bancorp's
board of directors on November 11, 2003 board meeting has been updated as of the
date of this proxy statement/prospectus and is described below. The description
contains projections, estimates and/or other forward-looking statements about
the future earnings or other measures of the future performance of Shore
Bancshares and Midstate Bancorp. RP Financial, LC has reviewed and consented to
the following description relating to its opinion. You should not rely on any of
these statements as having been made or adopted by Shore Bancshares and Midstate
Bancorp.
The Midstate Bancorp board retained RP Financial, LC in April 2003 to
render its opinion with respect to the merger consideration from the financial
point of view of the Midstate Bancorp stockholders. In requesting RP Financial,
LC's opinion, the Midstate Bancorp board did not give any special instructions
to RP Financial, LC, nor did it impose any limitations upon the scope of the
investigation that RP Financial, LC might wish to conduct to enable it to give
its opinion. RP Financial, LC has delivered to Midstate Bancorp its updated
written opinion dated as of the date of this proxy statement/prospectus to the
effect that, based upon and subject to the matters set forth therein, as of the
date thereof, the merger consideration is fair to the Midstate Bancorp
stockholders from a financial point of view. The opinion of RP Financial, LC is
directed toward the consideration to be received by Midstate Bancorp
stockholders and does not constitute a recommendation to any Midstate Bancorp
stockholder to vote in favor of approval of the merger agreement. The updated
opinion is attached as Appendix B, and Midstate Bancorp stockholders should read
it in its entirety. RP Financial, LC has consented to the inclusion and
description of its written opinion in this proxy statement/prospectus.
RP Financial, LC was selected by Midstate Bancorp to render a fairness
opinion because of RP Financial, LC's expertise in connection with mergers and
acquisitions of commercial banks and bank holding companies, savings and loan
associations, savings banks and savings and loan holding companies, as well as
its expertise in the valuation of businesses and their securities for a variety
of purposes, particularly for insured financial institutions. Prior to the
engagement in connection with the proposed acquisition by Shore Bancshares,
Midstate Bancorp and RP Financial, LC had no previous professional relationship.
Pursuant to a letter agreement dated and executed by Midstate Bancorp on
April 15, 2003 (the "engagement letter"), RP Financial, LC estimates that it
will receive from Midstate Bancorp total professional fees of approximately
$20,000, of which $15,000 has been paid to date, plus reimbursement of certain
out-of-pocket expenses, for its services in connection with the proposed merger.
In addition, Midstate Bancorp has agreed to indemnify and hold harmless RP
Financial, LC, any affiliates of RP Financial, LC, and the respective directors,
officers, agents and employees of RP Financial, LC and their successors and
assigns who act for or on behalf of RP Financial, LC from and against any and
all losses, claims, damages and liabilities, (including, but not limited to, all
losses and expenses in connection with claims under the federal securities laws)
actually incurred by RP Financial, LC and attributable to: (i) any untrue
statement or alleged untrue statement of a material fact contained in the
financial statements or other
- 33 -
information furnished or otherwise provided by Midstate Bancorp to RP Financial,
LC, either orally or in writing; (ii) the omission or alleged omission of a
material fact from the financial statements or other information furnished or
otherwise made available by Midstate Bancorp to RP Financial, LC; or (iii) any
action or omission to act by Midstate Bancorp, or Midstate Bancorp's respective
officers, directors, employees or agents, which action or omission is willful or
negligent. Midstate Bancorp will be under no obligation to indemnify RP
Financial, LC if a court determines that RP Financial, LC was negligent or acted
in bad faith with respect to any actions or omissions of RP Financial, LC
related to a matter for which indemnification is sought. In addition, if RP
Financial, LC is entitled to indemnification from Midstate Bancorp under the
engagement letter, and in connection therewith incurs legal expenses in
defending any legal action challenging the opinion of RP Financial, LC where RP
Financial, LC is not negligent or otherwise at fault or is found by a court of
law to be not negligent or otherwise at fault, Midstate Bancorp will indemnify
RP Financial, LC for all reasonable expenses incurred in connection with the
matter which is the subject of indemnification.
In rendering this opinion, RP Financial, LC reviewed the following
materials: (1) the merger agreement dated November 12, 2003, as amended on
January 15, 2004, between Midstate Bancorp and Shore Bancshares, including its
exhibits; (2) the following information for Midstate Bancorp - (a) the annual
audited financial statements for the fiscal years ended December 31, 2000 and
2001 included in the Annual Report for the respective years, and the audited
financial statements for the fiscal year ended December 31, 2002; (b) the annual
proxy statement for fiscal year 2001; and, (c) stockholder, regulatory and
internal financial and other reports through December 31, 2003, including the
Confidential Private Offering Memorandum dated August 28, 2000; (3) the
following information for Shore Bancshares - (a) the annual audited financial
statements for the fiscal years ended December 31, 2001 and 2002, included in
the Annual Report and other securities filings, (b) stockholder, regulatory and
internal financial and other reports through September 30, 2003, (c) the annual
stockholder proxy statements for the last two fiscal years, and (d) other
securities filings; (4) discussions with management of Midstate Bancorp and
Shore Bancshares regarding the past and current business, operations, financial
condition, and future prospects of both institutions; (5) an analysis of the pro
forma value of alternative strategies for Midstate Bancorp as an independent
institution; (6) the competitive, economic and demographic characteristics
nationally, regionally and in the local market area; (7) the potential impact of
regulatory and legislative changes on financial institutions; (8) the financial
terms of other recently completed and pending acquisitions of banks regionally
and nationally with similar characteristics as Midstate Bancorp, including
regionally based banks and banks nationwide with similar financial
characteristics; (9) Shore Bancshares' financial condition as of September 30,
2003 regarding the perceived financial ability to complete the proposed merger
from a cash and capital perspective; (10) the estimated pro forma financial
impact of the proposed merger to Shore Bancshares, including the pro forma per
share data and the pro forma pricing ratios based on Shore Bancshares' current
market price; and (11) the prospective strategic benefits of the proposed merger
to Midstate Bancorp, including, but not limited to, expanded market area,
enhanced delivery channels, broadened products and services, increased stock
liquidity, expanded management team, the opportunity to realize cost reductions
and increased platform for future expansion.
- 34 -
RP Financial, LC reviewed financial, operational, market area and stock
price and trading characteristics for Midstate Bancorp relative to
publicly-traded commercial banks and their holding companies with comparable
resources, financial condition, earnings, operations and markets. RP Financial,
LC also considered the economic and demographic characteristics in the local
market area, and the potential impact of the regulatory, legislative and
economic environments on operations for Midstate Bancorp and Shore Bancshares
and the public perception of the commercial banking and savings institution
industries. RP Financial, LC also specifically considered: (1) the financial
terms, financial and operating condition and market area of other pending and
recently completed acquisitions of relatively comparable commercial banks
regionally; (2) discounted cash flow analyses incorporating future prospects for
Midstate Bancorp; (3) the future prospects for Shore Bancshares and the pro
forma pricing characteristics of Shore Bancshares' common stock as a result of
the proposed merger at different pricing levels; and (4) the potential value of
the proposed merger assuming that Shore Bancshares' common stock increases or
decreases, including provisions in the merger agreement providing for an
increase in the number of shares to be issued to Midstate Bancorp stockholders
in the event Shore Bancshares' average share price falls below certain levels.
In rendering its opinion, RP Financial, LC relied, without independent
verification, on the accuracy and completeness of the information concerning
Midstate Bancorp and Shore Bancshares furnished by the respective institutions
to RP Financial, LC for review for purposes of its opinion, as well as
publicly-available information regarding other financial institutions and
economic and demographic data. Midstate Bancorp and Shore Bancshares did not
restrict RP Financial, LC as to the material it was permitted to review. RP
Financial, LC did not perform or obtain any independent appraisals or
evaluations of the assets and liabilities and potential and/or contingent
liabilities of Midstate Bancorp or Shore Bancshares.
RP Financial, LC expresses no opinion on matters of a legal, regulatory,
tax or accounting nature or the ability of the proposed merger as set forth in
the Agreement to be consummated. In rendering its opinion, RP Financial, LC
assumed that, in the course of obtaining the necessary regulatory and
governmental approvals for the proposed Merger, no restriction will be imposed
on Shore Bancshares that would have a material adverse effect on the ability of
the proposed merger to be consummated as set forth in the Agreement.
RP Financial, LC's opinion was based solely upon the information available
to it and the economic, market and other circumstances as they existed as of
November 11, 2003 and the date of this proxy statement/prospectus. Events
occurring after the date of this proxy statement/prospectus could materially
affect the assumptions used in preparing the opinion. In connection with
rendering its opinion, RP Financial, LC performed a variety of financial
analyses that are summarized below. Although the evaluation of the fairness,
from a financial point of view, of the merger consideration was to some extent
subjective based on the experience and judgment of RP Financial, LC, and not
merely the result of mathematical analyses of financial data, RP Financial, LC
relied, in part, on the financial analyses summarized below in its
determinations. The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analyses or summary description. RP
Financial, LC believes its analyses must be considered as a whole and that
selecting portions of such analyses and factors considered
- 35 -
by RP Financial, LC without considering all such analyses and factors could
create an incomplete view of the process underlying RP Financial, LC's opinion.
In its analyses, RP Financial, LC took into account its assessment of general
business, market, monetary, financial and economic conditions, industry
performance and other matters, many of which are beyond the control of Midstate
Bancorp, as well as RP Financial, LC's experience in securities valuation, its
knowledge of financial institutions, and its experience in similar transactions.
With respect to the comparable transactions analysis described below, no public
company utilized as a comparison is identical to Midstate Bancorp and such
analyses necessarily involve complex considerations and judgments concerning the
differences in financial and operating characteristics of the companies and
other factors that could affect the acquisition values of the companies
concerned. The analyses were prepared solely for purposes of RP Financial, LC
providing its opinion as to the fairness of the merger consideration, and they
do not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Any estimates contained in RP
Financial, LC's analyses are not necessarily indicative of future results of
values, which may be significantly more or less favorable than such estimates.
None of the analyses performed by RP Financial, LC was assigned a greater
significance by RP Financial, LC than any other.
Comparable Transactions Analysis. RP Financial, LC compared the proposed
merger on the basis of multiples or ratios of reported and core earnings,
reported and tangible book value, assets, deposits and core deposit premium of
Midstate Bancorp implied by the merger consideration to be paid to the Midstate
Bancorp stockholders with the same multiples or ratios at announcement in
pending acquisitions and acquisitions completed: (1) all commercial banks and
commercial bank holding companies nationwide with assets less than $125 million
and equity/assets ratios of less than 10% September 30, 2002 to date; and (2)
all commercial banks and commercial bank holding companies located in the
MidAtlantic region of the United States with assets between $25 million and $500
million and equity/asset ratios of less than 10% January 1, 2001 to date. In
both groups, RP Financial, LC excluded those with inadequate publicly available
transaction data. The first group of transactions consisted of 28 completed and
17 pending transactions, while the second group consisted of 10 completed and
one pending transactions. The mean and median acquisition pricing multiples or
ratios of these groups were:
Nationwide Group MidAtlantic Group Midstate
Mean Median Mean Median Bancorp(1)
-----------------------------------------------------------
Price/earnings 22.40x 20.04x 23.30x 21.32x 28.67x
Price/book 200.16% 190.72% 246.88% 255.88% 204.63%
Price/tangible book 203.82% 193.53% 257.62% 255.88% 204.63%
Price/assets 16.03% 15.95% 20.89% 21.46% 12.23%
Tg bk prem/core deps 11.59% 9.46% 17.68% 18.95% 7.41%
----------
(1) Based on merger price at announcement and Midstate Bancorp's December
31, 2003 financial data.
In comparison to the Nationwide Group, Midstate Bancorp was of a smaller
size, maintained a more leveraged capital position and had lower profitability
in terms of return on average assets and return on average equity. Midstate
Bancorp's acquisition pricing multiples or ratios were above the mean and median
price/earnings and price/book acquisition pricing ratios for the Nationwide
Group. In comparison to the MidAtlantic Group, Midstate Bancorp was of a smaller
size, maintained a more leveraged capital position and had lower profitability
in terms of
- 36 -
return on average assets and return on average equity. Midstate Bancorp's
acquisition pricing multiples or ratios fell within the range of the acquisition
pricing ratios for the MidAtlantic Group.
Discounted Cash Flow Analysis. Using discounted cash flow analyses, RP
Financial, LC estimated the present value of future dividends and the terminal
value to Midstate Bancorp's stockholders, reflecting alternative strategies for
Midstate Bancorp as an independent institution over a five-year period. Since
Midstate Bancorp has no immediate plans to pay dividends, no dividends were
assumed in the discounted cash flow analyses, and the sole cash flow was the
terminal value. The terminal value was calculated based on fifth year earnings
and book value utilizing earnings and book value multipliers consistent with the
comparable transactions analysis. The discounted cash flow scenarios analyzed
included a slow growth scenario and a high growth scenario. The slow growth
scenario reflects an asset growth rate and profitability ratio consistent with
Midstate Bancorp's recent history. The high growth scenario incorporated the
base case scenario plus a higher asset growth rate assumption, and assumed an
increasing level of profitability, thus there was sufficient capital to support
the faster asset growth rate assumption and remain well-capitalized. In applying
the faster growth scenario, no adjustment was made for potential cost to
earnings reflecting the more competitive pricing and additional operating
expenses required to achieve a faster growth rate than realized historically.
The discount rates range used to compute the present value in the two scenarios
was 12% to 15%. The discount rates used in the two scenarios were derived from
the earnings capitalization rate of publicly-traded thrifts, the risk-free rate
for the relevant period (i.e., the five-year Treasury rate) and perceived
investment risks in Midstate Bancorp. The present values pursuant to these two
scenarios ranged from $45.56 to $65.09 per share. The merger consideration is at
the upper end of the range of value calculated pursuant to the discounted cash
flow approach.
Pro Forma Impact Analysis. In view of the stock component of the merger
consideration and the Board's strategic reasons for the proposed merger, RP
Financial, LC considered the estimated pro forma impact of the proposed merger
on Shore Bancshares' financial condition, operating results and stock pricing
ratios. Specifically, RP Financial, LC considered that the proposed merger is
anticipated: (1) to be accretive to Shore Bancshares' pro forma earnings per
share, before incorporating potential merger synergies; and (2) to expand Shore
Bancshares' market area and franchise coverage into the State of Delaware. RP
Financial, LC considered the pro forma impact of the proposed merger on Shore
Bancshares' per share data and pricing ratios based on Shore Bancshares'
pre-announcement trading price relative to other publicly-traded financially
comparable commercial banks in the MidAtlantic. RP Financial, LC also took into
account Shore Bancshares' strategic objectives following the proposed merger,
including additional growth. RP Financial, LC also considered other benefits of
the proposed merger, including the potential for increased liquidity of the
stock for Midstate Bancorp stockholders given Shore Bancshares' comparatively
larger size, greater market capitalization and higher shares outstanding, the
eligibility to receive cash dividends as a result of the share exchange ratio
and Shore Bancshares current dividend policy, the enhanced products and services
and delivery systems for Midstate Bancorp customers, as a merged company, and
the expanded management team, including back-office support, for the merged
company's operations.
- 37 -
As described above, RP Financial, LC's opinion and presentation to the
Midstate Bancorp board was one of many factors taken into consideration by the
Midstate Bancorp board in making its determination to approve the merger
agreement. Although the foregoing summary describes the material components of
the analyses presented by RP Financial, LC to the Midstate Bancorp board in
connection with its opinion as of those dates, it does not purport to be a
complete description of all the analyses performed by RP Financial, LC and is
qualified by reference to the updated written opinion of RP Financial, LC.
Material Federal Income Tax Consequences of the Merger
The following is a summary description of the material anticipated federal
income tax consequences of the proposed merger generally applicable to the
stockholders of Midstate Bancorp. This summary is not intended to be a complete
description of all of the federal income tax consequences of the proposed
merger. No information is provided with respect to the tax consequences of the
proposed merger under any other tax laws, including applicable state, local and
foreign tax laws. In addition, the following discussion may not be applicable
with respect to specific categories of stockholders, including but not limited
to persons who are corporations, trusts, dealers in securities, financial
institutions, insurance companies or tax exempt organizations; persons who are
not United States citizens or resident aliens or domestic entities (partnerships
or trusts); persons who are subject to alternative minimum tax (to the extent
that tax affects the tax consequences of the proposed merger) or are subject to
the "golden parachute" provisions of the Internal Revenue Code (to the extent
that tax affects the tax consequences of the proposed merger); persons whose
shares of Midstate Bancorp stock are treated as "section 306 stock" under
Section 306 of the Internal Revenue Code; persons who acquired shares of
Midstate Bancorp stock by exercising employee stock options or otherwise as
compensation; persons who do not hold their shares as capital assets; or persons
who hold their shares as part of a "straddle" or "conversion transaction". No
ruling has been or will be requested from the IRS with respect to the tax
effects of the proposed merger. The federal income tax laws are complex, and a
stockholder's individual circumstances may affect the tax consequences to the
stockholder.
If the proposed merger qualifies as a reorganization under Section
368(a)(1)(A) of the Internal Revenue Code, then:
o Midstate Bancorp stockholders will (except to the extent special
rules may apply to one or more of the categories of stockholders
described above) recognize gain, if any, as a result of the proposed
merger only to the extent of the cash received for their stock in
Midstate Bancorp pursuant to the merger agreement. Subject to the
ordinary income treatment rule under Section 302 of the Internal
Revenue Code discussed below, any gain recognized by a Midstate
Bancorp stockholder by virtue of receiving cash will be capital
gain, provided that such Midstate Bancorp stockholder held the
Midstate Bancorp stock as a capital asset on the date of the
proposed merger. Any capital gain recognized will be long-term
capital gain if such Midstate Bancorp stockholder held the Midstate
Bancorp stock for more than one year as of the date of the proposed
merger.
- 38 -
o The aggregate tax basis of Shore Bancshares stock received by a
stockholder of Midstate Bancorp in the proposed merger, will be the
same as the aggregate tax basis of the Midstate Bancorp stock being
exchanged in connection with the proposed merger, less the amount of
any cash consideration received by the stockholder in the proposed
merger, plus any gain or dividend income recognized by the
stockholder in the proposed merger.
o The holding period of Shore Bancshares stock received tax-free by a
stockholder of Midstate Bancorp in the proposed merger will include
the holding period of the shares of Midstate Bancorp common stock
being exchanged in connection with the proposed merger.
o A stockholder of Midstate Bancorp who receives cash in the proposed
merger will be treated as if shares of Shore Bancshares stock were
issued in the proposed merger and then redeemed by Shore Bancshares
in a separate transaction governed by Section 302 of the Internal
Revenue Code. The cash payments will be treated as having been
received as distributions in payment for the shares deemed issued
and redeemed. The application of Section 302 may result in ordinary
income treatment with respect to the cash received, on the theory
that the payment was a disguised dividend. The deemed redemption
will be treated as a sale of the shares surrendered for the cash
payment (i.e., not a disguised dividend), provided that it is not,
as Section 302 recites, "essentially equivalent to a dividend" or
"substantially disproportionate" with respect to the Midstate
Bancorp stockholder. If the deemed redemption is treated as a sale
of a fractional share (i.e., not a disguised dividend under Section
302), and the shares surrendered are capital assets in the hands of
the Midstate Bancorp stockholder, then the stockholder will
recognize capital gain or loss equal to the difference between the
amount of cash received and the basis of the shares surrendered for
the cash payment. This capital gain or loss will be long-term
capital gain or loss if, as of the date of the exchange, the holding
period for the shares is greater than one year. Section 302 is
complicated, and individual circumstances will affect how Section
302 applies to each Midstate Bancshares stockholder.
Prior to the effective time of the proposed merger, we will receive an
opinion from Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC, in which
it will conclude, as of the effective date of the proposed merger, that the
proposed merger will qualify as a reorganization under Section 368(a)(1)(A) of
the Internal Revenue Code. The tax opinion will be based upon assumptions and
representations of the managements of Shore Bancshares and Midstate Bancorp.
The merger agreement provides that at least 40% of the total consideration
to be received by Midstate Bancorp stockholders in the proposed merger will be
paid in the form of shares of Shore Bancshares common stock. While there is
substantial case law indicating that a statutory merger will qualify as a
reorganization under Section 368(a)(1)(A) of the Internal Revenue Code when the
stock portion of the merger consideration to be received by stockholders of a
target company, such as Midstate Bancorp, is as little as 40% of the total
merger consideration, with as much as 60% percent of the total merger
consideration being in the form of cash, the Internal Revenue Service has
limited its willingness to issue advance rulings to mergers involving
- 39 -
consideration of no less than 50% stock and no more than 50% cash. All
stockholders of Midstate Bancorp are urged to consult their own tax advisers as
to the specific tax consequences of the proposed merger under federal, state,
local and any other applicable income tax laws.
Backup Withholding and Information Reporting
Cash received in the proposed merger may be subject to backup withholding
at a 28% rate. Backup withholding will not apply, however, to a taxpayer who (1)
furnishes a correct taxpayer identification number on IRS Form W-9 or an
appropriate substitute form and certifies on such form that he or she is not
subject to backup withholding, (2) provides a certificate of foreign status on
IRS Form W-8BEN or an appropriate substitute form, or (3) is otherwise exempt
from backup withholding. Any amount paid as backup withholding will be credited
against the taxpayer's federal income tax liability. As stockholders of Midstate
Bancorp who will receive shares of Shore Bancshares common stock in the proposed
merger, stockholders also must comply with the information reporting
requirements of the Treasury Regulations under Section 368 of the Internal
Revenue Code. In general, these regulations require any taxpayer who receives
stock, securities or other property, including cash, in a reorganization
described in Section 368(a) of the Internal Revenue Code to include with his or
her federal income tax return a complete statement of the facts pertaining to
the nonrecognition of gain or loss, including (1) the cost or other basis of the
stock transferred in the exchange and (2) the fair market value of stock,
securities or other property received by the taxpayer. The taxpayer is also
required to maintain permanent records. All stockholders of Midstate Bancorp are
encouraged to consult their own tax advisors to determine the specific
information required to be filed by them.
Accounting Treatment
Shore Bancshares will account for the proposed merger under the "purchase"
method of accounting in accordance with accounting principles generally accepted
in the United States. Using the purchase method of accounting, the assets and
liabilities of Midstate Bancorp will be recorded by Shore Bancshares at their
respective fair values at the time of the completion of the proposed merger. The
excess of Shore Bancshares' purchase price over the net fair value of the assets
acquired and liabilities assumed will then be allocated to identified intangible
assets, with any remaining unallocated cost recorded as goodwill.
Regulatory Approvals
Consummation of the proposed merger and the other transactions
contemplated by the merger agreement is subject to, and conditioned upon,
receipt of the approvals from the Federal Reserve Board, the Maryland
Commissioner of Financial Regulation and the Delaware State Bank Commissioner.
Applications in connection with the proposed merger were filed with the
regulatory agencies on or about January 16, 2004. The proposed merger has not
yet been approved by the regulatory agencies.
There can be no assurance that the regulatory agencies will approve or
take other required action with respect to the proposed merger. Shore Bancshares
and Midstate Bancorp are not
- 40 -
aware of any governmental approvals or actions that are required to consummate
the proposed merger except as described above. Should other approvals or actions
be required, it is contemplated that Shore Bancshares and Midstate Bancorp would
seek the approval or action. There can be no assurance as to whether or when any
other approval or action, if required, could be obtained.
Interests of Certain Persons in the Merger
Some officers and directors of Midstate Bancorp have interests in the
proposed merger in addition to their interests as stockholders. The board of
directors of Midstate Bancorp was aware of these interests and took these
interests into account in approving the merger agreement and the transactions
contemplated by the merger agreement. These interests include:
o the appointment of W. Edwin McKee, Jr., who is currently serving as
a director of Midstate Bancorp, to the Shore Bancshares board of
directors after the proposed merger (see "Certain Other Agreements
and Information--Supplemental Agreements" on page 52);
o the acceleration prior to the proposed merger of Thomas Evans'
unvested rights to acquire shares of Midstate Bancorp common stock
and the execution of an employment agreement between Shore
Bancshares, Felton Bank and Mr. Evans, who will continue to serve as
President and Chief Executive Officer of Felton Bank after the
proposed merger (see "Certain Other Agreements and
Information--Supplemental Agreements" on page 52); and
o the continuation of the indemnification rights and liability
insurance of directors and officers of Midstate Bancorp and Felton
Bank (see "Description of the Merger Agreement--Indemnification and
Related Matters" on page 52).
Resale of Shore Bancshares Common Stock
The shares of Shore Bancshares common stock issued pursuant to the merger
agreement will be freely transferable under the Securities Act of 1933, except
for shares issued to any stockholder who may be deemed to be an "affiliate" of
Midstate Bancorp for purposes of Rule 145 under the Securities Act as of the
date of the Midstate Bancorp special meeting. Affiliates may not sell their
shares of Shore Bancshares common stock acquired in connection with the proposed
merger except pursuant to an effective registration statement under the
Securities Act covering the resale of such shares or in compliance with Rule 145
promulgated under the Securities Act or another applicable exemption from the
registration requirements of the Securities Act. Rule 145 imposes restrictions
on the manner in which an affiliate may resell and the quantity of any resale of
any of the shares of Shore Bancshares common stock received by the affiliate in
the proposed merger. Persons who may be deemed to be affiliates of Midstate
Bancorp generally include individuals or entities that control, are controlled
by or are under common control with Midstate Bancorp and may include executive
officers and directors of Midstate Bancorp as well as principal stockholders of
Midstate Bancorp.
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Midstate Bancorp has agreed in the merger agreement to use its best
efforts to cause each director, executive officer and other person who is an
affiliate of Midstate Bancorp to enter into an agreement with Shore Bancshares
providing that such person will not sell, pledge, transfer or otherwise dispose
of shares of Shore Bancshares common stock to be received by such person in the
proposed merger except in compliance with Rule 145 or in a transaction exempt
under the Securities Act (see "Certain Other Agreements and
Information--Affiliate Undertakings" on page 52). This prospectus does not cover
resales of Shore Bancshares common stock following consummation of the proposed
merger, and no person may make use of this prospectus in connection with any
such resale.
DESCRIPTION OF THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement.
This summary is not complete and is subject to the full text of and qualified in
its entirety by reference to the merger agreement, which is incorporated by
reference in its entirety and attached to this proxy statement/prospectus as
Appendix A. Midstate Bancorp stockholders are urged to read the merger agreement
in its entirety for a more complete description of the proposed merger.
Time of Completion
The completion of the proposed merger will take place on the first day
that is both the last business day of a month and at least two business days
after the satisfaction or waiver, where permissible, of all conditions to
completion of the proposed merger specified in the merger agreement. This date
is sometimes referred to in this proxy statement/prospectus as the "effective
date". Shore Bancshares and Midstate Bancorp can also mutually agree on a
different effective date.
On or before the effective date of the proposed merger, we will file
articles of merger with the Maryland State Department of Assessments and
Taxation and a certificate of merger with the Delaware Secretary of State, and
these documents will state the effective date of the proposed merger. Either
Shore Bancshares or Midstate Bancorp can terminate the merger agreement if,
among other reasons, the proposed merger does not occur on or before July 31,
2004 and the terminating party has not breached or failed to perform any of its
obligations under the merger agreement. See "The Merger Agreement--Termination"
on page 50.
Consideration to be Received in the Merger
At the effective time of the proposed merger, each outstanding share of
Midstate Bancorp common stock will be converted into the right to receive (i)
$31.00 in cash plus (ii) between 0.8513 and 0.9015 shares of Shore Bancshares
common stock, depending on the price of Shore Bancshares common stock prior to
the proposed merger. The number of shares of Shore Bancshares common stock into
which each share of Midstate Bancorp common stock will be converted (this number
is sometimes referred to in this document as the "conversion ratio") will be
calculated as follows:
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Average Shore Bancshares Shares of Shore Bancshares Common Stock Received
Common Stock Price (per Midstate Bancorp share)
----------------------------------------------------------------------------------
$30.95 or less 0.9015
$30.96 to $31.94 $27.90 divided by Shore Bancshares Stock Price
$31.95 to $39.05 0.8732
$39.06 to $40.04 $34.10 divided by Shore Bancshares Stock Price
$40.05 or greater 0.8513
The price of Shore Bancshares common stock for this purpose will be the
average of the daily closing bid and closing ask quotations of Shore Bancshares
common stock as reported on The Nasdaq SmallCap Market for each of the 20
consecutive trading days ending five days before the proposed merger. Shore
Bancshares common stock is listed under the symbol "SHBI" on the Nasdaq SmallCap
Market. We have agreed that, during the 20 consecutive trading day period that
will be used to price the shares of Shore Bancshares common stock for purposes
of the proposed merger, transactions in shares of Shore Bancshares common stock
on the Nasdaq Stock Market by us, our subsidiaries, and our executive officers
and directors are prohibited.
In lieu of issuing fractional shares of Shore Bancshares common stock,
Shore Bancshares will pay an amount in cash equal to the product of (a) the
fraction of a share of Shore Bancshares common stock to which a Midstate Bancorp
stockholder (after taking into account all shares of Midstate Bancorp common
stock held immediately before the effective time of the proposed merger by the
stockholder) would otherwise be entitled and (b) the Shore Bancshares common
stock price determined as described above.
The table below lists examples of the number of shares of Shore Bancshares
common stock to which Midstate Bancorp stockholders would be entitled to receive
at the effective time based on a sampling of assumed average closing bid and ask
quotations on The Nasdaq SmallCap Market for each of the 20 consecutive trading
days ending five days before the proposed merger.
Shares of
Average Shore Bancshares Shore Bancshares Common Stock
Common Stock Price(1) (Per Share of Midstate Bancorp Common Stock)(2)
---------------------------------------------------------------------------------
$30.00 0.9015
$31.00 0.9000
$32.00 0.8732
$33.00 0.8732
$34.00 0.8732
$35.00 0.8732
$36.00 0.8732
$37.00 0.8732
$38.00 0.8732
$39.00 0.8732
$40.00 0.8525
$41.00 0.8513
----------
(1) The actual bid and ask quotations, and thus the average of the closing
bid and ask quotations during the 20 consecutive trading day period ending
five days before the proposed merger, are subject to market fluctuations.
(2) Cash will be issued in lieu of fractional shares.
- 43 -
Two occurrences may change the merger consideration to be received by
Midstate Bancorp stockholders in the proposed merger.
First, we have agreed that Midstate Bancorp can elect to terminate the
merger agreement if the average of the daily closing bid and closing ask
quotations of Shore Bancshares common stock as reported on The Nasdaq SmallCap
Market for each of the 20 consecutive trading days ending five days before the
proposed merger were to fall below $26.63 per share, unless Shore Bancshares
agrees to pay additional cash or shares of Shore Bancshares common stock to
Midstate Bancorp stockholders who would otherwise be eligible to receive shares
of Shore Bancshares common stock in the proposed merger. If Shore Bancshares
were to agree to pay this additional cash or shares of its common stock, the
value of this additional cash or shares, per share of Midstate Bancorp, would be
equal to the difference between (a) $24.00 and (b) the product of (i) 0.9015 and
(ii) the average price of Shore Bancshares common stock, determined as described
above. The tables above do not contemplate these additional payments by Shore
Bancshares. See "The Merger Agreement--Termination" on page 50.
Second, if on the fifth day preceding the effective date of the proposed
merger it is determined that the value of all shares of Shore Bancshares common
stock to be issued in the proposed merger, calculated as described above, would
constitute less than 40% of the aggregate value of the merger consideration to
be received by all Midstate Bancorp stockholders, then, to satisfy the
requirements of Section 368(a)(1)(A) of the Internal Revenue Code, Shore
Bancshares will increase the number of shares to be issued, and proportionately
decrease the amount of cash to be paid, to Midstate Bancorp stockholders so that
the value of the shares to be issued will equal at least 40% of the total merger
consideration.
Exchange of Certificates
On and after the effective time of the proposed merger, certificates
representing shares of Midstate Bancorp common stock will represent the right to
receive cash and whole shares of Shore Bancshares common stock, as described
above in "Consideration to be Received in the Merger". Shore Bancshares will
deposit with an independent exchange agent the cash and certificates
representing whole shares of Shore Bancshares common stock to be issued to
Midstate Bancorp stockholders in exchange for shares of Midstate Bancorp common
stock.
Within five business days after the effective time of the proposed merger,
the exchange agent will mail to Midstate Bancorp stockholders a letter of
transmittal, together with instructions for the exchange of their Midstate
Bancorp stock certificates for the merger consideration. Upon surrendering his
or her certificate(s) representing shares of Midstate Bancorp common stock,
together with the signed letter of transmittal, the Midstate Bancorp stockholder
will be entitled to receive, as applicable, (i) certificate(s) representing a
number of whole shares of Shore Bancshares common stock (if any) determined in
accordance with the conversion ratio described above, (ii) a check representing
the amount of cash into which such shares of Midstate Bancorp shall have been
converted, and (iii) a check representing the amount of cash in lieu of
fractional shares of Shore Bancshares common stock.
- 44 -
Until you surrender your Midstate Bancorp stock certificates for exchange
after completion of the proposed merger, you will not be paid dividends or other
distributions declared after the proposed merger with respect to any Shore
Bancshares common stock into which your shares have been converted. No interest
will be paid or accrued to Midstate Bancorp stockholders on any cash to be
received in the proposed merger or on unpaid dividends or distributions, if any.
After the completion of the proposed merger, there will be no further transfers
of Midstate Bancorp common stock. Midstate Bancorp stock certificates presented
for transfer after the completion of the proposed merger will be canceled and
exchanged for the merger consideration.
If your stock certificates have been lost, stolen or destroyed, you will
have to prove your ownership of these certificates and that they were lost,
stolen or destroyed before you receive any consideration for your shares. You
may also be required to post a bond as indemnity against any claim that may be
made against Shore Bancshares with respect to the lost certificates. Upon
request, the exchange agent will send you instructions on how to provide
evidence of ownership.
If any certificate representing shares of Midstate Bancorp common stock is
to be issued in a name other than that in which the certificate for shares
surrendered in exchange is registered, or cash is to be paid to a person other
than the registered holder, it will be a condition of issuance or payment that
the certificate so surrendered be properly endorsed or otherwise be in proper
form for transfer and that the person requesting the exchange either:
o pay to the exchange agent in advance any transfer or other taxes
required by reason of the issuance of a certificate or payment to a
person other than the registered holder of the certificate
surrendered; or
o establish to the satisfaction of the exchange agent that the tax has
been paid or is not payable.
Any portion of the merger consideration made available to the exchange
agent that remains unclaimed by Midstate Bancorp stockholders for six months
after the effective time of the proposed merger will be returned to Shore
Bancshares. Any Midstate Bancorp stockholder who has not exchanged shares of
Midstate Bancorp common stock for the merger consideration in accordance with
the merger agreement before that time can look only to Shore Bancshares for
payment of the merger consideration for these shares and any unpaid dividends or
distributions after that time. Nonetheless, neither Shore Bancshares, Midstate
Bancorp, the exchange agent, nor any other person will be liable to any Midstate
Bancorp stockholder for any amount properly delivered to a public official under
applicable abandoned property, escheat or similar laws.
You should not forward your stock certificates until you have received
transmittal forms and instructions. You should not return your stock
certificates with the enclosed proxy.
- 45 -
Representations and Warranties
We have made representations and warranties in the merger agreement. These
include, among other things, representations relating to:
o valid corporation organization and existence;
o capitalization;
o corporate power to enter into the proposed merger and merger
agreement;
o absence of any breach of organizational documents, law or other
agreements as a result of the merger agreement or proposed merger;
o consents and approvals from third parties required in connection
with the proposed merger;
o timely filing of reports required by regulatory agencies;
o financial statements;
o broker's fees;
o absence of material adverse changes or events;
o absence of legal challenges to the proposed merger or the merger
agreement;
o compliance with SEC filing requirements;
o accuracy of information provided to the other party;
o agreements with regulatory agencies;
o ownership of Midstate Bancorp common stock; and
o inapplicability of state takeover laws.
Midstate Bancorp has made additional representations and warranties to
Shore Bancshares in the merger agreement relating to, among other things:
o timely filing of income tax returns;
o employment matters;
- 46 -
o compliance with applicable laws;
o absence of certain contracts;
o value of investment securities;
o ownership of intellectual property;
o administration of fiduciary accounts;
o environmental matters;
o absence of derivative transactions; and
o composition of the loan portfolio.
Conduct of Business Pending the Merger and Certain Covenants
Under the merger agreement, we have agreed to certain restrictions on our
activities until the proposed merger is completed or terminated. In general, we
are required to conduct our businesses in the usual and ordinary course,
consistent with prudent banking practices.
The following is a summary of the more significant prohibitions imposed
upon Midstate Bancorp, subject to the exceptions set forth in the merger
agreement:
o solely in the case of Midstate Bancorp, declare or pay any dividends
on, or make other distributions in respect of, any of its capital
stock;
o effect any change in the capitalization or the number of issued and
outstanding shares of capital stock or of any other securities
convertible into shares of capital stock of Midstate Bancorp or
Felton Bank;
o amend the organizational documents of Midstate Bancorp or Felton
Bank;
o generally, make any capital expenditures in excess of $50,000 in the
aggregate;
o enter into any new line of business;
o acquire or agree to acquire any material business, business
organization, or division or assets of a business or business
organization;
o take any action that would cause a breach of the merger agreement,
cause a representation made in the merger agreement to become
untrue, or cause the failure of a condition to the proposed merger;
- 47 -
o change its method of accounting;
o adopt, amend, renew or terminate any employee benefit plan or any
agreement, arrangement, plan or policy with any director or
employee, or make anything other than normal increases in the
compensation or fringe benefits of any director or employee or pay
any benefit not required by any existing employee benefit plan or
agreement;
o take any action that would disqualify the proposed merger as a
tax-free reorganization under the Internal Revenue Code of 1986;
o other than in the ordinary course of business, sell, lease,
encumber, assign or otherwise dispose of, or agree to sell, lease,
encumber, assign or otherwise dispose of, any of its material
assets, properties or other rights or agreements;
o other than in the ordinary course of business, incur any
indebtedness for borrowed money or assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations
of any other individual, corporation or other entity;
o file any application to relocate or terminate the operations of any
banking office;
o other than in the ordinary course of business, make any equity
investment or commitment to make an investment in real estate or in
any real estate development project;
o create, renew, amend or terminate or give notice of a proposed
renewal, amendment or termination of, any material contract,
agreement or lease for goods, services or office space to which
Midstate Bancorp or Felton Bank is a party or by which Midstate
Bancorp or Felton Bank or their respective properties is bound,
except that Felton Bank may renew or extend the real property lease
covering its Milford branch permises;
o other than in prior consultation with Shore Bancshares, restructure
or materially change its investment securities portfolio, its gap
position, or the manner in which the portfolio is classified or
reported;
o other than in prior consultation with Shore Bancshares, make or
purchase, or commit to make or purchase, any loan or loans, or
extend any line of credit, to any borrower and its affiliates in a
principal amount greater than $500,000.
The following is a summary of the more significant prohibitions imposed
upon Shore Bancshares, subject to the exceptions set forth in the merger
agreement:
o declare or pay any extraordinary or special dividends or
distributions with respect to its capital stock;
- 48 -
o take any action that would cause a breach of the merger agreement,
cause a representation made in the merger agreement to become
untrue, or cause the failure of a condition to the proposed merger;
o change its methods of accounting; and
o take any action that would disqualify the proposed merger as a
tax-free reorganization under the Internal Revenue Code of 1986.
Shore Bancshares has agreed to file a registration statement containing
this proxy statement/prospectus with the SEC and all applications and notices
necessary to obtain regulatory approvals for the transactions contemplated by
the merger agreement. Midstate Bancorp has agreed to cooperate with Shore
Bancshares in connection with filing the registration statement and with
obtaining the regulatory approvals. Both parties agree:
o to use all reasonable efforts and to cooperate in the preparation
and filing of the registration statement containing this proxy
statement/prospectus and of all applications, notices and documents
required to obtain regulatory approval and/or consents from
governmental authorities for the proposed merger and the merger
agreement;
o that all information provided to the other party for inclusion in
the registration statement containing this proxy
statement/prospectus and in the applications and notices will be
complete and not misleading;
o to provide the other party with reasonable access to information
under the condition that the information be kept confidential; and
o to coordinate publicity of the transactions contemplated by the
merger agreement with the media and Midstate Bancorp stockholders.
Exclusive Dealing
Midstate Bancorp has agreed that it will not encourage or facilitate any
third-party proposals to acquire Midstate Bancorp or Felton Bank and will not
participate in negotiations regarding such a proposal. However, Midstate Bancorp
may provide information and negotiate with a third party if Midstate Bancorp's
board of directors determines that failure to do so would be inconsistent with
its fiduciary duties. Midstate Bancorp is required under the merger agreement to
provide Shore Bancshares with notice of any proposal that it receives to acquire
Midstate Bancorp or Felton Bank.
Conditions to Completion of the Merger
The merger agreement provides that our obligations to effect the proposed
merger are subject to the fulfillment of the following conditions:
- 49 -
o approval of the proposed merger by Midstate Bancorp stockholders;
o authorization of the shares of Shore Bancshares common stock to be
issued in the proposed merger for quotation on the Nasdaq SmallCap
Market;
o receipt of all necessary regulatory approvals;
o the registration statement containing this proxy
statement/prospectus has been declared effective by the SEC and
continues to be effective as of the effective time;
o absence of any laws, rules, injunctions or other governmental
restraints preventing the proposed merger, including any pending
governmental actions to prevent the proposed merger;
o receipt of necessary consents, releases and opinions.
In addition, Shore Bancshares' obligations are further subject to the
fulfillment of the following conditions:
o the accuracy of representations and warranties of Midstate Bancorp
in all material respects as of the date the proposed merger is
completed;
o performance by Midstate Bancorp in all material respects of its
agreements under the merger agreement; and
o termination of all restrictive agreements between Midstate Bancorp
and/or Felton Bank and their banking regulators.
Midstate Bancorp's obligations are additionally subject to fulfillment of
the following conditions:
o the accuracy of representations and warranties of Shore Bancshares
in all material respects as of the date the proposed merger is
completed; and
o performance by Shore Bancshares in all material respects of its
agreements under the merger agreement.
Termination
We can mutually agree at any time to terminate the merger agreement
without completing the proposed merger. Either of us can also terminate the
merger agreement if:
o any required approval, consent or waiver is finally denied;
- 50 -
o the other party materially breaches any of its representations,
warranties or agreements under the merger agreement and this breach
either cannot be cured before the date the proposed merger is to be
completed or is not cured within 30 days after receiving written
notice of the breach;
o the proposed merger is not completed by July 31, 2004, unless the
failure to complete the proposed merger is due to the failure of the
party seeking to terminate the merger agreement to satisfy its
obligations under the merger agreement; or
o Midstate Bancorp fails to obtain stockholder approval, provided
that, in the case of a termination by Midstate Bancorp, Midstate
Bancorp is not in material breach of any of its obligations under
the merger agreement.
Additionally, Midstate Bancorp can terminate the merger agreement if the
average of the daily closing bid and closing ask quotations of Shore Bancshares
common stock as reported on The Nasdaq SmallCap Market for each of the 20
consecutive trading days ending five days before the proposed merger were to
fall below $26.63 per share and Shore Bancshares does not agree to pay
additional cash or shares of Shore Bancshares common stock to Midstate Bancorp
stockholders who would otherwise be eligible to receive shares of Shore
Bancshares common stock in the proposed merger. If Shore Bancshares were to
agree to pay this additional cash or shares of its common stock, the value of
this additional cash or shares, per share of Midstate Bancorp, would be equal to
the difference between (a) $24.00 and (b) the product of (i) 0.9015 and (ii) the
average price of Shore Bancshares common stock, determined as described above.
Shore Bancshares can terminate the merger agreement if Midstate Bancorp's
independent auditor is unable to issue an unqualified opinion of its audit of
the consolidated financial statements of Midstate Bancorp for calendar year
2003.
At any time before the completion of the proposed merger, we can amend the
merger agreement in any way. After the merger agreement is approved by
stockholders of Midstate Bancorp and subject to applicable law, we can also
amend the merger agreement in any way unless the amendment would reduce the
amount or change the form of merger consideration, in which case Midstate
Bancorp stockholders must approve the amendment.
Employee Benefit Matters
The merger agreement requires Shore Bancshares to continue the employment
of all persons who are employees of Midstate Bancorp or Felton Bank immediately
prior to the effective time of the proposed merger. Generally, Midstate
Bancorp's existing employee benefit plans and arrangements will be assumed and
continued by Shore Bancshares after the proposed merger, although Shore
Bancshares has the right to amend, freeze or terminate these plans and
arrangements or merge them together.
- 51 -
Expenses
The expenses incurred by each of us in connection with the merger
agreement and the transactions contemplated by the merger agreement, including
the proposed merger, will be paid by the party incurring such expenses. We will
share equally the costs of printing and mailing this proxy statement/prospectus.
Indemnification and Related Matters
We have agreed that we will use our best efforts to cooperate and defend
any threatened or actual claim, action, suit, proceeding or investigation of any
kind arising prior to the effective time of the proposed merger. After the
effective time of the proposed merger, Shore Bancshares has agreed to indemnify
and hold harmless, to the extent permitted by applicable law, any current or
former director, officer or employee of Midstate Bancorp and of Felton Bank
against losses, claims, damages, liabilities, costs, expenses, judgments, fines
and amounts paid in settlement in connection with any threatened or actual
claims, actions, suits, proceedings, or investigations based on (in whole or in
part), arising out of (in whole or in part), or pertaining to (a) the fact that
such person was a director, officer, or employee of Midstate Bancorp or of
Felton Bank or (b) the merger agreement or the transactions contemplated by the
merger agreement. Shore Bancshares will not have such an obligation if a
settlement is effected without its prior written consent or if a court of
competent jurisdiction ultimately determines that indemnification is prohibited
by law.
Subject to limits set forth in the merger agreement, Midstate Bancorp has
agreed to purchase, and Shore Bancshares has agreed to maintain for a period of
three years after the effective time, directors and officers liability insurance
similar to Midstate Bancorp's existing policy, to cover wrongful acts and/or
omissions committed or allegedly committed prior to the effective time of the
proposed merger.
CERTAIN OTHER AGREEMENTS AND INFORMATION
Affiliate Undertakings
In connection with the execution and delivery of the merger agreement, the
directors, executive officers, and any other person deemed to be an "affiliate"
(as defined under federal securities laws) of Midstate Bancorp executed a
memorandum, undertaking and agreement under which they have undertaken to comply
with certain provisions of the federal securities laws that restrict the sale of
shares of Shore Bancshares common stock by these persons after the proposed
merger. See "The Merger--Resale of Shore Bancshares' Common Stock" on page 41.
Supplemental Agreements
We have agreed supplementally that the Chairman of Midstate Bancorp's
board of directors, W. Edwin Kee, Jr., will be appointed to serve as a Class III
Director on the board of directors of Shore Bancshares after the proposed
merger. Mr. Kee, who is 52 years of age, has served on the Midstate Bancorp
board of directors since 1996 and on the
- 52 -
Felton Bank board of directors since 1992. Mr. Kee also serves as a professor at
the University of Delaware, College of Agriculture, and as President of Kee's
Creek Farm. In accordance with Shore Bancshares' Amended and Restated Articles
of Incorporation and Amended and Restated Bylaws, Mr. Kee's term will expire at
the 2006 Annual Meeting of Stockholders or when his successor is duly elected
and qualifies.
As an outside director of Shore Bancshares, Mr. Kee will be entitled to
receive directors' fees and to participate in the Shore Bancshares, Inc. 1998
Stock Option Plan to the same extent as other outside directors. Information
regarding these fees and benefits is incorporated in this proxy
statement/prospectus by reference to Part III, Item 11 of Shore Bancshares'
Annual Report on Form 10-K, as amended on Form 10-K/A, for the year ended
December 31, 2002 (see "Incorporation of Certain Information by Reference" on
page 73). After the proposed merger, Mr. Kee will also continue to serve on the
board of directors of Felton Bank as an outside director. Outside directors of
Felton Bank currently do not receive any compensation for serving in that
capacity. Directors of Felton Bank will receive fees for their service on the
board after the proposed merger, but these fees have not been determined as of
the date of this proxy statement/prospectus.
We have also agreed supplementally that Thomas Evans, the current
President and Chief Executive Officer of Felton Bank, will enter into a
four-year employment agreement with Shore Bancshares after the proposed merger
to serve as Felton Bank's President and Chief Executive Officer, with an annual
salary of $105,000 and other customary terms, including entitlement to
discretionary bonuses, fringe benefits, and participation in those Shore
Bancshares' pension, profit sharing, retirement, equity and incentive
compensation plans and vacation generally available to other officers of its
bank affiliates. This employment agreement will additionally provide that, in
the event Mr. Evans is terminated without cause within 12 months of a change in
control (as defined in the employment agreement), he will be entitled to receive
one year's salary.
Under his current employment agreement with Midstate Bancorp, Mr. Evans is
entitled to receive 600 shares of Midstate Bancorp common stock on February 8,
2005. Midstate Bancorp has agreed to accelerate this right and issue these
shares prior to the effective time of the proposed merger. Mr. Evans' current
employment agreement will be terminated as of the effective date of the proposed
merger.
Beneficial Ownership of Common Stock
The following table sets forth information as of the record date relating
to the beneficial ownership of the common stock of Midstate Bancorp by (i) each
of Midstate Bancorp's directors and named executive officers (as defined in Item
402(a)(2) of the SEC's Regulation S-B); and (ii) all directors and executive
officers of Midstate Bancorp as a group, and includes all shares of Midstate
Bancorp common stock that may be acquired within 60 days of the record date.
Midstate Bancorp knows of no person or group of persons who beneficially owns
more than 5% of the outstanding shares of Midstate Bancorp common stock. The
amount disclosed below includes shares held in the individual's name and shares
held as joint tenants, tenants in common,
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tenants by the entirety, or as community property. The address of each of the
persons named below is the address of Midstate Bancorp except as otherwise
indicated.
Percent
Number of Shares of Class
Beneficially Beneficially
Name Owned Owned(2)
-----------------------------------------------------------------
David G. Danielson 1,800 1.83%
Thomas Evans 2,000(1) 2.03%
W. Edwin Kee, Jr 1,512 1.53%
Harvey R. Kenton, Jr 410 (3)
Thomas E. Melvin 20 (3)
David W. Moore 20 (3)
James W. Torbert 1,178 1.20%
All Directors 4,940 5.01%
All Directors/Executive
Officers as a Group (7 Persons) 6,940 7.04%
Total 6,940 7.04%
----------
(1) Amount includes 1,200 shares to be granted under Mr. Evans'
current employment agreement with Midstate Bancorp and Felton Bank
as follows: (i) 600 shares on February 8, 2004; and (ii) 600 shares
on February 8, 2005, which entitlement will be accelerated by
Midstate Bancorp prior to the effective time of the merger.
(2) Includes all shares that may be acquired within 60 days of the
record date.
(3) Amount represents less than 1%.
As of the record date, the persons named above do not beneficially own any
shares of Shore Bancshares common stock. Information with respect to the
beneficial ownership of shares of Shore Bancshares common stock by directors and
executive officers of Shore Bancshares and by persons owning more than 5% of the
outstanding common stock is incorporated in this proxy statement/prospectus by
reference to Part III, Item 12 of Shore Bancshares' Annual Report on Form 10-K,
as amended on Form 10-K/A, for the year ended December 31, 2002 (see
"Incorporation of Certain Information by Reference" on page 73).
DESCRIPTION OF SHORE BANCSHARES CAPITAL STOCK
General
Shore Bancshares' authorized capital stock consists of 35,000,000 shares
of common stock, par value $.01 per share, and the board of directors can
increase or decrease the number of authorized shares without approval of the
stockholders. The board of directors can classify and reclassify any unissued
shares of capital stock by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of the shares of stock. The following description does not contain
all the information that might be important to you; therefore, you should read
the more detailed provisions of the Shore Bancshares Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws, which is incorporated
by
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reference as exhibits to the registration statement on Form S-4 of which this
proxy statement/prospectus is a part. The following summary does not give effect
to provisions of applicable statutory or common law.
Common Stock
As of February 2, 2004, there were 5,409,748 shares of Shore Bancshares
common stock outstanding owned by approximately 1,465 stockholders of record. A
holder of common stock has one vote for each share held by him on all matters
submitted to a vote of stockholders and the exclusive voting power for all
purposes is vested in the holders of the common stock. Holders of common stock
do not have the right of cumulative voting in connection with the election of
directors. The common stock has no conversion rights and is not subject to
redemption. A stockholder of Shore Bancshares has no preemptive rights to
subscribe for additional shares of stock or other securities of Shore Bancshares
except as may be granted by the board of directors.
The holders of common stock of Shore Bancshares are entitled to receive,
pro rata, dividends when, as and if declared by the board of directors from
funds legally available for that purpose. The ability of Shore Bancshares to pay
dividends to its stockholders will be limited primarily by the ability of Talbot
Bank, Centreville National Bank, and, if the proposed merger is consummated,
Felton Bank to pay dividends to Shore Bancshares. In the event of any
liquidation, dissolution or winding up of Shore Bancshares, the holders of
common stock will be entitled to share ratably in the net assets remaining after
the payment of provision for payment of debts and other liabilities of Shore
Bancshares and the amount to which holders of any other class of security having
a preference on distributions upon liquidation or dissolution would be entitled.
All of the outstanding shares of common stock are, and the shares of
common stock offered by this proxy statement/prospectus will be, validly issued,
fully paid and nonassessable.
The Transfer Agent for the common stock is the Centreville National Bank.
Preferred Stock
Under the Shore Bancshares charter, Shore Bancshares is authorized without
further stockholder action, from time to time, to classify any unissued shares
of capital stock as preferred stock and to issue shares of preferred stock of
Shore Bancshares, in one or more series, with the designations, preferences,
powers and relative participating, optional or other special rights, and the
qualifications, limitations or restrictions, including, but not limited to,
dividend rights, dividend rate or rates, conversion rights, voting rights,
rights and terms of redemption, the redemption price or prices, and the
liquidation preferences as shall be stated in the resolution providing for the
issued of a series of the stock adopted, at any time or from time to time, by
the Shore Bancshares board.
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COMPARISON OF STOCKHOLDER RIGHTS
Shore Bancshares is incorporated in Maryland and governed by the Maryland
General Corporation Law, or the "MGCL", and Midstate Bancorp is incorporated in
Delaware and governed by the Delaware General Corporation Law, or the "DGCL".
Midstate Bancorp stockholders who do not seek an appraisal of their shares
of Midstate Bancorp common stock will be stockholders of Shore Bancshares after
the proposed merger. The following discussion compares the rights of holders of
Shore Bancshares common stock and Midstate Bancorp common stock and summarizes
the material differences between the current rights of Midstate Bancorp
stockholders and the rights those stockholders will have as stockholders of
Shore Bancshares following the completion of the proposed merger.
The following table is a summary of the provisions affecting, and
differences between, the rights of holders of Midstate Bancorp common stock and
those of holders of Shore Bancshares common stock. The table does not purport to
be a complete statement of all provisions affecting, or the differences between,
the rights of holders of Midstate Bancorp common stock and those of holders of
Shore Bancshares common stock. The identification of specific provisions or
differences is not meant to indicate that other equally or more significant
differences do not exist. This summary is qualified in its entirety by reference
to the DGCL and the MGCL, by the Certificate of Incorporation of Midstate
Bancorp, as amended, and the Amended and Restated Articles of Incorporation of
Shore Bancshares (these documents are referred to in the table as a "charter"),
and the Bylaws of each entity, to which stockholders are referred.
Provision Midstate Bancorp Shore Bancshares
- ---------------------------------------------------------------------------------------------------------------------
Authorized Capital Stock Midstate Bancorp's charter Shore Bancshares' charter authorizes
authorizes issuance of up 250,000 issuance of up 35,000,000 shares of
shares of Midstate Bancorp common Shore Bancshares stock of all
stock, $1.00 par value per share, classes, $0.01 par value per share,
and 50,000 shares of preferred all of which were initially
stock, $1.00 par value per share. classified as common stock. As of
As of February 2, 2004, there were February 2, 2004, there were
97,360 shares of Midstate Bancorp 5,409,748 shares of Shore Bancshares
common stock outstanding, with no common stock were outstanding, with
shares of preferred stock no shares of preferred stock
outstanding. The authorized amount outstanding. As permitted by
of shares of common stock and of Maryland law, the board of directors
preferred stock may, without a class of Shore Bancshares has the power
or series vote, be increased by the under its charter to amend the
affirmative vote of the holders of a charter, without stockholder
majority of the stock of Midstate approval, to increase or decrease
Bancorp entitled to vote thereon. the aggregate number of authorized
shares of stock or the number of
authorized shares of stock of any
class.
Voting Rights Midstate Bancorp's bylaws provide Shore Bancshares' charter permits
that each stockholder entitled to vote the board of directors to set voting
at a meeting may vote in person or rights and terms of voting rights for
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by proxy and shall have one vote for each class or series of capital
every share of stock entitled to vote. stock. Each outstanding share of
The charter provides that shares of common stock is entitled to one vote
preferred stock will have such voting on all actions to be taken by the
rights as may be determined by the holders of common stock. The bylaws
board of directors at the time such provide that votes may be either in
shares of preferred stock are person or by proxy appointed by an
classified and authorized for issuance. instrument in writing. Holders of
The DGCL states that holders of a class Shore Bancshares common stock do not
of stock are entitled to vote as a have cumulative voting rights.
class on any amendment to the charter
if the amendment would change the
aggregate number of shares or par value
or adversely affect the powers or
special rights of the class, whether or
not the charter so provides. The
charter and bylaws do not provide for
cumulative voting rights.
Dividends Subject to applicable law and Subject to applicable law and
preferences of any class of stock, the preferences of any class of stock,
board may declare and pay dividends. the board may declare and pay
DGCL Section 170(1) provides that dividends. MGCL Section 2-309 allows
dividends may be declared from Midstate for the payment of dividends. Under
Bancorp's surplus, or if there is no MGCL Section 2-311, however,
surplus, from its net profits for the dividends may not be paid if, after
fiscal year in which the dividend is giving effect to such dividends: (1)
declared and the preceding fiscal year. Shore Bancshares would not be able
Dividends may not be declared, however, to pay its indebtedness as the
if Midstate Bancorp's capital has been indebtedness becomes due in the
diminished to an amount less than the usual course of business; or (2)
aggregate of all capital represented by Shore Bancshares' total assets would
the issued and outstanding stock of all be less than the sum of its total
classes having a preference upon the liabilities plus, unless the charter
distribution of assets. permits otherwise, the amount that
would be needed, if Shore Bancshares
were to be dissolved at the time of
the distribution, to satisfy the
preferential rights upon dissolution
of stockholders whose preferential
rights on dissolution are superior
to those receiving the distribution.
Liquidation The charter provides that in the The charter provides that, in the
event of the liquidation, event of liquidation, dissolution or
distribution or sale of assets, winding up of the affairs of Shore
dissolution or winding up of the Bancshares, subject to payment of
affairs of Midstate Bancorp, subject debts and other liabilities of Shore
to any preferential rights of Bancshares, and subject to any
holders of preferred stock, holders classified or reclassified stock
of outstanding shares of common having a preference on distribution,
stock are entitled to share ratably holders of common stock are entitled
in all remaining assets of Midstate to share ratably in the remaining
Bancorp. net
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assets of Shore Bancshares.
Classification of Stock The charter provides that the board of The charter provides that the board
directors has the power to classify or of directors has the power to
reclassify any of the unissued shares classify and reclassify any of the
of a particular series of preferred unissued shares of capital stock into
stock. a class or series, or classes or
series, of preferred stock or other
type of stock.
Number of Directors The charter provides that there shall The charter provides that there shall
be not less than five nor more than 25 be not less than three nor more than
directors. The number of directors is 25 directors. Two-thirds of the
determined by a resolution passed by a entire board of directors may alter
majority of the whole board. The the number of directors set by the
charter also provides that directors charter. The charter also provides
are divided into three classes, with that directors are divided into three
directors of each class generally classes, with directors of each class
serving staggered three-year terms. generally serving staggered
three-year terms.
Election of Directors The charter provides that, at each The charter provides that, at each
annual stockholders' meeting, directors annual stockholders' meeting,
of one class of directors are elected directors of one class of directors
to serve for a three-year term. are elected to serve for a three-year
Midstate Bancorp's bylaws provide that term. Shore Bancshares' bylaws
a plurality of votes cast at a meeting provide that a plurality of votes
of stockholders at which a quorum is cast at a meeting of stockholders at
present, is sufficient to elect a which a quorum is present is
director, provided, however, that no sufficient to elect a director. The
person shall be elected having received charter provides that shares of
less than ten percent of the votes common stock shall not have
cast, exclusive of abstentions. The cumulative voting rights.
charter does not provide for cumulative
voting.
Removal of Directors As permitted by Delaware law, the The bylaws provide that any or all of
charter provides that any or all of the the directors may be removed only in
directors may be removed at any time accordance with Maryland law. Because
without cause and only by the the board is divided into three
affirmative vote of the holders of at classes, MGCL Section 2-406 provides
least two-thirds of Midstate Bancorp's that a director may be removed only
then outstanding shares of capital for cause by the affirmative vote of
stock entitled to vote generally in the a majority of all the votes entitled
election of directors, cast at a to be cast generally for the election
meeting of stockholders called for that of directors. Additionally, a
purpose. director elected by a class or series
separately may also be removed only
for cause by the affirmative vote of
a majority of all the votes of that
class or series.
Vacancies on the Board of Directors The charter and the bylaws provide that The charter provides that a vacancy
a vacancy on the board may be filled by on the board may be filled by the
the affirmative vote of a affirmative vote of a majority of the
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majority of the remaining directors, remaining directors, even if a quorum
even if a quorum of the board is not of the board is not present. Until
present. The appointed director will September 30, 2005, however, where a
serve until the next annual director that is also a director of a
stockholders meeting to elect bank subsidiary of Shore Bancshares
directors, at which time a successor resigns or is removed, a director of
shall be elected for the unexpired the same bank subsidiary must fill
term. the vacancy. In either case, the
appointed director shall hold office
for the remainder of the full term of
the class of directors in which the
vacancy occurred and until a
successor is elected and qualified.
Notice of Stockholder Nominations of Neither the DGCL nor the charter and The bylaws allow stockholders to
Directors and Stockholder Proposals bylaws specifically authorize the submit director nominations and
submission of stockholder proposals. stockholder proposals.
The charter provides for the nomination For nominations or business to be
of directors by the board of directors properly brought before an annual
or by stockholders entitled to vote at meeting by a stockholder, the
the meeting who comply with applicable stockholder must have given timely
notice provisions. Nominations must be notice in writing to the secretary of
made pursuant to timely notice in Shore Bancshares.
writing to the secretary of Midstate
Bancorp. To be timely, a notice must be To be timely, notice of intention to
delivered or mailed not less than 14 make a nomination must be delivered
days nor more than 50 days prior to any or mailed to the secretary at Shore
meeting of stockholders called for the Bancshares' principal executive
election of directors. In the event offices not less than 120 days nor
that less than 21 days' notice of the more than 180 days prior to any
meeting is given, such notice shall be meeting of stockholders called for
delivered or mailed to the secretary the election of directors. In the
not later than the close of business on event that the date of the annual
the seventh day following the day on meeting is advanced by more than 30
which notice of the meeting was mailed. days or delayed by more than 60 days
Notice to the secretary shall set from the anniversary date of the
forth, as to each nominee: (1) the preceding year's annual meeting,
name, age, business address and, if notice by the stockholder must be
known, residence address; (2) the delivered not earlier than the 180th
principal occupation or employment; and day prior to such annual meeting and
(3) the number of shares of stock of no later than close of business on
Midstate Bancorp owned beneficially. No the later of the 120th day prior to
information regarding the nominating such annual meeting of the 10th day
stockholder is required to be included following the day on which public
in the notice. announcement of the date of such
annual meeting is first made. In the
case of a special meeting called for
the purpose of electing directors, a
stockholder's notice must be given
not later than the close of business
on the 10th day following the day on
which notice of the date of the
special meeting was mailed or public
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announcement of the meeting was made,
which ever occurs first. Notice to
the secretary shall set forth: (1)
the name and address of each proposed
nominee; (2) the principal occupation
of each proposed nominee; (3) the
number of shares of capital stock of
Shore Bancshares owned by each
proposed nominee; (4) the name and
residence address of the notifying
stockholder; (5) the number of shares
of capital stock of Shore Bancshares
owned by the notifying stockholder;
(6) the consent in writing of the
proposed nominee as to the proposed
nominee's name being placed in
nomination for director; (7) a
description of all arrangements or
understandings between the
stockholder and nominee and any other
person(s) (including their names)
pursuant to which the nomination is
made; (8) a representation that such
stockholder intends to appear in
person or by proxy at the meeting to
make the nomination; and (9) any
other information relating to the
nominee required to be disclosed in a
proxy statement in connection with
solicitation of proxies for election
of directors by Regulation 14A under
the Securities Exchange Act of 1934,
as amended, and Rule 14a-11
promulgated thereunder.
To be timely, a stockholder proposal
must be delivered or mailed and
received by the secretary at Shore
Bancshares' principal executive
offices not less than 60 days nor
more than 90 days prior to the first
anniversary of the preceding year's
annual meeting, provided, however,
that in the even that the date of the
annual meeting is advanced by more
than 30 days or delayed by more than
60 days from the anniversary date of
the preceding year's annual meeting,
notice by the stockholder must be so
delivered not earlier than the 90th
day prior to such annual meeting and
not later than the close of business
on the later of the 60th
- 60 -
day prior to such annual meeting or
the tenth day following the day on
which public announcement of the date
of such meeting is first made. Notice
to the secretary shall set forth as
to each proposal: (1) a brief
description of the business desired
to be brought before the annual
meeting and the reasons for
conducting such business at the
meeting; (2) the name and address of
such stockholder as they appear on
Shore Bancshares' books and of the
beneficial owner, if any, on whose
behalf the proposal is made; (3) the
class or series and number of shares
of capital stock of Shore Bancshares
owned beneficially or of record by
such stockholder and such beneficial
owner; (4) a description of all
arrangements or understandings
between the stockholder and any other
person(s) (including their names) in
connection with the proposal and any
material interest of such stockholder
in such business; and (5) a
representation that such stockholder
intends to appear in person or by
proxy at the meeting to make the
proposal.
Special Meetings The bylaws provide that the chairman of The bylaws provide that a special
the board of directors, the president, meeting may be called by the
the chief executive officer or the president, the chairman of the board
board of directors may call special of directors or a majority of the
meetings of the stockholders. board, or by the secretary upon the
written request of the holders of a
majority of all the shares
outstanding and entitled to vote on
the business to be transacted at the
meeting.
Notice of Meetings The bylaws provide that written notice The bylaws provide that written
of each meeting of the stockholders notice of each meeting of the
shall be given to each stockholder stockholders shall be mailed by the
entitled to vote at such meeting, at secretary to each stockholder
least 10 days but no more than 60 days entitled to vote at the meeting at
before the meeting. A written waiver, the stockholder's address as it
signed by a stockholder, whether before appears on Shore Bancshares' books,
of after the meeting, shall be deemed at least 10 days but no more than 90
equivalent to the notice required to be days before the meeting. A
given to such stockholder. stockholder may waive notice by,
before or after the meeting, signing
a waiver that is filed with the
records of stockholders' meetings or
by attending the meeting in person or
by
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proxy.
Quorum The bylaws provide that the presence The bylaws provide that the presence
in person or by proxy of the holders in person or by proxy of the holders
of a majority of the shares entitle of record of a majority of the
to vote at the meeting shall shares of the capital stock of Shore
constitute a quorum. Bancshares issued and outstanding and
entitled to vote at the meeting shall
constitute a quorum.
Stockholder Action Without a DGCL Section 228 provides that, Under MGCL Section 2-505, any action
Meeting unless limited by a corporation's required or permitted to be taken at
certificate of incorporation, any a meeting of the stockholders may be
action required or permitted to be taken without a meeting if all
taken at a meeting of the stockholders entitled to vote on the
stockholders may be taken without a matter consent to the action.
meeting if a consent is delivered to Additionally, unless a corporation's
the corporation by the holders of articles of incorporation provide
outstanding stock having not less otherwise, the holders of any class
than the minimum number of votes of stock other than common stock
that would be necessary to authorize entitled to vote generally in the
or take such action at a meeting at election of directors may take
which all shares entitled to vote action or consent to any action by
thereon were present and voted. delivering a consent in writing or
Midstate Bancorp's charter does not by electronic transmission of the
specifically limit the ability of stockholders entitled to cast not
stockholders to take action without less than the minimum number of
a meeting. votes that would be necessary to
authorize or take the action at a
stockholders meeting if the
corporation gives notice of the
action to each stockholder not later
than 10 days after the effective time
of the action. Shore Bancshares'
charter specifically authorizes the
stockholders to take action by
unanimous consent.
Preemptive Rights The charter provides that no holder of The charter provides that no holder
any shares or any other securities of of any stock or any other securities
Midstate Bancorp shall have preemptive of Shore Bancshares shall have
rights to purchase or subscribe for any preemptive rights to subscribe for or
unissued stock other than as the board purchase any stock or any other
of directors in its sole discretion may securities of Shore Bancshares other
determine. than as the board of directors in its
sole discretion may determine and at
such price as the board may fix.
Standard of Conduct of Directors Under Delaware law, the standards of Under Maryland law, the standard of
conduct for directors have developed conduct for directors is governed by
through written opinions of Delaware statute. MGCL Section 2-405.1(a)
courts. Generally, directors of requires that a director of Shore
Delaware corporations are subject to a Bancshares perform his or her duties:
duty of loyalty and a duty of care. The (1) in good faith; (2) in a manner he
duty of loyalty has reasonably
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been said to require directors to believes to be in the best interests
refrain from self-dealing and the duty of the corporation; and (3) with the
of care requires directors in managing care that an ordinarily prudent
the corporate affairs to use that person in a like position would use
amount of care which ordinarily careful under similar circumstances.
and prudent persons would use in
similar circumstances. In general, A director's acts are presumed to
gross negligence has been established satisfy this standard of conduct and
as the test for breach of the standard acts relating to or affecting an
for the duty of care in the process of acquisition or a potential
decision-making by directors of acquisition of control of a
Delaware corporations. When directors corporation may not be subject to a
act consistently with their duties of higher duty or greater scrutiny than
loyalty and care, their decisions is applied to any other act of a
generally are presumed to be valid director.
under the business judgment rule.
A director's duty does not require
him to: (1) accept, recommend, or
respond on behalf of the corporation
to any proposal by an acquiring
person; (2) authorize Shore
Bancshares to redeem any rights
under, modify, or render
inapplicable, a stockholder rights
plan; or (3) act or fail to act
solely because of (i) the effect the
act or failure to act may have on an
acquisition or potential acquisition
of control of the corporation; or
(ii) the amount or type of any
consideration that may be offered or
paid to stockholders in an
acquisition.
Limitations on Director Liability The charter and bylaws do not address The charter provides for the
limitations on director liability. DGCL elimination of personal liability for
Section 172 limits liability of directors and officers to the fullest
directors who rely in good faith upon extent possible under applicable law.
the records of the corporation and upon Under applicable law, and by virtue
information provided by a person who of such charter provision, a director
has been selected with reasonable care or officer of Shore Bancshares will
by or on behalf of the corporation. have no personal liability for
Section 174, exonerates from liability monetary damages except: (1) to the
any director who was absent when a extent that the person actually
decision to unlawfully pay dividends received an improper benefit or
was made, or whose dissent was entered profit in money, property, or
on the books containing the minutes of services; or (2) to the extent that a
the proceedings. judgment or other final adjudication
adverse to the person is entered in a
proceeding based on a finding that
the person's action, or failure to
act, was the result of active and
deliberate dishonesty and was
material to the cause of action
adjudicated in the proceeding.
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Indemnification Midstate Bancorp's bylaws generally The charter provides that Shore
provide that it will indemnify any Bancshares will indemnify its
person who was or is a party or is officers and directors to the fullest
threatened to be made a party to any extent permitted by applicable law
threatened, pending or completed action and will indemnify its employees and
or suit or proceeding, whether civil, agents to such extent as shall be
criminal, administrative or authorized by the board of directors
investigative, by reason of the fact of Shore Bancshares or its bylaws and
that she is or was a director, officer, as permitted by law.
employee or agent of the corporation if
she (1) acted in good faith, (2) The bylaws provide that Shore
reasonably believed her actions to be Bancshares shall indemnify and
in or not opposed to the best interests advance expenses to a director or
of Midstate Bancorp, and (3) in a officer of Shore Bancshares in
criminal proceeding, had no reasonable connection with a proceeding to the
cause to believe her conduct was fullest extent permitted by and in
unlawful. No indemnification shall be accordance with the indemnification
made if the person to be indemnified is section of the MGCL. However, Shore
adjudged to be liable for negligence or Bancshares may not indemnify a
misconduct in the performance of her director or an officer in connection
duty to the corporation unless and only with a proceeding commenced by such
to the extent a court determines that director or officer unless the board
the person is fairly and reasonably of directors authorized the
entitled to indemnity. proceeding. Shore Bancshares may
indemnify and advance expenses to
employees and agents, other than
directors and officers, as determined
by and in the discretion of the board
of directors, in connection with a
proceeding to the extent permitted by
and in accordance with the
indemnification section of the MGCL.
MGCL Section 2-418 permits Shore
Bancshares to indemnify any person
who was or is a party or is
threatened to be made a party to any
threatened, pending or completed
action or suit or proceeding, whether
civil, criminal, administrative or
investigative, by reason of the fact
that the person was a director,
officer, employee or agent of Shore
Bancshares if he or she (1) acted in
good faith, (2) reasonably believed
her actions to be in or not opposed
to the best interests of Shore
Bancshares, (3) did not actually
receive an improper personal benefit
in money, property, or services, and
(4) in a criminal proceeding, had no
reasonable cause to believe her
conduct was unlawful.
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Under MGCL Section 2-418,
indemnification may be against
judgments, penalties, fines,
settlements, and reasonable expenses
actually incurred by the director in
connection with the proceeding.
Indemnification may not be made
unless authorized for a specific
proceeding after a determination has
been made that the director has met
the applicable standard of conduct.
This determination is required to be
made: (1) by the board of directors;
(2) by special legal counsel selected
by the board of directors or a
committee of the board by vote; or
(3) by the stockholders.
Shore Bancshares may pay, before
final disposition, the expenses,
including attorneys' fees, incurred
by a director, officer, employee or
agent in defending a proceeding when
the director of officer gives and
undertaking to the corporation to
repay the amounts advanced if it is
ultimately determined that he or she
is not entitled to indemnification.
Shore Bancshares is required to
indemnify any director who has been
successful on the merits or
otherwise, in defense of a proceeding
for reasonable expenses incurred in
connection with the proceeding.
The indemnification and advancement
of expenses provided by the statute
are not exclusive of any other rights
to which a person seeking
indemnification or advancement of
expenses may be entitled under any
bylaw, agreement, vote of
stockholders, vote of directors or
otherwise.
Mergers, Share Exchanges and Sales Under DGCL Section 251(c), a merger, Under MGCL Section 3-105, with
of Assets consolidation, or transfer of assets limited exceptions, a merger,
must generally be approved by the consolidation, or share exchange in
affirmative vote of a majority of all which Shore Bancshares is not the
the votes entitled to be cast on the surviving entity, or a transfer of
matter. In addition to any affirmative all or substantially all of the
vote required by law, Midstate assets of Shore Bancshares, must be
Bancorp's charter provides that an declared advisable by the board of
affirmative vote of the holders of at directors and approved by the
least two-thirds of the stockholders by the affirmative vote
of two-thirds of
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outstanding shares of capital stock of all votes entitled to be cast on the
Midstate Bancorp entitled to vote matter unless the charter contains a
generally in the election of directors provision requiring a different vote,
is required for certain mergers, sales, which cannot be less than a majority.
leases, exchanges, reclassifications, The Shore Bancshares charter requires
pledges, transfers and other the approval only by a majority of
dispositions of assets involving a all votes entitled to be cast on the
stockholder owning more than 10% of matter. The charter also provides
voting shares, or any affiliate of such that, until September 30, 2005,
stockholder. See "Business without approval of at least
Combinations" below for further two-thirds of the entire board of
details. directors, Shore Bancshares may not
(1) merge or consolidate with,
Also see "Voting on Certain Interested transfer all or substantially all of
Transactions" and "Business its assets to, or engage in a share
Combinations" sections below. exchange with another entity, (2)
cause any subsidiary bank of Shore
Bancshares to merge or consolidate
with, to transfer all or
substantially all of its assets to,
or engage in a share exchange with
another entity, or (3) sell or
otherwise dispose of any stock of any
subsidiary bank.
In addition, when a Maryland
corporation is to be the successor in
a merger or share exchange, or the
transferee of assets of another,
approval by the stockholders of the
successor or transferee is not
required absent, in the case of a
merger, any change in the terms of
the outstanding stock or an increase
in the number of outstanding shares
of any class by more than 20%.
Also see "Voting on Certain
Interested Transactions" and
"Business Combinations" sections
below.
Amendments to the Charter The charter provides that the The charter provides that the
affirmative vote of the holders of corporation reserves the right to
at least two-thirds of the amend the charter as authorized by
outstanding shares of the capital law. Pursuant to MGCL Section
stock entitled to vote generally in 2-105(a)(12), the board of directors,
the election of directors shall be with the approval of a majority of
required to amend, alter, or repeal the entire board, and without action
any provisions of Article VI, VII, by the stockholders, may amend the
X, or XI of the charter (relating to charter to increase or decrease the
the board of directors, the aggregate number of shares of stock
executive committee, business of Shore Bancshares or the number of
combinations, and the amendment of shares of stock of any class that
the charter). Shore Bancshares has authority to
issue. In addition, Shore
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Bancshares' charter provides that any
amendment to, repeal of or adoption
of any provision inconsistent with
Article Sixth (related to the number
of directors), or with Article
Seventh (a)(5), (6), (7), (8), (10)
or (11) (relating to indemnification
of directors and officers; liability
of directors and officers;
stockholders notice of nomination of
directors and proposals; board of
director vacancies; mergers,
consolidations, and transfers of
assets; and the amendment of the
charter) requires the approval of at
least 80% of the aggregate votes
entitled to be cast.
Amendments to the Bylaws The charter and bylaws provide that the The bylaws provide that they may be
board of directors has the power to repealed, altered, amended or
adopt, alter, amend or repeal the rescinded and new bylaws may be
bylaws by a vote of a majority of the adopted by the stockholders of Shore
entire board. Stockholders may not Bancshares by the affirmative vote of
make, alter, or repeal any bylaw except not less than a majority of all the
upon the affirmative vote of at least votes entitled to be cast by the
the holders of two-thirds of the outstanding shares of capital stock
outstanding shares of capital stock of of Shore Bancshares or by the board
Midstate Bancorp to vote generally in of directors by the affirmative vote
the election of directors. of not less than two-thirds of the
board of directors at a meeting held
in accordance with the bylaws.
Voting on Certain Interested Under DGCL Section 144, no contract or Neither the charter nor the bylaws
Transaction transaction between a corporation and contain provisions related to voting
any of its directors or officers, or on certain interested transactions.
with any in which any of its directors Under MGCL Section 2-419, no
or officers are directors or officers contract or other transaction
or have a financial interest, shall be between Shore Bancshares and any of
void or voidable solely for this its directors or with any other
reason, or solely because the director entity in which any of its directors
or officer is present at or is a director or has a material
participates in the meeting of the financial interest will be void or
board or committee which authorizes the voidable solely because of the
contract or transaction, or solely common directorship or interest if
because any such director's or (i) the fact of the common
officer's votes are counted for such directorship or interest is
purpose, if the fact of the common disclosed or known to the board of
directorship or interest is disclosed directors or the committee and the
or known to the board of directors or board or committee authorizes the
the committee and the board or contract or transaction by the
committee in good faith authorizes the affirmative votes of a majority of
contract or transaction by the the disinterested directors, even
affirmative votes of a majority of the though the disinterested directors
disinterested directors, even though are less than a quorum, or (ii) the
the fact of the common directorship or
interest is disclosed or known to the
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disinterested directors are less than a stockholders entitled to vote
quorum, or if the fact of the common thereon, and the contract or
directorship or interest is disclosed transaction is approved by a majority
or known to the stockholders entitled of votes cast by the stockholders
to vote thereon, and the contract or entitled to vote other than the votes
transaction is specifically approved in of shares owned of record or
good faith by vote of the stockholders, beneficially by the interested
or if the contract or transaction is director or other entity, or (iii)
fair to Midstate Bancorp as of the time the contract or transaction is fair
it is authorized, approved or ratified, and reasonable to Shore Bancshares.
by the board of directors, a committee
or the stockholders. Also see "Business Combinations"
section.
Also see "Business Combinations"
section.
Stockholder Inspection Rights; Under DGCL Section 220, any Under MGCL Section 2-513, one or more
Stockholder Lists stockholder, in person or by attorney persons who together are and for at
or other agent, shall, upon written least six months have been
demand given under oath stating the stockholders of record or holders of
purpose thereof, have the right to voting trust certificates of at least
inspect for any proper purpose Midstate 5% of the outstanding stock of any
Bancorp's stock ledger, a list of its class of Shore Bancshares may: (1) in
stockholders, and its other books and person or by agent, on written
records, and to make copies or extracts request, inspect and copy the
therefrom. A proper purpose is a corporation's books of account and
purpose reasonably related to such its stock ledger; (2) present to any
person's interest as a stockholder. officer or resident agent of the
corporation a written request for a
Under DGCL Section 219 and Midstate statement of its affairs; and (3) in
Bancorp's bylaws, a complete list of the case of any corporation which
the stockholders entitled to vote at does not maintain the original or a
the meeting, and their addresses and duplicate stock ledger at its
holdings, must be open to the principal office, present to any
examination of any stockholder for any officer or resident agent of the
purpose germane to the meeting for a corporation a written request for a
period of at least 10 days prior to the list of its stockholders.
meeting. The list must also be
available at the meeting and may be Under MGCL Section 2-512, any
inspected by any stockholder who is stockholder, holder of a voting trust
present. certificate, or her agent may inspect
and copy bylaws, minutes of the
proceedings of the stockholders,
annual statements of affairs, and
voting trust agreements on file at
Shore Bancshares. In addition, any
stockholder or holder of a voting
trust certificate may request a
statement showing all stock and
securities issued by the corporation
during the past 12 months.
Business Combinations DGCL Section 203 generally prohibits a MGCL Section 3-602 generally
corporation from prohibits corporations from being
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engaging in any "business combination" involved in any "business
(defined as a variety of transactions, combination" (defined as a variety of
including a merger, asset sale, transactions, including a merger,
issuance of stock and other consolidation, share exchange, asset
transactions resulting in a financial transfer or issuance or
benefit to an interested stockholder) reclassification of equity
with any interested stockholder securities) with any interested
(defined generally as the person who is stockholder for a period of 5 years
the beneficial owner of 15% or more of following the most recent date on
the corporation's outstanding voting which the interested stockholder
stock) for a period of three years became an interested stockholder. An
following the time such stockholder interested stockholder is defined
becomes an interested stockholder, generally as a person who is the
unless: (1) prior to such time the beneficial owner of 10% or more of
board of directors approved either the the voting power of the outstanding
business combination or the transaction voting stock of the corporation after
that resulted in the stockholder the date on which the corporation had
becoming an interested stockholder; (2) 100 or more beneficial owners of its
upon consummation of the combination stock or who is an affiliate or
that resulted in the stockholder associate of the corporation and was
becoming an interested stockholder, the the beneficial owner, directly or
interested stockholder owned at least indirectly, of 10% percent or more of
85% of the voting stock of the the voting power of the then
corporation outstanding at the time the outstanding stock of the corporation
transaction commenced; or (3) at or at any time within the 2-year period
subsequent to the date such person immediately prior to the date in
became an interested stockholder, the question and after the date on which
business combination is approved by the the corporation had 100 or more
board of directors and authorized at a beneficial owners of its stock. A
meeting of stockholders, and not by business combination that is not
written consent, by the affirmative prohibited shall be recommended by
vote of at least two-thirds of the the board of directors and approved
outstanding voting stock that is not by the affirmative vote of at least
owned by the interested stockholder. 80% of the votes entitled to be cast
Under Delaware law, a corporation may by outstanding shares of voting stock
adopt an amendment to its charter or of the corporation, voting together
bylaws expressly electing not to be as a single voting group and
governed by DGCL Section 203 if, in two-thirds of the votes entitled to
addition to any other vote required by be cast by holders of voting stock
law, such amendment is approved by the other than voting stock held by the
affirmative vote of a majority of the interested stockholder who will (or
shares entitled to vote. However, such whose affiliate will) be a party to
amendment generally may not be the business combination or by an
effective until twelve months after affiliate or associate of the
adoption of such amendment and will not interested stockholder, voting
apply to a business combination with an together as a single voting group,
interested stockholder who was such on unless, among other things, the
or prior to the adoption of the corporation's stockholders receive a
amendment. Midstate Bancorp has not minimum price, as defined in the MGCL
adopted such an amendment. for their shares, in cash or in the
same form as paid by the interested
stockholder for its shares. These
provisions will not apply if the
board of directors has exempted the
transaction in question or the
interested stockholder prior to the
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In addition to these restrictions, time that the interested stockholder
Midstate Bancorp's charter provides became an interested stockholder. In
that, unless the transaction is addition, the board of directors may
approved by at least a majority of adopt a resolution approving or
the board of directors, at least exempting specific business
two-thirds of the holders of the combinations, business combinations
outstanding shares of capital stock generally, or generally by type, as
of Midstate entitled to vote to specifically identified or
generally in the election of unidentified existing or future
directors must approve: (1) any stockholders or their affiliates from
merger or consolidation of Midstate the business combination provisions
with or into (i) any subsidiary or of the MGCL. Shore Bancshares' board
any stockholder owning more than 10% has not adopted such provisions.
of the voting shares or (ii) any
other corporation that would become
an affiliate of such a stockholder;
(2) any sale, lease, exchange,
pledge, transfer or other
disposition to or with any such
stockholder or any affiliate of such
stockholder of any assets of
Midstate or any subsidiary having an
aggregate fair market value of
$1,000,000 or more; (3) the issuance
or transfer by Midstate or any
subsidiary of any securities of
Midstate or any subsidiary to any
such stockholder or any affiliate of
such stockholder in exchange for
cash, securities or other property
having an aggregate fair market
value of $1,000,000 or more.
Control Share Statute The DGCL does not have provisions The Maryland Control Share
comparable to the Maryland Control Acquisition Act generally provides
Share Acquisition Statute. that "control shares" of a
corporation acquired in a "control
share acquisition" have no voting
rights except to the extent approved
by the stockholders at a meeting by
the affirmative vote of two-thirds of
all the votes entitled to be cast on
the matter, excluding all interested
shares. "Control shares" are shares
of stock that, if aggregated with all
other shares of stock of the
corporation previously acquired by a
person or in respect of which that
person is entitled to exercise or
direct the exercise of voting power,
except solely by virtue of a
revocable proxy, entitle that person,
directly or indirectly, to exercise
or direct the exercise of the voting
power of shares of stock of the
corporation in the election of
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directors within any of the following
ranges of voting power: one-tenth or
more, but less than one-third of all
voting power, one-third or more, but
less than a majority of all voting
power or a majority or more of all
voting power. "Control share
acquisition" means the acquisition,
directly or indirectly, of control
shares, subject to certain
exceptions. If voting rights or
control shares acquired in a control
share acquisition are not approved at
a stockholders' meeting, then,
subject to certain conditions, the
issuer may redeem any or all of the
control shares for fair value. If
voting rights of such control shares
are approved at a stockholders'
meeting and the acquiror becomes
entitled to vote a majority of the
shares of stock entitled to vote, all
other stockholders may exercise
appraisal rights. The bylaws contain
a provision exempting from these
control share laws any share of the
capital stock of Shore Bancshares.
LEGAL MATTERS
Certain legal matters in connection with the validity of the securities
offered by this prospectus/proxy statement and the proposed merger will be
passed upon for Shore Bancshares by Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC, Baltimore, Maryland.
EXPERTS
The consolidated financial statements of Shore Bancshares, Inc. and
Subsidiaries as of December 31, 2002 and 2001 and for each of the three years in
the period ended December 31, 2002, incorporated in this prospectus/proxy
statement by reference to the Annual Report of Shore Bancshares, Inc. for the
year ended December 31, 2002, have been so incorporated in reliance on the
report of Stegman & Company, independent certified public accountants,
incorporated herein by reference and upon the authority of said firm as experts
in auditing and accounting.
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
The next annual meeting of Shore Bancshares stockholders will be held in
April of 2004. Pursuant to Rule 14a-8 of the Securities Exchange Act of 1934,
the deadline (November 28, 2003) has passed for stockholders to submit proposals
to be considered for inclusion in the proxy statement and form of proxy relating
to this 2004 Annual Meeting of Stockholders. All other
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stockholder proposals must be received by Shore Bancshares at its principal
office no earlier than January 24, 2004 and no later than February 24, 2004.
If the proposed merger is not consummated, then Midstate Bancorp will
notify its stockholders of the date of the next annual meeting of stockholders
and the date by which stockholders must submit proposals to be considered for
inclusion in the proxy statement and form of proxy. Generally, notice of
stockholder proposals must be received by Midstate Bancorp within a reasonable
time before it mails proxy materials for the annual meeting and must meet all
other requirements for inclusion in the proxy statement.
OTHER BUSINESS
As of the date of this proxy statement/prospectus, management of Midstate
Bancorp does not know of any other matters that will be brought before the
meeting requiring action of the stockholders. However, if any other matters
requiring the vote of the stockholders properly come before the meeting, it is
the intention of the persons named in the enclosed form of proxy to vote the
proxies in accordance with the discretion of management. The persons designated
as proxies will also have the right to approve any and all adjournments of the
meeting for any reason.
WHERE YOU CAN FIND MORE INFORMATION
Shore Bancshares has filed with the SEC a registration statement on Form
S-4 under the Securities Act of 1933, as amended, covering 85,688 shares of
Shore Bancshares common stock. Statements contained in this proxy
statement/prospectus concerning any document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance
reference is made to the copy of the applicable document filed with the SEC or
attached as an annex or exhibit to the registration statement.
Shore Bancshares is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and files reports, proxy statements
and other information with the SEC. These reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of these facilities by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers, like Shore Bancshares, that file electronically with the SEC.
Shore Bancshares also maintains an Internet site (http://www.shbi.net) on
which it makes available free of charge its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments
to the foregoing as soon as reasonably practicable after these reports are
electronically filed with, or furnished to, the SEC.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows Shore Bancshares to "incorporate by reference" information
into this proxy statement/prospectus. This means that Shore Bancshares may
disclose important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
to be a part of this proxy statement/prospectus, except for any information that
is superseded by information that is included directly in this document.
The following documents, previously filed with the SEC, are incorporated
by reference into this proxy statement/prospectus:
1. Shore Bancshares' Annual Report on Form 10-K, as amended on Form
10-K/A, for the year ended December 31, 2002;
2. Shore Bancshares' Quarterly Reports on Form 10-Q for the periods
ended March 31, 2003, June 30, 2003, and September 30, 2003;
3. Shore Bancshares' Current Report on Form 8-K filed on January 15,
2004;
4. Shore Bancshares' Current Report on Form 8-K filed on November 12,
2003; and
5. Description of Shore Bancshares common stock which appears in Shore
Bancshares' Registration Statement on Form 10, or any description of
the common stock that appears in any prospectus forming a part of
any subsequent registration statement of Shore Bancshares or in any
registration statement filed pursuant to Section 12 of the Exchange
Act, including any amendments or reports filed for the purpose of
updating such description.
In addition, Shore Bancshares incorporates by reference all documents that
we may file with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, between the date of this proxy
statement/prospectus and the date of the Midstate Bancorp special meeting.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this proxy statement/prospectus shall be deemed to
be modified or superseded for purposes of this proxy statement/prospectus to the
extent that a statement contained herein, or in any other subsequently filed
document that also is incorporated or deemed to be incorporated by reference
herein, modifies or supersedes the statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this proxy statement/prospectus.
You can obtain any of the documents incorporated by reference in this
document through Shore Bancshares or from the SEC through its web site at the
address described above. This information is available to you without charge
upon your oral or written request to Shore
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Bancshares, Inc., 18 East Dover Street, Easton, Maryland 21601, Attention:
Treasurer (telephone (410) 822-1400). To ensure timely delivery of the
documents, any request should be made by March 9, 2004.
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We have not authorized anyone to give any information or to make any
representation not contained in or incorporated by reference in this proxy
statement/prospectus, and, if given or made, any information or representation
not contained in this proxy statement/prospectus must not be relied upon as
having been authorized. This proxy statement/prospectus does not constitute an
offer to sell, or the solicitation of an offer to purchase, any of the
securities offered by this proxy statement/prospectus, or the solicitation of a
proxy, in any jurisdiction, or from any person to or from whom it is unlawful to
make an offer or solicitation of an offer, or proxy solicitation in that
jurisdiction. Neither the delivery of this proxy statement/prospectus nor the
issuance or sale of any securities under this proxy statement/prospectus shall
under any circumstances create any implication that there has been no change in
the information set forth in this proxy statement/prospectus since the date of
this proxy statement/prospectus or incorporated by reference in this proxy
statement/prospectus since the date of this proxy statement/prospectus.
APPENDIX A
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
by and between
SHORE BANCSHARES, INC.
and
MIDSTATE BANCORP, INC.
Dated as of November 12, 2003
- --------------------------------------------------------------------------------
A-1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 12, 2003 by and
between Shore Bancshares, Inc., a Maryland corporation ("Buyer"), and Midstate
Bancorp, Inc., a Delaware corporation (the "Company"). (Buyer and the Company
are sometimes collectively referred to herein as the "Constituent
Corporations.")
WHEREAS, the Boards of Directors of Buyer and the Company have
determined that it is in the best interests of their respective companies and
their stockholders to consummate the business combination provided for herein in
which the Company will, subject to the terms and conditions set forth herein,
merge (the "Merger") with and into Buyer; and
WHEREAS, as a result of the Merger, the wholly-owned subsidiary of
the Company, The Felton Bank, a banking institution organized under the laws of
the State of Delaware ("Felton Bank"), shall become a wholly-owned subsidiary of
the Buyer; and
WHEREAS, the parties desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
certain conditions to the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the
Merger will qualify as a reorganization under the provisions of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and intending to be
legally bound hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this
Agreement, in accordance with the Maryland General Corporation Law (the "MGCL")
and the Delaware General Corporation Law (the "DGCL"), at the Effective Time (as
defined in Section 1.2 of this Agreement), the Company shall merge with and into
Buyer. Buyer shall be the surviving corporation (hereinafter sometimes called
the "Surviving Corporation") in the Merger and shall continue its corporate
existence under the laws of the State of Maryland. The name of the Surviving
Corporation shall continue to be Shore Bancshares, Inc. Upon consummation of the
Merger, the separate corporate existence of the Company shall terminate.
1.2 Effective Time. Provided that the conditions set forth in
Article VIII of this Agreement have been satisfied or waived, the Buyer and the
Company shall, on the Closing Date (as defined in Section 10.1 hereto), cause a
Certificate of Merger (the "Certificate of Merger") to be executed, acknowledged
and filed with the Secretary of State of Delaware (the "Delaware Secretary") as
provided in Section 252 of the DGCL and cause Articles of Merger
A-2
(the "Articles of Merger") to be filed with the State Department of Assessments
and Taxation of Maryland (the "SDAT") as provided in Section 3-107 of the MGCL.
The Merger shall become effective (the "Effective Time") as of the later to
occur of (i) the filing of a Certificate of Merger with the Delaware Secretary,
(ii) the acceptance for record of the Articles of Merger by the SDAT, or (iii)
the date and time specified in the Certificate of Merger and the Articles of
Merger.
1.3 Effects of the Merger. At and after the Effective Time, the
Merger shall have the effects set forth in Section 252 of the DGCL and Section
3-114 of the MGCL.
1.4 Conversion of Company Common Stock. (a) At the Effective Time,
subject to Section 2.2(e) and Section 9.1(i) of this Agreement, each share of
the common stock, par value $1.00 per share, of the Company (the "Company Common
Stock") issued and outstanding immediately prior to the Effective Time (other
than shares of Company Common Stock held directly or indirectly by Buyer or the
Company or any of their respective Subsidiaries (as defined below) (except for
Trust Account Shares and DPC Shares, as such terms are defined in Section 1.4(d)
of this Agreement)) shall, by virtue of this Agreement and without any action on
the part of the holder thereof, be converted into and exchangeable for the right
to receive both (1) the Stock Consideration (as defined in Section 1.4(b) of
this Agreement) and (2) $31.00 in cash (the "Cash Consideration"). Each share of
Company Common Stock converted into the Stock Consideration and Cash
Consideration pursuant to this Article I shall no longer be outstanding and
shall automatically be cancelled and shall cease to exist, and each certificate
(each a "Certificate") previously representing any such shares of Company Common
Stock shall, subject to Section 1.4(c) of this Agreement,(1) thereafter
represent only the right to receive (I) the number of whole shares of Buyer
Common Stock into which the shares of Company Common Stock represented by such
Certificate are convertible pursuant to this Section 1.4(a), (II) the cash in
lieu of fractional shares into which the shares of Company Common Stock
represented by such Certificate have been converted pursuant to this Section
1.4(a) and Section 2.2(e) of this Agreement, and (III) the Cash Consideration
payable pursuant to this Section 1.4(a). Certificates previously representing
shares of Company Common Stock shall be exchanged for certificates representing
whole shares of Buyer Common Stock, cash in lieu of fractional shares of Buyer
Common Stock issued in consideration therefor, and Cash Consideration upon the
surrender of such Certificates in accordance with Section 2.2 of this Agreement,
without any interest thereon. If, between the date of this Agreement and the
Effective Time, the outstanding shares of Buyer Common Stock shall be changed
into a different number or class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
a stock dividend thereon shall be declared with a record date within said
period, the Stock Consideration shall be adjusted to result in the same
aggregate consideration being delivered to the Company's stockholders as would
have been received had such event not occurred.
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(1) On January 15, 2004, Shore Bancshares and Midstate Bancorp amended
this agreement and plan of merger to delete the reference to Section 1.4(c) in
Section 1.4(a).
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(b) For purposes of this Agreement, the Stock Consideration
shall be: (1) 0.9015 shares of Buyer Common Stock if the Average Buyer Common
Stock Price (as defined below) is equal to or less than $30.95 per share; (2) if
the Average Buyer Common Stock Price is equal to or greater than $30.96 per
share but less than or equal to $31.94 per share, the number of shares of Buyer
Common Stock derived by dividing $27.90 by the Average Buyer Common Stock Price;
(3) 0.8732 shares of Buyer Common Stock if the Average Buyer Common Stock Price
is equal to or greater than $31.95 per share but less than or equal to $39.05
per share; (4) if the Average Buyer Common Stock Price is equal to or greater
than $39.06 per share but less than or equal to $40.04 per share, the number of
shares of Buyer Common Stock derived by dividing $34.10 by the Average Buyer
Common Stock Price; or (5) 0.8513 shares of Buyer Common Stock if the Average
Buyer Common Stock Price is equal to or greater than $40.05 per share. For
purposes of this Section 1.4(b), the term "Average Buyer Common Stock Price"
means the average of the daily closing bid and closing ask quotations of Buyer
Common Stock as reported on The Nasdaq SmallCap Market ("Nasdaq/SCM") (as
reported in The Wall Street Journal or, if not reported therein, in another
mutually agreed upon authoritative source) for each of the twenty (20)
consecutive trading days ending on the fifth (5th) day immediately preceding the
day of the Effective Time (the "Determination Period").
(c) Notwithstanding the provisions of Section 1.4(a) of this
Agreement, if any Company stockholder holds, immediately prior the Effective
Time, less than 50 shares of Company Common Stock, then each share of Company
Common Stock so held shall not be converted into and exchangeable for the right
to receive, at the Effective Time, the Stock Consideration and the Cash
Consideration in respect of such share as provided in Section 1.4(a) of this
Agreement, but shall, in lieu thereof, be converted into and exchangeable for
the right to receive cash in an amount equal to the sum of the value of the
Stock Consideration plus the Cash Consideration. For purposes of this Agreement,
the aggregate Stock Consideration, the aggregate Cash Consideration, the
aggregate amount of cash payable pursuant to this Section 1.4(c), and the
aggregate amount of cash, if any, payable pursuant to Section 9.1(i) of this
Agreement with respect to all Certificates shall collectively be referred to as
the "Merger Consideration".(2)
(d) At the Effective Time, all shares of Company Common Stock
that are owned directly or indirectly by Buyer or the Company or any of their
respective Subsidiaries (other than shares of Company Common Stock (1) held
directly or indirectly in trust accounts, managed accounts and the like or
otherwise held in a fiduciary capacity for the benefit of third parties (any
such shares, and shares of Buyer Common Stock that are similarly held, whether
held directly or indirectly by Buyer or the Company, as the case may be, being
referred to herein as "Trust Account Shares") and (2) held by Buyer or the
Company or any of their respective Subsidiaries in respect of a debt previously
contracted (any such shares of Company Common
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(2) On January 15, 2004, Shore Bancshares and Midstate Bancorp amended
this agreement and plan of merger to eliminate the distinction created by this
Section 1.4(c) between Midstate Bancorp stockholders holding fewer than 50
shares of Midstate Bancorp common stock and Midstate Bancorp stockholders
holding at least 50 shares.
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Stock, and shares of Buyer Common Stock that are similarly held, whether held
directly or indirectly by Buyer or the Company, being referred to herein as "DPC
Shares")) shall be cancelled and shall cease to exist and no stock of Buyer or
other consideration shall be delivered in exchange therefor. All shares of Buyer
Common Stock that are owned by the Company or any of its Subsidiaries (other
than Trust Account Shares and DPC Shares) shall become authorized but unissued
shares of Buyer Common Stock.
(e) Notwithstanding any other provision contained in this
Agreement, it is intended that the Merger will qualify as a reorganization under
the provisions of Section 368(a)(1)(A) of the Code and that this Agreement shall
constitute a "plan of reorganization" for the purposes of Section 368 of the
Code. So that the Merger will not fail to satisfy the continuity of interest
requirements under applicable federal income tax principles relating to
reorganizations under Section 368(a)(1)(A) of the Code, as of the Effective
Time, in the event that the value of the Stock Consideration (exclusive of cash
in lieu of fractional shares payable pursuant to Section 2.2(e) of this
Agreement) measured at the Average Buyer Common Stock Price would represent less
than 40% of the Merger Consideration payable at the Effective Time, the Stock
Consideration shall be increased and the Cash Consideration shall be
proportionally decreased so that the Stock Consideration (exclusive of cash in
lieu of fractional shares payable pursuant to Section 2.2(e) of this Agreement)
measured at the Average Buyer Common Stock Price will represent at least 40% of
the value of the Merger Consideration payable to Company stockholders at the
Effective Time.
(f) Shares of Company Common Stock that have not been voted
for approval of this Agreement and the Merger and with respect to which
appraisal rights shall have been properly perfected in accordance with Section
262 of the DGCL ("Dissenting Shares") shall not be converted into the right to
receive any of the Merger Consideration at or after the Effective Time and shall
instead have those rights prescribed by Section 262 of the DGCL, unless and
until the holder of such Dissenting Shares withdraws such holder's demand for
such appraisal in accordance with Section 262(k) of the DGCL or becomes
ineligible for such appraisal. If a holder of Dissenting Shares shall withdraw
in accordance with Section 262(k) of the DGCL or such holder's demand for such
appraisal shall become ineligible for such appraisal, then, as of the later of
the Effective Time or the occurrence of such event, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall be converted into the right
to receive a portion of the Merger Consideration as provided in Article I.
1.5 Buyer Common Stock. Except for shares of Buyer Common Stock
owned by the Company or any of its Subsidiaries (other than Trust Account Shares
and DPC Shares), which shall constitute authorized but unissued shares of Buyer
Common Stock as contemplated by Section 1.4 of this Agreement, the shares of
Buyer Common Stock issued and outstanding immediately prior to the Effective
Time shall be unaffected by the Merger and such shares shall remain issued and
outstanding.
1.6 Articles of Incorporation. At the Effective Time, the Articles
of Incorporation of Buyer, as in effect at the Effective Time, shall be the
Articles of Incorporation of the Surviving Corporation.
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1.7 By-Laws. At the Effective Time, the By-Laws of Buyer, as in
effect immediately prior to the Effective Time, shall be the By-Laws of the
Surviving Corporation until thereafter amended in accordance with applicable
law.
1.8 Directors and Officers. Except as contemplated by Section 7.13
of this Agreement, the directors and officers of Buyer immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation,
each to hold office in accordance with the Articles of Incorporation and By-Laws
of the Surviving Corporation until their respective successors are duly elected
or appointed and qualified.
1.9 Tax Consequences. It is intended that the Merger shall
constitute a reorganization within the meaning of Section 368(a)(1)(A) of the
Code, and that this Agreement shall constitute a "plan of reorganization" for
purposes of Section 368 of the Code.
1.10 No Purchases or Sales of Buyer Common Stock. During the
Determination Period, neither Buyer, Company, or any subsidiary of Buyer or
Company, nor any executive officer or director of either Buyer, Company, or any
subsidiary of Buyer or Company, shall purchase or sell on Nasdaq, or submit a
bid to purchase or an offer to sell on Nasdaq, any shares of Buyer Common Stock
or any options, warrants, rights or other securities convertible into or
exchangeable for shares of Buyer Common Stock.
ARTICLE II
EXCHANGE OF SHARES
2.1 Buyer to Make Shares Available. At or prior to the Effective
Time, Buyer shall deposit, or shall cause to be deposited, with an independent
third party bank or trust company (which may not be a Subsidiary or affiliate of
Buyer) (the "Exchange Agent"), selected by Buyer and reasonably satisfactory to
the Company, for the benefit of the holders of Certificates, and who shall act
as Exchange Agent pursuant to an agreement in form and substance reasonably
satisfactory to Buyer and the Company, for exchange in accordance with this
Article II, (a) certificates representing the total number of whole shares of
Buyer Common Stock to be issued as Stock Consideration pursuant to Article I of
this Agreement, and (b) cash representing (i) the total Cash Consideration to
which holders of Company Common Stock shall have become entitled pursuant to the
provisions of Article I of this Agreement, (ii) the amount of cash in lieu of
fractional shares, if any, that such holders have the right to receive in
respect of their Company Common Stock pursuant to the provisions of this
Agreement, (iii) the amount of cash to which holders of Company Common Stock
shall have become entitled pursuant to Section 1.4(c) of this Agreement,(3) and
(iv) the amount of cash, if any, to which holders of Company Common Stock shall
have become entitled pursuant to Section 9.1(i) of this
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(3) On January 15, 2004, Shore Bancshares and Midstate Bancorp amended
this agreement and plan of merger to delete item (b)(iii) of Section 2.1.
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Agreement (such cash and certificates for shares of Buyer Common Stock, together
with any dividends or distributions with respect thereto, being hereinafter
referred to as the "Exchange Fund").
2.2 Exchange of Shares. (a) As soon as practicable after the
Effective Time, and in no event more than five business days thereafter, the
Exchange Agent shall mail to each holder of record of a Certificate or
Certificates a form letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent) advising such
holder of the effectiveness of the Merger and instructions for use in effecting
the surrender of the Certificates in exchange for either (1) the Cash
Consideration and Stock Consideration into which the shares of Company Common
Stock represented by such Certificate shall have been converted pursuant to
Article I of this Agreement, or (2) in the case of those holders subject to
Section 1.4(c) of this Agreement,(4) cash in the amount required by such
section. Upon surrender of a Certificate for exchange and cancellation to the
Exchange Agent, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor (I)
a certificate representing that number of whole shares of Buyer Common Stock to
which such holder of Company Common Stock shall have become entitled pursuant to
the provisions of Article I of this Agreement and (II) a check representing that
portion of the Cash Consideration to which such holder of Company Common Stock
shall have become entitled pursuant to the provisions of Article I of this
Agreement and the amount of cash in lieu of fractional shares, if any, that such
holder has the right to receive in respect of the Certificate surrendered
pursuant to the provisions of this Agreement, and the Certificate so surrendered
shall forthwith be cancelled. No interest will be paid or accrued on the Cash
Consideration, the cash in lieu of fractional shares, or unpaid dividends and
distributions, if any, payable to holders of Certificates.
(b) No dividends or other distributions declared at or after
the Effective Time with respect to Buyer Common Stock and payable to the holders
of record thereof shall be paid to the holder of any unsurrendered Certificate
until the holder thereof shall surrender such Certificate in accordance with
this Article II. After the surrender of a Certificate in accordance with this
Article II, the record holder thereof shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of Buyer Common Stock
represented by such Certificate. No holder of an unsurrendered Certificate shall
be entitled, until the surrender of such Certificate, to vote the shares of
Buyer Common Stock into which his Company Common Stock shall have been
converted.
(c) If any certificate representing shares of Buyer Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the Certificate so surrendered shall
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(4) On January 15, 2004, Shore Bancshares and Midstate Bancorp amended
this agreement and plan of merger to delete item (2) of Section 2.2(a).
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be properly endorsed (or accompanied by an appropriate instrument of transfer)
and otherwise in proper form for transfer, and that the person requesting such
exchange shall pay to the Exchange Agent in advance any transfer or other taxes
required by reason of the issuance of a certificate representing shares of Buyer
Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or required for any other reason, or shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(d) After the Effective Time, there shall be no transfers on
the stock transfer books of the Company of the shares of Company Common Stock
that were issued and outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates representing such shares are presented
for transfer to the Exchange Agent, they shall be cancelled and exchanged for
certificates representing shares of Buyer Common Stock as provided in this
Article II.
(e) Notwithstanding anything to the contrary contained herein,
no certificates or scrip representing fractional shares of Buyer Common Stock
shall be issued upon the surrender for exchange of Certificates, no dividend or
distribution with respect to Buyer Common Stock shall be payable on or with
respect to any fractional share, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a stockholder of
Buyer. In lieu of the issuance of any such fractional share, Buyer shall pay to
each former stockholder of the Company who otherwise would be entitled to
receive a fractional share of Buyer Common Stock an amount in cash determined by
multiplying (1) the fraction of a share of Buyer Common Stock to which such
holder would otherwise be entitled to receive pursuant to Section 1.4 of this
Agreement by (2) the Average Buyer Common Stock Price.
(f) Any portion of the Exchange Fund that remains unclaimed by
the stockholders of the Company for six (6) months after the Effective Time
shall be delivered by the Exchange Agent to Buyer. Any stockholders of the
Company who have not theretofore complied with this Article II shall thereafter
be entitled to look to Buyer for payment of the stockholder's share of the
Merger Consideration and any unpaid dividends and distributions on Buyer Common
Stock deliverable in respect of each share of Company Common Stock such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. Notwithstanding the foregoing, none of Buyer, the
Company, the Exchange Agent or any other person shall be liable to any former
holder of shares of Company Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(g) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Buyer, the posting by such person of a bond in such amount as Buyer reasonably
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the portion of the Merger Consideration
and any unpaid dividends and distributions on Buyer Common Stock deliverable in
respect of such Certificate as determined pursuant to this Agreement, in each
case, without any interest thereon.
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ARTICLE III
DISCLOSURE SCHEDULES; STANDARDS FOR
REPRESENTATIONS AND WARRANTIES
3.1 Disclosure Schedules. Prior to the execution and delivery of
this Agreement, the Company has delivered to Buyer, and Buyer has delivered to
the Company, a schedule (in the case of the Company, the "Company Disclosure
Schedule," and in the case of Buyer, the "Buyer Disclosure Schedule") setting
forth, among other things, items the disclosure of which is necessary or
appropriate either in response to an express disclosure requirement contained in
a provision of this Agreement or as an exception to one or more of such party's
representations or warranties contained in Article IV, in the case of the
Company, or Article V, in the case of Buyer, or to one or more of such party's
covenants contained in Article VI; provided, however, that notwithstanding
anything in this Agreement to the contrary: (a) no such item is required to be
set forth in the Disclosure Schedule as an exception to a representation or
warranty (other than the representations and warranties contained in Sections
4.2, 4.3(a), 4.6, 4.12, 4.13, 5.2, 5.3(a), 5.6, 5.10 and 5.12) if its absence
would not result in the related representation or warranty being deemed untrue
or incorrect under the standard established by Section 3.2 of this Agreement;
and (b) the mere inclusion of an item in a Disclosure Schedule as an exception
to a representation or warranty shall not be deemed an admission by a party that
such item represents a material exception or material fact, event or
circumstance or that such item has had or is reasonably likely to have a
Material Adverse Effect (as defined herein) with respect to either the Company
or Buyer, respectively. The Company Disclosure Statement and the Buyer
Disclosure Statement are attached to this Agreement and are made a part hereof;
provided, however, that no schedule or portion thereof need be attached to this
Agreement if the responsible party has nothing to disclose therein.
3.2 Standards. (a) No representation or warranty of the Company
contained in Article IV (other than the representations and warranties contained
in Sections 4.2, 4.3(a), 4.6, 4.12 and 4.13) or of Buyer in Article V (other
than the representations and warranties contained in Sections 5.2, 5.3(a), 5.6,
5.10 and 5.12) shall be deemed untrue or incorrect for any purpose under this
Agreement, including for purposes of Sections 8.2(a) and 8.3(a) of this
Agreement, and no party hereto shall be deemed to have breached any such
representation or warranty for any purpose under this Agreement, in any case as
a consequence of the existence or absence of any fact, circumstance or event,
unless such fact, circumstance or event, individually or when taken together
with all other facts, circumstances or events inconsistent with any such
representations or warranties contained in Article IV, in the case of the
Company, or Article V, in the case of Buyer, has had or is reasonably likely to
have a Material Adverse Effect with respect to the Company or Buyer,
respectively.
(b) As used in this Agreement, the term "Material Adverse
Effect" means, with respect to Buyer or the Company, as the case may be, a
material adverse effect on (1) the business, results of operations or financial
condition of such party and its Subsidiaries taken as a whole, other than any
such effect attributable to or resulting from (i) any change in banking or
similar laws, rules or regulations of general applicability or interpretations
thereof by courts or governmental authorities; (ii) any change in GAAP (as
defined herein) or regulatory accounting principles applicable to banks or their
holding companies generally; (iii) actions and omissions of
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the Buyer or the Company taken with the prior written consent of the other in
contemplation of the transactions contemplated hereby, or (iv) the direct
effects of compliance with this Agreement on the operating performance of the
parties, including expenses incurred by the parties in consummating the
transactions contemplated by this Agreement or relating to any litigation
arising as a result of the Merger; or (2) the ability of such party and its
Subsidiaries to consummate the transactions contemplated by this Agreement. As
used in this Agreement, the word "Subsidiary" when used with respect to any
party means any corporation, partnership or other organization, whether
incorporated or unincorporated, which is consolidated with such party for
financial reporting purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Buyer as follows:
4.1 Corporate Organization. (a) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted, and is duly qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such qualification necessary.
The Company is duly registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). The Certificate of
Incorporation and By-laws of the Company, copies of which have previously been
delivered to Buyer, are true, complete and correct copies of such documents as
in effect as of the date of this Agreement.
(b) Felton Bank is a commercial bank duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
deposit accounts of Felton Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") through the Bank Insurance Fund ("BIF") and/or the
Savings Association Insurance Fund ("SAIF") to the fullest extent permitted by
law, and all premiums and assessments required to be paid in connection
therewith have been paid when due by Felton Bank. Each of the Company's other
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization.
Each of the Company's Subsidiaries has the corporate power and authority to own
or lease all of its properties and assets and to carry on its business as it is
now being conducted and is duly qualified to do business in each jurisdiction in
which the nature of the business conducted by it or the character or the
location of the properties and assets owned or leased by it makes such
qualification necessary. Except as set forth in Section 4.1 (b) of the Company
Disclosure Schedule, the articles of incorporation, by-laws and similar
governing documents of each Subsidiary of the Company, copies of which have
previously been delivered to Buyer, are true, complete and correct copies of
such documents as in effect as of the date of this Agreement.
(c) Except as set forth in Section 4.l(c) of the Company
Disclosure Schedule, the minute books of the Company and each of its
Subsidiaries contain true, complete and accurate records of all meetings and
other corporate actions held or taken since December
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31, 2000 of their respective stockholders and Boards of Directors (including
committees of their respective Boards of Directors).
4.2 Capitalization. (a) The authorized capital stock of the Company
consists of 200,000 shares of Company Common Stock and 50,000 shares of
preferred stock ("Company Preferred Stock"). As of the date of this Agreement,
there are 96,560 shares of Company Common Stock outstanding and no shares of
Company Preferred Stock outstanding. The Company has reserved 2,000 shares of
Company Common Stock for issuance to Thomas Evans (collectively, the "Evans
Shares") pursuant to his employment agreement with Felton Bank (the "Evans
Employment Agreement"), none of which has been issued as of the date of this
Agreement. All of the issued and outstanding shares of Company Common Stock have
been duly authorized and validly issued and are fully paid and nonassessable,
with no personal liability attaching to the ownership thereof, and, when issued
pursuant to Section 7.10 of this Agreement, all of the Evans Shares will have
been duly authorized and validly issued and will be fully paid and
nonassessable, with no personal liability attaching to the ownership thereof.
Except as referred to above or reflected in Section 4.2(a) of the Company
Disclosure Schedule, the Company does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of Company
Common Stock or any other equity security of the Company or any securities
representing the right to purchase or otherwise receive any shares of Company
Common Stock or any other equity security of the Company.
(b) Section 4.2(b) of the Company Disclosure Schedule sets
forth a true, complete and correct list of all of the Subsidiaries of the
Company. Except as set forth in Section 4.2(b) of the Company Disclosure
Schedule, the Company owns, directly or indirectly, all of the issued and
outstanding shares of the capital stock of, or membership interests in, each of
such Subsidiaries, free and clear of all liens, charges, encumbrances and
security interests whatsoever, and all of such shares or membership interests
are duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights, with no personal liability attaching to the ownership
thereof. No Subsidiary of the Company has or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of capital stock or
any other equity security of such Subsidiary or any securities representing the
right to purchase or otherwise receive any shares of capital stock or any other
equity security of such Subsidiary. At the Effective Time, there will not be any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character by which the Company or any of its Subsidiaries will be bound
calling for the purchase or issuance of any shares of the capital stock of the
Company or any of its Subsidiaries.
4.3 Authority; No Violation. (a) The Company has full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of the Company. The Board of
Directors of the Company has directed that this Agreement and the transactions
contemplated hereby be submitted to the Company's stockholders for approval at a
meeting of such stockholders and, except for the approval of the Merger and this
Agreement by the requisite vote of the Company's stockholders, no other
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corporate proceedings on the part of the Company are necessary to approve this
Agreement and to consummate the transactions contemplated hereby. Without
limiting the foregoing, the Board of Directors of the Company has adopted a
resolution declaring that this Agreement, the Merger and the transactions
contemplated hereby and thereby are advisable on substantially the terms set
forth herein and that such proposed transactions be submitted for consideration
at a special meeting of the stockholders of the Company. This Agreement has been
duly and validly executed and delivered by the Company and (assuming due
authorization, execution and delivery by Buyer) constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(b) Except as set forth in Section 4.3(b) of the Company
Disclosure Schedule, neither the execution and delivery of this Agreement by the
Company, nor the consummation by the Company of the transactions contemplated
hereby, nor compliance by the Company with any of the terms or provisions of
this Agreement, will: (1) violate any provision of the Certificate of
Incorporation or By-Laws of the Company or the articles of incorporation,
by-laws or similar governing documents of any of its Subsidiaries; or (2)
assuming that the consents and approvals referred to in Section 4.4 of this
Agreement are duly obtained prior to the Effective Time, (i) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to the Company or any of its Subsidiaries, or any of their
respective properties or assets, or (ii) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event that, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of the Company or
any of its Subsidiaries under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which the Company or any of its Subsidiaries
is a party, or by which they or any of their respective properties or assets may
be bound or affected.
4.4 Consents and Approvals. Except for (a) the filing of
applications and notices, as applicable, with the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") under the BHC Act and
approval of such applications and notices, (b) and the filing and declaration of
effectiveness of the registration statement on Form S-4 (the "S-4") in which a
proxy statement relating to the meeting of the Company's stockholders to be held
in connection with this Agreement and the transactions contemplated hereby (the
"Proxy Statement") will be included as a prospectus, (c) approval of the
transactions contemplated by this Agreement by the requisite vote of the holders
of Company Common Stock under applicable law, (d) the filing of the Articles of
Merger with the Department pursuant to the MGCL, (e) the filing of the
Certificate of Merger with the Delaware Secretary pursuant to the DGCL, (f)
authorization for quotation of Buyer Common Stock to be issued in the Merger on
Nasdaq/SCM, (g) approval of the transactions contemplated by this Agreement by
the Maryland Commissioner of Financial Regulation and/or filings in connection
therewith pursuant to the Financial Institutions Article of the Annotated Code
of Maryland, (h) approval of the transactions contemplated by this Agreement by
the Delaware State Bank Commissioner and/or filings in
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connection therewith pursuant to Title 5 of the Annotated Code of Delaware, (i)
filings under state securities and "Blue Sky Laws", and (j) such filings,
authorizations or approvals as may be set forth in Section 4.4 of the Company
Disclosure Schedule, no consents or approvals of or filings or registrations
with any court, administrative agency or commission or other governmental
authority or instrumentality (each a "Governmental Entity") or with any third
party are necessary in connection with (1) the execution and delivery by the
Company of this Agreement, and (2) the consummation by the Company of the Merger
and the other transactions contemplated hereby.
4.5 Reports. Except as set forth in Section 4.5(a) of the Company
Disclosure Schedule, the Company and each of its Subsidiaries have timely filed
all reports, registrations and statements, together with any amendments required
to be made with respect thereto, that they were required to file since December
31, 1999 with (a) the Federal Reserve Board, (b) the FDIC, (c) any state banking
commissions or any other state regulatory authority (each a "State Regulator")
and (d) and any self-regulatory organization ("SRO") (collectively, the
"Regulatory Agencies"), and have paid all fees and assessments due and payable
in connection therewith. Except for normal examinations conducted by a
Regulatory Agency in the regular course of the business of the Company and its
Subsidiaries, and except as set forth in Section 4.5(b) of the Company
Disclosure Schedule, no Regulatory Agency has initiated any proceeding or
investigation into the business or operations of the Company or any of its
Subsidiaries since December 31, 1999. There is no unresolved material violation,
criticism, or exception by any Regulatory Agency with respect to any report or
statement relating to any examinations of the Company or any of its
Subsidiaries.
4.6 Financial Statements. The Company has previously made available
to Buyer copies of (a) the audited consolidated financial statements of the
Company and its Subsidiaries as of December 31 for the fiscal years 1998, 1999,
2000, 2001 and 2002, together with the notes thereto, certified by Trice, Geary
& Myers, independent certified public accountants, (b) a copy of the most recent
management letter rendered by the Company's independent certified public
accountants, and (c) the unaudited consolidated statements of financial
condition of the Company and its Subsidiaries as of June 30, 2003 and June 30,
2002 and the related unaudited consolidated statements of operations and cash
flows for the three-month periods then ended. The December 31, 2002 consolidated
balance sheet of the Company (including the related notes, where applicable)
fairly presents the consolidated financial position of the Company and its
Subsidiaries as of the date thereof, and the other financial statements referred
to in this Section 4.6 (including the related notes, where applicable) fairly
present (subject, in the case of the unaudited statements, to recurring audit
adjustments normal in nature and amount), and the financial statements to be
compiled after the date of this Agreement will fairly present (subject, in the
case of the unaudited statements, to recurring audit adjustments normal in
nature and amount), the results of the consolidated operations and consolidated
financial position of the Company and its Subsidiaries for the respective fiscal
periods or as of the respective dates therein set forth; and each of such
statements (including the related notes, where applicable) has been, and the
financial statements to be compiled after the date of this Agreement will be,
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied during the periods involved, except as indicated in the
notes thereto or, in the case of unaudited statements, as permitted by the SEC's
Form 10-Q. The books
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and records of the Company and its Subsidiaries have been, and are being,
maintained in accordance with applicable legal and accounting requirements.
4.7 Broker's Fees. Neither the Company nor any Subsidiary of the
Company nor any of their respective officers or directors has employed any
broker or finder or incurred any liability for any broker's fees, commissions or
finder's fees in connection with any of the transactions contemplated by this
Agreement.
4.8 Absence of Certain Changes or Events. (a) Except as may be set
forth in Section 4.8(a) of the Company Disclosure Schedule, since December 31,
2002, there has been no change or development or combination of changes or
developments that, individually or in the aggregate, has had or is reasonably
likely to have a Material Adverse Effect on the Company.
(b) Except as set forth in Section 4.8(b) of the Company
Disclosure Schedule, since December 31, 2002, the Company and its Subsidiaries
have carried on their respective businesses in the ordinary course consistent
with their past practices.
(c) Except as set forth in Section 4.8(c) of the Company
Disclosure Schedule, since June 30, 2003, neither the Company nor any of its
Subsidiaries has (1) increased the wages, salaries, compensation, pension or
other fringe benefits or perquisites payable to any executive officer, employee
or director from the amount thereof in effect as of June 30, 2003 (which amounts
have been previously disclosed to Buyer), granted any severance or termination
pay, entered into any contract to make or grant any severance or termination
pay, or paid any bonus other than year-end bonuses for fiscal year 2002 as
listed in Section 4.8(c) of the Company Disclosure Schedule, (2) suffered any
strike, work stoppage, slow-down, or other labor disturbance, (3) been a party
to a collective bargaining agreement, contract or other agreement or
understanding with a labor union or organization, or (4) had any union
organizing activities.
4.9 Legal Proceedings. (a) Except as set forth in Section 4.9 of the
Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is
a party to any legal, administrative, arbitral or other proceedings, claims,
actions or governmental or regulatory investigations of any nature against the
Company or any of its Subsidiaries or challenging the validity or propriety of
the transactions contemplated by this Agreement, and no such proceedings,
claims, actions, or governmental or regulatory investigations are pending or, to
the Company's knowledge, threatened.
(b) There is no injunction, order, judgment, decree, or
regulatory restriction imposed upon the Company, any of its Subsidiaries or the
assets of the Company or any of its Subsidiaries.
4.10 Taxes. (a) (1) Except as set forth in Section 4.10(a) of the
Company Disclosure Schedule, each of the Company and its Subsidiaries (i) has
duly and timely filed (including applicable extensions granted without penalty)
all Tax Returns (as hereinafter defined) required to be filed on or prior to the
date of this Agreement and will duly and timely file all Tax Returns due after
the date of this Agreement and prior to the Effective Time, and such Tax Returns
are or will be true, correct and complete, and (ii) has paid or will pay in full
or to the
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extent necessary made or will make adequate provision in the financial
statements of the Company (in accordance with GAAP) for all Taxes (as
hereinafter defined).
(2) Except as set forth in Section 4.10(a) of the
Company Disclosure Schedule, since January 1, 1998 neither the Company nor any
of its Subsidiaries has granted any waiver of any statute of limitations or
otherwise agreed to any extension of a period for the assessment of any federal,
state, county, municipal, or foreign income tax. The accruals and reserves
reflected in the consolidated financial statements that the Company has provided
to Buyer as described in Section 4.6 are adequate to cover all taxes (including
interest and penalties, if any, thereon) that are payable or accrued as a result
of the operations of the Company and its Subsidiaries for all periods prior to
the date of such consolidated financial statements. Except as set forth in
Section 4.10(a) of the Company Disclosure Schedule, no deficiencies for any
Taxes have been proposed, asserted, assessed or, to the knowledge of the
Company, threatened against or with respect to the Company or any of its
Subsidiaries. The Company has made estimated tax payments for its current tax
year in such amounts as are sufficient to avoid the imposition of an
underpayment of estimated tax penalty.
(3) Except as set forth in Section 4.10(a) of the
Company Disclosure Schedule, (i) there are no liens for Taxes upon the assets of
either the Company or its Subsidiaries except for statutory liens for current
Taxes not yet due, (ii) neither the Company nor any of its Subsidiaries has
requested any extension of time within which to file any Tax Returns in respect
of any fiscal year that have not since been filed and no request for waivers of
the time to assess any Taxes are pending or outstanding, (iii) neither the
Company nor any of its Subsidiaries has filed or been included in a combined,
consolidated or unitary income Tax Return other than one in which the Company
was the parent of the group filing such Tax Return, (iv) neither the Company nor
any of its Subsidiaries is a party to any agreement providing for the allocation
or sharing of Taxes (other than the allocation of federal income taxes as
provided by Regulation 1.1552-1(a)(I) under the Code), (v) neither the Company
nor any of its Subsidiaries is required to include in income any adjustment
pursuant to Section 481(a) of the Code (or any similar or corresponding
provision or requirement of state, local or foreign income Tax law), by reason
of the voluntary change in accounting method (nor has any taxing authority
proposed in writing any such adjustment or change of accounting method), (vi)
neither the Company nor any of its Subsidiaries has filed a consent pursuant to
Section 341(f) of the Code, (vii) neither the Company nor any of its
Subsidiaries has made any payment or will be obligated to make any payment (by
contract or otherwise) that will not be deductible by reason of Section 280G of
the Code, and (viii) none of the Company, any of its Subsidiaries or any entity
acquired by the Company or its Subsidiaries is or was (A) a domestic building
and loan association, (B) a mutual savings bank or (C) a cooperative bank
without capital stock organized and operated for mutual purposes and without
profit, which has taken a deduction for additions to a reserve for bad debts
under Section 593 of the Code.
(b) For the purposes of this Agreement, "Taxes" shall mean all
taxes, charges, fees, levies, penalties or other assessments imposed by any
United States federal, state, local or foreign taxing authority, including, but
not limited to income, excise, property, sales, transfer, franchise, payroll,
withholding, social security or other taxes, including any interest, penalties
or additions attributable thereto. For purposes of this Agreement, "Tax Return"
shall
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mean any return, report, information return or other document (including any
related or supporting information) with respect to Taxes.
4.11 Employees. (a) Section 4.11(a) of the Company Disclosure
Schedule sets forth a true, complete and correct list of each deferred
compensation plan, incentive compensation plan, equity compensation plan,
"welfare" plan, fund or program (within the meaning of Section 3(1) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")); each
"pension" plan, fund or program (within the meaning of Section 3(2) of ERISA);
each employment, termination or severance agreement, whether written or oral,
and each other employee benefit plan, fund, program, agreement or arrangement,
in each case, that is sponsored, maintained or contributed to or required to be
contributed to (the "Plans") by the Company, any of its Subsidiaries or by any
trade or business, whether or not incorporated (an "ERISA Affiliate"), all of
which together with the Company would be deemed a "single employer" within the
meaning of Section 4001 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), for the benefit of any employee or former employee of the
Company, any Subsidiary or any ERISA Affiliate.
(b) The Company has heretofore made available to Buyer true,
complete and correct copies of each of the Plans and all related documents,
including but not limited to (1) the actuarial report for such Plan (if
applicable) for each of the last two years and (2) the most recent determination
letter from the Internal Revenue Service (if applicable) for such Plan.
(c) Except as set forth in Section 4.11(c) of the Company
Disclosure Schedule: (1) each of the Plans has been operated and administered in
all material respects in accordance with its terms and applicable law, including
but not limited to ERISA and the Code; (2) each of the Plans intended to be
"qualified" within the meaning of Section 401(a) of the Code either (i) has
received a favorable determination letter from the IRS, or (ii) is or will be
the subject of an application for a favorable determination letter, and the
Company is not aware of any circumstances likely to result in the revocation or
denial of any such favorable determination letter; (3) with respect to each Plan
that is subject to Title IV of ERISA, the present value of accrued benefits
under such Plan, based upon the actuarial assumptions used for funding purposes
in the most recent actuarial report prepared by such Plan's actuary with respect
to such Plan, did not, as of its latest valuation date, exceed the then current
value of the assets of such Plan allocable to such accrued benefits; (4) no Plan
provides benefits, including without limitation death or medical benefits
(whether or not insured), with respect to current or former employees of the
Company, its Subsidiaries or any ERISA Affiliate beyond their retirement or
other termination of service, other than (i) coverage mandated by applicable
law, (ii) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in Section 3(2) of ERISA, (iii) deferred
compensation benefits accrued as liabilities on the books of the Company, its
Subsidiaries or the ERISA Affiliates, or (iv) benefits the full cost of which is
borne by the current or former employee (or his beneficiary); (5) no liability
under Title IV of ERISA has been incurred by the Company, its Subsidiaries or
any ERISA Affiliate that has not been satisfied in full, and no condition exists
that presents a material risk to the Company, its Subsidiaries or an ERISA
Affiliate of incurring a liability thereunder; (6) no Plan is a "multi employer
pension plan," as such term is defined in Section 3(37) of ERISA; (7) all
contributions or other amounts payable by the Company, its Subsidiaries or any
ERISA Affiliates as of the
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Effective Time with respect to each Plan in respect of current or prior plan
years have been paid or accrued in accordance with GAAP and Section 412 of the
Code; (8) neither the Company, its Subsidiaries nor any ERISA Affiliate has
engaged in a transaction in connection with which the Company, its Subsidiaries
or any ERISA Affiliate could be subject to either a civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section
4975 or 4976 of the Code; (9) there are no pending or, to the best knowledge of
the Company, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of or against any of the Plans or any trusts related
thereto; and (10) the consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or officer of the
Company or any ERISA Affiliate to severance pay, termination pay or any other
payment or benefit, except as expressly provided in this Agreement or (ii)
accelerate the time of payment or vesting or increase the amount or value of
compensation or benefits due any such employee or officer.
4.12 SEC Reports and Stockholder Communications. Except as set forth
in Section 4.12 of the Company Disclosure Schedule, neither the Company nor
Felton Bank has filed, or is or, since January 1, 1998, has been required to
file, any registration statement, prospectus, report, schedule or definitive
proxy statement with the SEC pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company has previously made available to Buyer a true,
complete and correct copy of each communication mailed by the Company to its
stockholders since January 1, 2000, and no communication contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances in which they were made, not misleading, except that
information as of a later date shall be deemed to modify information as of an
earlier date.
4.13 Company Information. The information relating to the Company
and its Subsidiaries that is provided to Buyer by the Company specifically for
inclusion in the Proxy Statement and the S-4, or in any other document filed
with any other Regulatory Agency in connection herewith, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances in which they are
made, not misleading.
4.14 Compliance with Applicable Law. The Company and each of its
Subsidiaries hold all licenses, franchises, permits and authorizations necessary
for the lawful conduct of their respective businesses under and pursuant to all,
and are in compliance with and are not currently in default in any respect under
any, applicable law, statute, order, rule, regulation, policy and/or guideline
of any Governmental Entity relating to the Company or any of its Subsidiaries,
including any state securities laws and regulations, and neither the Company nor
any of its Subsidiaries has received notice of any violations of any of the
above.
4.15 Certain Contracts. (a) Except as set forth in Section 4.15(a)
of the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries is a party to or bound by any contract, arrangement, commitment or
understanding (whether written or oral) (1) with respect to the employment of
any directors, officers, employees or consultants, (2) that,
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upon the consummation of the transactions contemplated by this Agreement, will
(either alone or upon the occurrence of any additional acts or events) result in
any payment or benefits (whether of severance pay or otherwise) becoming due, or
the acceleration or vesting of any rights to any payment or benefits, from
Buyer, the Company, the Surviving Corporation, or any of their respective
Subsidiaries to any officer, director, consultant or employee thereof, (3) that
is a material contract (as defined in Item 601(b)(10) of Regulation S-K of the
SEC) to be performed after the date of this Agreement, (4) that is a consulting
agreement (including data processing, software programming and licensing
contracts) not terminable on 60 days or less notice involving the payment of
more than $25,000 per annum, in the case of any such agreement with an
individual, or $50,000 per annum, in the case of any other such agreement, (5)
that materially restricts the conduct of any line of business by the Company or
any of its Subsidiaries, or (6) (including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan) any of
the benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement, or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement. Each contract, arrangement, commitment or understanding of the type
described in this Section 4.15(a), whether or not set forth in Section 4.15(a)
of the Company Disclosure Schedule, is referred to herein as a "Company
Contract". The Company has previously delivered to Buyer true, complete and
correct copies of each Company Contract.
(b) Except as set forth in Section 4.15(b) of the Company
Disclosure Schedule, (1) each Company Contract is valid and binding and in full
force and effect, (2) the Company and each of its Subsidiaries has performed all
obligations required to be performed by it to date under each Company Contract,
(3) no event or condition exists that constitutes or, after notice or lapse of
time or both, would constitute, a default on the part of the Company or any of
its Subsidiaries under any such Company Contract, and (4) no other party to such
Company Contract is, to the knowledge of the Company, in default in any respect
thereunder.
4.16 Agreements with Regulatory Agencies. Except as set forth in
Section 4.16 of the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries is subject to any cease-and-desist or other order issued by, or
is a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, or has adopted any board resolutions
at the request of (each, whether or not set forth on Section 4.16 of the Company
Disclosure Schedule, a "Company Regulatory Agreement"), any Regulatory Agency or
other Governmental Entity that restricts the conduct of its business or that in
any manner relates to its capital adequacy, its credit policies, its management
or its business, nor has the Company or any of its Subsidiaries been advised in
writing by any Regulatory Agency or other Governmental Entity that it is
considering issuing or requesting any Company Regulatory Agreement.
4.17 Investment Securities. Section 4.17 of the Company Disclosure
Schedule sets forth the book and market value as of June 30, 2003 of the
investment securities and securities available for sale of the Company and its
Subsidiaries.
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4.18 Intellectual Property. The Company and each of its Subsidiaries
owns or possesses valid and binding licenses and other rights to use without
payment all patents, copyrights, trade secrets, trade names, servicemarks and
trademarks used in its businesses; and neither the Company nor any of its
Subsidiaries has received any notice of conflict with respect thereto that
asserts the right of others.
4.19 State Takeover Laws. The Board of Directors of the Company has
approved this Agreement and the transactions contemplated hereby prior to the
date of this Agreement such that the provisions of Section 203 of the DGCL and
Section 3-602 of the MGCL will not, assuming the accuracy of the representations
contained in Section 5.13 of this Agreement, apply to this Agreement or any of
the transactions contemplated hereby.
4.20 Administration of Fiduciary Accounts. The Company and each of
its Subsidiaries has properly administered all accounts for which it acts as a
fiduciary, including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor, in accordance with the terms of the governing documents and
applicable state and federal law and regulation and common law. Neither the
Company nor any of its Subsidiaries nor any of their respective directors,
officers or employees has committed any breach of trust with respect to any such
fiduciary account, and the accountings for each such fiduciary account are true,
complete and correct and accurately reflect the assets of such fiduciary
account.
4.21 Environmental Matters. Except as set forth in Section 4.21 of
the Company Disclosure Schedule:
(a) Each of the Company and its Subsidiaries and to the best
knowledge of the Company, the Participation Facilities and the Loan Properties
(each as hereinafter defined) are, and have been, in compliance with all
applicable federal, state and local laws including common law, regulations and
ordinances and with all applicable decrees, orders and contractual obligations
relating to pollution or the discharge of, or exposure to Hazardous Materials
(as hereinafter defined) in the environment or workplace ("Environmental Laws");
(b) There is no suit, claim, action or proceeding, pending or,
to the best knowledge of the Company, threatened, before any Governmental Entity
or other forum in which the Company, any of its Subsidiaries or to the best
knowledge of the Company, any Participation Facility or any Loan Property, has
been or, with respect to threatened proceedings, may be, named as a defendant
(1) for alleged noncompliance (including by any predecessor), with any
Environmental Laws or (2) relating to the release, threatened release or
exposure to any Hazardous Material whether or not occurring at or on a site
owned, leased or operated by the Company or any of its Subsidiaries, any
Participation Facility or any Loan Property;
(c) During the period of (1) the Company's or any of its
Subsidiaries' ownership or operation of any of their respective current or
former properties, (2) the Company's or any of its Subsidiaries' participation
in the management of any Participation Facility or (3) the Company's or any of
its Subsidiaries' holding of a security interest in a Loan Property, to the best
knowledge of the Company, there has been no release of Hazardous Materials in,
on, under or
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affecting any such property. Prior to the period of (1) the Company's or any of
its Subsidiaries' ownership or operation of any of their respective current or
former properties, (2) the Company's or any of its Subsidiaries' participation
in the management of any Participation Facility or (3) the Company's or any of
its Subsidiaries' holding of a security interest in a Loan Property, to the best
knowledge of the Company, there was no release or threatened release of
Hazardous Materials in, on, under or affecting any such property, Participation
Facility or Loan Property; and
(d) The following definitions apply for purposes of this
Section 4.21: (1) "Hazardous Materials" means any chemicals, pollutants,
contaminants, , wastes, toxic substances, petroleum or other regulated
substances or materials; (2) "Loan Property" means any property in which the
Company or any of its Subsidiaries holds a security interest, and, where
required by the context, said term means the owner or operator of such property;
and (3) "Participation Facility" means any facility in which the Company or any
of its Subsidiaries participates in the management and, where required by the
context, said term means the owner or operator of such property.
4.22 Derivative Transactions. Except as set forth in Section 4.22 of
the Company Disclosure Schedule, since December 31, 2002, neither the Company
nor any of its Subsidiaries has engaged in transactions in or involving
forwards, futures, options on futures, swaps or other derivative instruments
except (a) as agent on the order and for the account of others or (b) as
principal for purposes of hedging interest rate risk on U.S. dollar-denominated
securities and other financial instruments. None of the counterparties to any
contract or agreement with respect to any such instrument is in default with
respect to such contract or agreement and no such contract or agreement, were it
to be a Loan (as defined below) held by the Company or any of its Subsidiaries,
would be classified as "Other Loans Specially Mentioned", "Special Mention",
"Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit Risk
Assets", "Concerned Loans" or words of similar import. The financial position of
the Company and its Subsidiaries on a consolidated basis under or with respect
to each such instrument has been reflected in the books and records of the
Company and such Subsidiaries in accordance with GAAP consistently applied, and
no open exposure of the Company or any of its Subsidiaries with respect to any
such instrument (or with respect to multiple instruments with respect to any
single counterparty) exceeds $50,000.
4.23 Opinion. Prior to the execution of this Agreement, the Company
has received an opinion from RP Financial, LC to the effect that, as of the date
of this Agreement and based upon and subject to the matters set forth therein,
the consideration to be received by the stockholders of the Company pursuant to
this Agreement is fair to the Company's stockholders from a financial point of
view. Such opinion has not been amended or rescinded as of the date of this
Agreement.
4.24 Approvals. As of the date of this Agreement, the Company knows
of no reason why all regulatory approvals required for the consummation of the
transactions contemplated hereby (including, without limitation, the Merger)
should not be obtained.
4.25 Loan Portfolio. (a) Except as set forth in Section 4.25 of the
Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is
a party to any written or
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oral (1) loan agreement, note or borrowing arrangement (including, without
limitation, leases, credit enhancements, commitments, guarantees and
interest-bearing assets) (collectively, "Loans"), other than any Loan the unpaid
principal balance of which does not exceed $10,000, under the terms of which the
obligor is, as of the date of this Agreement, over 90 days delinquent in payment
of principal or interest or in default of any other provision, or (2) Loan with
any director, executive officer or five percent or greater stockholder of the
Company or any of its Subsidiaries, or to the knowledge of the Company, any
person, corporation or enterprise controlling, controlled by or under common
control with any of the foregoing. Section 4.25 of the Company Disclosure
Schedule sets forth (I) all of the Loans in original principal amount in excess
of $10,000 of the Company or any of its Subsidiaries that as of the date of this
Agreement are classified by any bank examiner (whether regulatory or internal)
as "Other Loans Specially Mentioned", "Special Mention", "Substandard",
"Doubtful", "Loss", "Classified", "Criticized", "Credit Risk Assets", "Concerned
Loans", "Watch List" or words of similar import, together with the principal
amount of and accrued and unpaid interest on each such Loan and the identity of
the borrower thereunder, (II) by category of Loan (i.e., commercial, consumer,
etc.), all of the other Loans of the Company and its Subsidiaries that as of the
date of this Agreement are classified as such, together with the aggregate
principal amount of and accrued and unpaid interest on such Loans by category,
and (III) each asset of the Company that as of the date of this Agreement is
classified as "Other Real Estate Owned" and the book value thereof. The Company
shall promptly inform Buyer in writing of any Loan that becomes classified in
the manner described in the previous sentence, or any Loan the classification of
which is changed, at any time after the date of this Agreement.
(b) Each Loan (1) is evidenced by notes, agreements or other
evidences of indebtedness that are true, genuine and what they purport to be,
(2) to the extent secured, has been secured by valid liens and security
interests that have been and remain perfected, and (3) is the legal, valid and
binding obligation of the obligor named therein, enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent conveyance and other
laws of general applicability relating to or affecting creditors' rights and to
general equity principles.
4.26 Reorganization. As of the date of this Agreement, the Company
has no reason to believe that the Merger will fail to qualify as a
reorganization under Section 368(a)(1)(A) of the Code.
4.27 Ownership of Company Common Stock. Immediately prior to the
Effective Time, none of the Company or its Subsidiaries will beneficially own,
directly or indirectly, any Company Common Stock that will be cancelled,
pursuant to Section 1.4(d) of this Agreement, at the Effective Time.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to the Company as follows:
5.1 Corporate Organization. (a) Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland. Buyer has the corporate
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power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary.
Buyer is duly registered as a financial holding company under the BHC Act. The
Articles of Incorporation and By-laws of Buyer, copies of which have previously
been made available to the Company, are true, complete and correct copies of
such documents as in effect as of the date of this Agreement.
(b) The Talbot Bank of Easton, Maryland ("Talbot Bank") is a
commercial bank duly organized, validly existing and in good standing under the
laws of the State of Maryland, and The Centreville National Bank of Maryland
("Centreville National Bank") is a national banking association duly organized,
validly existing and in good standing under the laws of the United States. The
deposit accounts of Talbot Bank and of Centreville National Bank are insured by
the Federal Deposit Insurance Corporation (the "FDIC") through the Bank
Insurance Fund ("BIF") and/or the Savings Association Insurance Fund ("SAIF") to
the fullest extent permitted by law, and all premiums and assessments required
to be paid in connection therewith have been paid when due by the respective
institutions. Each of Buyer's other Subsidiaries is a corporation or limited
liability company duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation or organization. Each of Buyer's
Subsidiaries has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted
and is duly qualified to do business in each jurisdiction in which the nature of
the business conducted by it or the character or the location of the properties
and assets owned or leased by it makes such qualification necessary. Except as
set forth in Section 5.1(b) of the Buyer Disclosure Schedule, the articles of
incorporation, by-laws and similar governing documents of each Subsidiary of
Buyer, copies of which have previously been delivered to the Company, are true,
complete and correct copies of such documents as in effect as of the date of
this Agreement.
(c) The minute books of Buyer and each of its Subsidiaries
contain true, complete and accurate records of all meetings and other corporate
actions held or taken since December 31, 2000 of their respective stockholders
and Boards of Directors (including committees of their respective Boards of
Directors).
5.2 Capitalization. (a) As of the date of this Agreement, the
authorized capital stock of Buyer consists of 35,000,000 shares of Buyer Common
Stock. As of September 30, 2003, there were 5,378,203 shares of Buyer Common
Stock issued and outstanding. Except as described in Section 5.2(a) of the Buyer
Disclosure Schedule and except for 217,673 shares of Buyer Common Stock reserved
for issuance upon the exercise of stock options pursuant to the Buyer 1998 Stock
Option Plan, the Buyer 1998 Employee Stock Purchase Plan, as amended, and the
Talbot Bancshares, Inc. Employee Stock Option Plan, no shares of Buyer Common
Stock were reserved for issuance as of the date of this Agreement. All of the
issued and outstanding shares of Buyer Common Stock have been duly authorized
and validly issued and are fully paid, nonassessable and free of preemptive
rights, with no personal liability attaching to the ownership thereof. As of the
date of this Agreement, except as referred to above or reflected in Section
5.2(a) of the Buyer Disclosure Schedule, Buyer does not have and is not bound by
any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character
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calling for the purchase or issuance of any shares of Buyer Common Stock or any
other equity securities of Buyer or any securities representing the right to
purchase or otherwise receive any shares of Buyer Common Stock. The shares of
Buyer Common Stock to be issued pursuant to the Merger will be duly authorized
and validly issued, and, at the Effective Time, all such shares will be fully
paid, nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof.
(b) Section 5.2(b) of the Buyer Disclosure Schedule sets forth
a true and correct list of all of Buyer Subsidiaries as of the date of this
Agreement. Except as set forth in Section 5.2(b) of the Buyer Disclosure
Schedule, as of the date of this Agreement, Buyer owns, directly or indirectly,
all of the issued and outstanding shares of capital stock or membership
interests of each of the Subsidiaries of Buyer, free and clear of all liens,
charges, encumbrances and security interests whatsoever, and all of such shares
are duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights, with no personal liability attaching to the ownership
thereof. As of the date of this Agreement, no Subsidiary of Buyer has or is
bound by any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character with any party that is not a direct or indirect
Subsidiary of Buyer calling for the purchase or issuance of any shares of
capital stock or any other equity or membership interest of such Subsidiary or
any securities representing the right to purchase or otherwise receive any
shares of capital stock or any other equity security or membership interest of
such Subsidiary.
5.3 Authority; No Violation. (a) Buyer has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of Buyer and no other corporate
proceedings on the part of Buyer are necessary to approve this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Buyer and (assuming due authorization,
execution and delivery by the Company) constitutes a valid and binding
obligation of Buyer, enforce- able against Buyer in accordance with its terms,
except as enforcement may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally.
(b) Except as set forth in Section 5.3(b) of the Buyer
Disclosure Schedule, neither the execution and delivery of this Agreement by
Buyer, nor the consummation by Buyer of the transactions contemplated hereby,
nor compliance by Buyer with any of the terms or provisions of this Agreement,
will (1) violate any provision of the Articles of Incorporation or By- Laws of
Buyer, or the articles of incorporation or by-laws or similar governing
documents of any of its Subsidiaries or (2) assuming that the consents and
approvals referred to in Section 5.4 are duly obtained, (i) violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Buyer or any of its Subsidiaries or any of their respective
properties or assets, or (ii) violate, conflict with, result in a breach of any
provision of or the loss of any benefit under, constitute a default (or an event
that, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of or a right of termination or cancellation under,
accelerate the performance required by, or result in the creation of any lien,
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pledge, security interest, charge or other encumbrance upon any of the
respective properties or assets of Buyer or any of its Subsidiaries under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which Buyer or any of its Subsidiaries is a party, or by which they or any of
their respective properties or assets may be bound or affected.
5.4 Consents and Approvals. Except for (a) the filing of
applications and notices, as applicable, with the Federal Reserve Board under
the BHC Act and approval of such applications and notices, (b) the filing and
declaration of effectiveness of the S-4 in which the Proxy Statement will be
included as a prospectus, (c) approval of the transactions contemplated by this
Agreement by the requisite vote of the holders of Company Common Stock under
applicable law, (d) the filing of the Articles of Merger with the Department
pursuant to the MGCL, (e) the filing of the Certificate of Merger with the
Delaware Secretary pursuant to the DGCL, (f) authorization for quotation of
Buyer Common Stock to be issued in the Merger on Nasdaq/SCM, (g) approval of the
transactions contemplated by this Agreement by the Maryland Commissioner of
Financial Regulation and/or filings in connection therewith pursuant to the
Financial Institutions Article of the Annotated Code of Maryland, (h) approval
of the transactions contemplated by this Agreement by the Delaware State Bank
Commissioner and/or filings in connection therewith pursuant to Title 5 of the
Annotated Code of Delaware, (i) filings under state securities and "Blue Sky
Laws", and (j) such filings, authorizations or approvals as may be set forth in
Section 5.4 of the Buyer Disclosure Schedule, no consents or approvals of or
filings or registrations with any Governmental Entity or with any third party
are necessary in connection with (1) the execution and delivery by Buyer of this
Agreement and (2) the consummation by Buyer of the Merger and the other
transactions contemplated hereby.
5.5 Reports. Buyer and each of its Subsidiaries have timely filed
all reports, registrations and statements, together with any amendments required
to be made with respect thereto, that they were required to file since December
31, 1999 with the Federal Reserve Board or any other Regulatory Agency
(collectively, the "Buyer Regulatory Agencies"), and have paid all fees and
assessments due and payable in connection therewith. Except for normal
examinations conducted by a Buyer Regulatory Agency in the regular course of the
business of Buyer and its Subsidiaries, and except as set forth in Section 5.5
of the Buyer Disclosure Schedule, no Buyer Regulatory Agency has initiated any
proceeding or investigation into the business or operations of Buyer or any of
its Subsidiaries since December 31, 1999. There is no unresolved violation,
criticism, or exception by any Buyer Regulatory Agency with respect to any
report or statement relating to any examinations of Buyer or any of its
Subsidiaries.
5.6 Financial Statements. Buyer has previously delivered to the
Company copies of (a) the consolidated balance sheets of Buyer and its
Subsidiaries as of December 31 for the fiscal years 2001 and 2002 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the fiscal years 2000 through 2002, inclusive, as reported in
Buyer's Annual Report on Form 10-K for the fiscal year ended December 31, 2002
filed with the SEC under the Exchange Act, in each case accompanied by the audit
report of Stegman & Company, independent public accountants with respect to
Buyer, and (b) the unaudited consolidated balance sheet of Buyer and its
Subsidiaries as of June 30, 2003 and June 30, 2002 and the related unaudited
consolidated statements of income and comprehensive income, changes
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in stockholders' equity and cash flows for the three-month periods then ended as
reported in Buyer's Quarterly Report on Form 10-Q for the period ended June 30,
2003 filed with the SEC under the Exchange Act. The December 31, 2002
consolidated balance sheet of Buyer (including the related notes, where
applicable) fairly presents the consolidated financial position of Buyer and its
Subsidiaries as of the date thereof, and the other financial statements referred
to in this Section 5.6 (including the related notes, where applicable) fairly
present and the financial statements to be filed with the SEC after the date of
this Agreement will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and changes in stockholders' equity and
consolidated financial position of Buyer and its Subsidiaries for the respective
fiscal periods or as of the respective dates therein set forth; each of such
statements (including the related notes, where applicable) comply, and the
financial statements to be filed with the SEC after the date of this Agreement
will comply, with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto; and each of such
statements (including the related notes, where applicable) has been, and the
financial statements to be filed with the SEC after the date of this Agreement
will be, prepared in accordance with GAAP consistently applied during the
periods involved, except as indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q. The books and records of Buyer
and its Subsidiaries have been, and are being, maintained in accordance with
GAAP and any other applicable legal and accounting requirements.
5.7 Broker's Fees. Neither Buyer nor any Subsidiary of Buyer, nor
any of their respective officers or directors, has employed any broker or finder
or incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement.
5.8 Absence of Certain Changes or Events. Except as may be set forth
in Section 5.8 of the Buyer Disclosure Schedule, there has been no change or
development or combination of changes or developments that, individually or in
the aggregate, has had or is reasonably likely to have a Material Adverse Effect
on Buyer.
5.9 Legal Proceedings. Except as set forth in Section 5.9 of the
Buyer Disclosure Schedule, neither Buyer nor any of its Subsidiaries is a party
to any and there are no pending or, to Buyer's knowledge, threatened, material
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations challenging the validity or propriety
of the transactions contemplated by this Agreement.
5.10 SEC Reports. Buyer has previously made available to the Company
a true, complete and correct copy of each (a) final registration statement,
prospectus, report, schedule and definitive proxy statement filed, or required
to be filed, since January 1, 2000 by Buyer with the SEC pursuant to the
Securities Act or the Exchange Act ("Buyer Reports"), and (b) communication
mailed by Buyer to its stockholders since January 1, 2000. As of their
respective dates, such documents complied, and all documents filed by Buyer with
the SEC under the Exchange Act or the Securities Act between the date of this
Agreement and the Closing Date will comply, in all material respects, with
applicable SEC requirements and did not, or in the case of documents filed on or
after the date hereof will not, contain any untrue statement of a material
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fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, except that information as of a later date shall be
deemed to modify information as of an earlier date; provided, however, that no
representation or warranty is made by Buyer in this Section 5.10 with respect to
statements made or incorporated by reference therein based on information that
was furnished in writing by the Company or its Subsidiaries for inclusion or
incorporation by reference in the Proxy Statement or the S-4. All Buyer Reports
and other documents required to be filed by it since January 1, 2000 have been
timely filed with the SEC, and Buyer will timely file with the SEC all documents
required to be filed by it under the Securities Act or the Exchange Act between
the date of this Agreement and the Closing Date.
5.11 Agreements with Regulatory Agencies. Neither Buyer nor any of
its Subsidiaries is subject to any cease-and-desist or other order issued by, or
is a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, or has adopted any board resolutions
at the request of (each, a "Buyer Regulatory Agreement"), any Buyer Regulatory
Agency or other Governmental Entity that restricts the conduct of its business
or that in any manner relates to its capital adequacy, its credit policies, its
management or its business, nor has Buyer or any of its Subsidiaries been
advised by any Buyer Regulatory Agency or other Governmental Entity that it is
considering issuing or requesting any Buyer Regulatory Agreement.
5.12 Buyer Information. The information relating to Buyer and its
Subsidiaries that is provided by Buyer for inclusion in the Proxy Statement and
the S-4, or which is incorporated by reference therein, or in any other document
filed with any other Regulatory Agency in connection herewith, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances in which
they are made, not misleading.
5.13 Ownership of Company Common Stock: Affiliates and Associates.
(a) Except as set forth in Section 5.13 of the Buyer Disclosure Schedule,
neither Buyer nor any of its affiliates or associates (as such terms are defined
under the Exchange Act) (i) beneficially owns, directly or indirectly or (ii) is
a party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, any shares of capital
stock of the Company (other than Trust Account Shares and DPC Shares).
(b) Neither Buyer nor any of its Subsidiaries is an
"affiliate" (as such term is defined in MGCL ss. 3-601 or DGCL ss. 203) or an
"associate" (as such term is defined in MGCL ss. 3-601 or DGCL ss. 203) of the
Company or an "Interested Stockholder" (as such term is defined in MGCL ss.
3-601 or DGCL ss. 203) of the Company.
5.14 Approvals. As of the date of this Agreement, Buyer knows of no
reason why all regulatory approvals required for the consummation of the
transactions contemplated hereby (including, without limitation, the Merger)
should not be obtained.
5.15 Reorganization. As of the date of this Agreement, Buyer has no
reason to
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believe that the Merger will fail to qualify as a reorganization under Section
368(a)(1)(A) of the Code.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 Covenants of the Company. During the period from the date of
this Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement or with the prior written consent of
Buyer, the Company and its Subsidiaries shall carry on their respective
businesses in the ordinary course consistent with past practice and consistent
with prudent banking practice. The Company will use its best efforts to preserve
its business organization and that of its Subsidiaries intact, to keep available
to itself and Buyer the present services of the employees of the Company and its
Subsidiaries, and to preserve for itself and Buyer the goodwill of the customers
of the Company and its Subsidiaries and others with whom business relationships
exist. Without limiting the generality of the foregoing, and except as set forth
on Section 6.1 of the Company Disclosure Schedule or as otherwise contemplated
by this Agreement or consented to in writing by Buyer, the Company shall not,
and shall not permit any of its Subsidiaries to:
(a) solely in the case of the Company, declare or pay any
dividends on, or make other distributions in respect of, any of its capital
stock;
(b) (1) split, combine or reclassify any shares of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock except
upon the exercise or fulfillment of rights or options issued or existing
pursuant to employee benefit plans, programs or arrangements, all to the extent
outstanding and in existence on the date of this Agreement and in accordance
with their present terms or (2) repurchase, redeem or otherwise acquire (except
for the acquisition of Trust Account Shares and DPC Shares) any shares of the
capital stock of the Company or any Subsidiary of the Company, or any securities
convertible into or exercisable for any shares of the capital stock of the
Company or any Subsidiary of the Company;
(c) issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, or enter into any agreement with respect to any of the
foregoing, other than the issuance of the Evans Shares in accordance with
Section 7.10 of this Agreement;
(d) amend its Certificate of Incorporation, By-laws or other
similar governing documents;
(e) make any capital expenditures other than those that (1)
are made in the ordinary course of business or are necessary to maintain
existing assets in good repair and (2) in any event are in an amount of no more
than $50,000 in the aggregate;
(f) enter into any new line of business; provided that Felton
Bank may
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issue debit cards to its customers and take steps to implement the CEDARS
program;
(g) acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire any assets, which would be material, individually or in the
aggregate, to the Company, other than in connection with foreclosures,
settlements in lieu of foreclosure or troubled loan or debt restructurings in
the ordinary course of business consistent with prudent banking practices;
(h) take any action that is intended or may reasonably be
expected to result in any of the conditions to the Merger set forth in Article
VIII not being satisfied;
(i) change its methods of accounting in effect at June 30,
2003, except as required by changes in GAAP or regulatory accounting principles
as concurred to by the Company's independent auditors;
(j) (1) except as required by applicable law or to maintain
qualification pursuant to the Code, adopt, amend, renew or terminate any
employee benefit plan (including, without limitation, any Plan) or any
agreement, arrangement, plan or policy between the Company or any Subsidiary of
the Company and one or more of its current or former directors, officers or
employees, or (2) except for normal increases in the ordinary course of business
consistent with past practice or except as required by applicable law, increase
in any manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any Plan or agreement as in effect
as of the date of this Agreement (including, without limitation, the granting of
stock options, stock appreciation rights, restricted stock, restricted stock
units or performance units or shares);
(k) take or cause to be taken any action that would disqualify
the Merger as a tax-free reorganization under Section 368(a)(1)(A) of the Code;
(l) other than activities in the ordinary course of business
consistent with past practice, sell, lease, encumber, assign or otherwise
dispose of, or agree to sell, lease, encumber, assign or otherwise dispose of,
any of its material assets, properties or other rights or agreements;
(m) other than in the ordinary course of business consistent
with past practice, incur any indebtedness for borrowed money or assume,
guarantee, endorse or otherwise as an accommodation become responsible for the
obligations of any other individual, corporation or other entity;
(n) file any application to relocate or terminate the
operations of any banking office of it or any of its Subsidiaries;
(o) make any equity investment or commitment to make such an
investment in real estate or in any real estate development project, other than
in connection with foreclosures, settlements in lieu of foreclosure or troubled
loan or debt restructurings in the
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ordinary course of business consistent with prudent banking practices;
(p) create, renew, amend or terminate or give notice of a
proposed renewal, amendment or termination of, any material contract, agreement
or lease for goods, services or office space to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
their respective properties is bound, except for the Milford lease;
(q) other than in prior consultation with Buyer, restructure
or materially change its investment securities portfolio or its gap position,
through purchases, sales or otherwise, or the manner in which the portfolio is
classified or reported;
(r) other than in prior consultation with Buyer, make or
purchase, or commit to make or purchase, any loan or loans, or extend any line
of credit, to any borrower and its affiliates in a principal amount greater than
$500,000; or
(s) agree to do any of the foregoing.
6.2 Covenants of Buyer. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement or with the prior written consent of
the Company, Buyer and its Subsidiaries shall carry on their respective
businesses in the ordinary course consistent with prudent banking practice.
Without limiting the generality of the foregoing, and except as set forth on
Section 6.2 of the Buyer Disclosure Schedule or as otherwise contemplated by
this Agreement or consented to in writing by the Company, Buyer shall not, and
shall not permit any of its Subsidiaries to:
(a) solely in the case of Buyer, declare or pay any
extraordinary or special dividends on or make any other extraordinary or special
distributions in respect of any of its capital stock; provided, however, that
nothing contained herein shall prohibit Buyer from increasing the quarterly cash
dividend on Buyer Common Stock;
(b) take any action that is intended or may reasonably be
expected to result in any of the conditions to the Merger set forth in Article
VIII not being satisfied;
(c) change its methods of accounting in effect at June 30,
2003, except in accordance with changes in GAAP or regulatory accounting
principles as concurred to by Buyer's independent auditors;
(d) take or cause to be taken any action that would disqualify
the Merger as a tax-free reorganization under Section 368(a)(1)(A) of the Code;
or
(e) agree to do any of the foregoing.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Regulatory Matters.
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(a) Buyer, with the assistance and cooperation of the Company
and its representatives, shall prepare and file with the SEC the S-4 under the
Securities Act with respect to the shares of Buyer Common Stock issuable upon
consummation of the Merger and shall use all commercially reasonable efforts to
have the S-4 declared effective by the SEC as promptly as practicable after such
filing, and the Company shall thereafter mail the Proxy Statement to its
stockholders. Buyer and the Company may each rely upon all information provided
by the other party in connection with the preparation and filing of the S-4 and
shall not be liable for any untrue statement of a material fact or any omission
to state a material fact in the S-4, or in the Proxy Statement that is prepared
as a part thereof, if such statement is made in reliance upon any information
provided by the other party or by any of the other party's officers or
authorized representatives. Buyer shall also use all commercially reasonable
efforts to obtain all necessary state securities law or "Blue Sky" permits and
approvals required to carry out the transactions contemplated by this Agreement,
and the Company shall furnish all information concerning the Company and the
holders of Company Common Stock as may be reasonably requested in connection
with any such action.
(b) The parties hereto shall cooperate with each other and use
their commercially reasonable efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities that are necessary
or advisable to consummate the transactions contemplated by this Agreement
(including without limitation the Merger) (it being understood that any
amendments to the S-4 or a resolicitation of proxies as a consequence of a
subsequent proposed merger, stock purchase or similar acquisition by Buyer or
any of its Subsidiaries shall not violate this covenant). The Company and Buyer
shall have the right to review in advance, and to the extent practicable each
will consult the other on, in each case subject to applicable laws relating to
the exchange of information, all the information relating to the Company or
Buyer, as the case may be, and any of their respective Subsidiaries, that
appears in any filing made with, or written materials submitted to, any third
party or any Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable. The parties
hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated herein.
(c) Buyer and the Company shall, upon request, furnish all
information concerning themselves, their Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement, the S-4 or any other statement, filing,
notice or application made by or on behalf of Buyer, the Company or any of their
respective Subsidiaries to any Governmental Entity in connection with the Merger
and the other transactions contemplated by this Agreement.
(d) Buyer and the Company shall promptly furnish each other
with copies of written communications received by Buyer or the Company, as the
case may be, or any of their respective Subsidiaries, Affiliates or Associates
(as such terms are defined in Rule 12b-2 under
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the Exchange Act as in effect on the date of this Agreement) from, or delivered
by any of the foregoing to, any Governmental Entity in respect of the
transactions contemplated hereby.
(e) The information supplied by the Company for inclusion in
the S-4 shall not, at the time the S-4 is declared effective, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The information supplied by the Company for inclusion in the Proxy
Statement shall not, at the date the Proxy Statement (or any supplement thereto)
is first mailed to stockholders, at the time of the Company's stockholders
meeting or at the Effective Time contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made not misleading. If at any time prior to the Effective Time, any
event or circumstance relating to the Company or any of its affiliates, or its
or their respective officers or directors, should be discovered by the Company
that should be set forth in an amendment to the S-4 or a supplement to the Proxy
Statement, the Company shall promptly inform Buyer thereof in writing.
(f) The information supplied by Buyer for inclusion in the S-4
shall not, at the time the S-4 is declared effective, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The information supplied by Buyer for inclusion in the Proxy
Statement shall not, at the date the Proxy Statement (or any supplement thereto)
is first mailed to stockholders, at the time of the Company's stockholders
meeting or at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. If at any time prior to the Effective
Time, any event or circumstance relating to Buyer or any of its affiliates, or
to their respective officers or directors, should be discovered by Buyer that
should be set forth in an amendment to the S-4 or a supplement to the Proxy
Statement, Buyer shall promptly inform the Company thereof in writing. All
documents that Buyer is responsible for filing with the SEC in connection with
the transactions contemplated hereby will comply as to form in all material
respects with the applicable requirements of the Securities Act and the rules
and regulations thereunder and the Exchange Act and the rules and regulations
thereunder.
7.2 Access to Information.
(a) Upon reasonable notice and subject to applicable laws
relating to the exchange of information, the Company shall, and shall cause each
of its Subsidiaries to, afford to the officers, employees, accountants, counsel
and other representatives of Buyer, access, during normal business hours during
the period prior to the Effective Time, to all its properties, books, contracts,
commitments, records, officers, employees, accountants, counsel and other
representatives and, during such period, the Company shall, and shall cause its
Subsidiaries to, make available to Buyer (1) a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to the requirements of federal securities laws or federal or
state banking laws (other than reports or documents that the Company is not
permitted to disclose under applicable law) and (2) all other information
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concerning its business, properties and personnel as Buyer may reasonably
request. Neither the Company nor any of its Subsidiaries shall be required to
provide access to or to disclose information where such access or disclosure
would violate or prejudice the rights of the Company's customers, jeopardize any
attorney-client privilege or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered into prior to the
date of this Agreement. Buyer will hold, and will cause its officers, directors,
employees, accountants, counsel and other representatives to hold, all such
information in confidence to the extent required by, and in accordance with, the
provisions of the confidentiality agreement, dated March 14, 2003 by and between
the Company and Buyer (the "Confidentiality Agreement").
(b) Upon reasonable notice and subject to applicable laws
relating to the exchange of information, Buyer shall, and shall cause its
Subsidiaries to, afford to the officers, employees, accountants, counsel and
other representatives of the Company, access, during normal business hours
during the period prior to the Effective Time, to such information regarding
Buyer and its Subsidiaries as shall be reasonably necessary for the Company to
fulfill its obligations pursuant to this Agreement to assist in the preparation
of the Proxy Statement or which may be reasonably necessary for the Company to
confirm that the representations and warranties of Buyer contained herein are
true and correct and that the covenants of Buyer contained herein have been
performed in all material respects. Neither Buyer nor any of its Subsidiaries
shall be required to provide access to or to disclose information where such
access or disclosure would violate or prejudice the rights of Buyer's customers,
jeopardize any attorney-client privilege or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or binding agreement entered
into prior to the date of this Agreement. The parties hereto will make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(c) All information furnished by Buyer to the Company or its
representatives pursuant hereto shall be held in confidence to the extent
required by, and in accordance with the provisions of the Confidentiality
Agreement.
(d) No investigation by either of the parties or their
respective representatives shall affect the representations, warranties,
covenants or agreements of the other set forth herein.
7.3 No Solicitation. The Company agrees that neither it nor any of
its Subsidiaries shall, or shall authorize or permit any of its respective
officers, directors, employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by it to, directly or
indirectly through another person, (a) solicit, initiate, encourage or
facilitate any inquiries relating to, or the making of any proposal that
constitutes, a "Takeover Proposal" (as defined below), (b) recommend or endorse
any Takeover Proposal, or (c) enter into, encourage or facilitate any
discussions or negotiations regarding, furnish to any person any information
with respect to, or facilitate any attempt to make or implement any proposal
that constitutes or may reasonably be expected to lead to, any proposal relating
to or involving a Takeover Proposal; provided, however, that the Company may
communicate information about any such Takeover Proposal to its stockholders if,
in the good faith judgment of the Company's Board of Directors, based upon the
advice of outside counsel, such communication is required
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under applicable law; provided further, however, that nothing contained in this
Section 7.3 shall prohibit the Board of Directors of the Company from (A) to the
extent applicable, complying with Rule 14e-2 and/or Rule 14d-9 promulgated under
the Exchange Act or (B) furnishing information to, or entering into discussions
or negotiations with, any person or entity that makes an unsolicited, written
bona fide proposal regarding a Takeover Proposal if, and only to the extent that
(1) the meeting of the Company's stockholders contemplated by Section 7.4 of
this Agreement shall not have occurred, (2) the Board of Directors of the
Company concludes in good faith, after consultation with and based upon the
advice of outside counsel, that it is legally required to furnish such
information or enter into such discussions or negotiations in order to comply
with its fiduciary duties to stockholders under applicable law, (3) prior to
taking such action, the Company receives from such person or entity an executed
confidentiality agreement and an executed standstill agreement, each in
reasonably customary form (provided that each such agreement is at least as
limiting as any such agreement between Buyer and the Company), and (4) the Board
of Directors of the Company, after consultation with and based upon the advice
of its financial advisor, concludes in good faith that the proposal regarding
the Takeover Proposal contains an offer of consideration that is greater than
the consideration set forth herein (a "Superior Takeover Proposal"). The Company
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations previously conducted with any parties other than
Buyer with respect to any of the foregoing. The Company will take all actions
necessary or advisable to inform the appropriate individuals or entities
referred to in the first sentence of this Agreement of the obligations
undertaken in this Section 7.3. The Company will notify Buyer immediately if any
such inquiries or Takeover Proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, the Company, and the Company will promptly inform
Buyer in writing of all of the relevant details with respect to the foregoing.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the first sentence of this Section 7.3 by any officer
or director of the Company or any Subsidiary thereof or any investment banker,
attorney or other advisor, representative or agent of the Company or any
Subsidiary thereof, acting on behalf of or at the request of the Board of
Directors of the Company, shall be deemed to be a breach of this Section 7.3 by
the Company. As used in this Agreement, "Takeover Proposal" shall mean any
tender or exchange offer, proposal for a merger, consolidation or other business
combination involving the Company or any Subsidiary of the Company or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, the Company or any Subsidiary of the
Company other than the transactions contemplated or permitted by this Agreement.
7.4 Stockholder Meeting.
(a) The Company shall take all steps necessary to duly call,
give notice of, convene and hold a meeting of its stockholders to be held as
soon as is reasonably practicable after the date on which the S-4 becomes
effective for the purpose of voting upon the approval of this Agreement and the
consummation of the transactions contemplated hereby. The Company will, through
its Board of Directors, except as provided in Section 7.4(b) of this Agreement,
recommend to its stockholders approval of this Agreement and the transactions
contemplated hereby and such other matters as may be submitted to its
stockholders in connection with this Agreement.
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(b) Notwithstanding the provisions of Section 7.4(a) above,
the Board of Directors of the Company may withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to Buyer, the approval or
recommendation by such Board of Directors or such committee of the Merger or
this Agreement if the Company receives an unsolicited, written bona fide
proposal regarding a Takeover Proposal, and (1) the Board of Directors of the
Company concludes in good faith that it is required to take such action, but
only after consultation with and based upon the advice of outside counsel that
the failure to take such action would result in a violation of any fiduciary
duties of the Board of Directors to its stockholders under applicable law, and
(2) the Board of Directors of the Company, after consultation with and based
upon the advice of its financial advisor, concludes in good faith that such
Takeover Proposal is a Superior Takeover Proposal.
7.5 Legal Conditions to Merger. Each of Buyer and the Company shall,
and shall cause its Subsidiaries to, use their commercially reasonable efforts
(a) to take, or cause to be taken, all actions necessary, proper or advisable to
comply promptly with all legal requirements that may be imposed on such party or
its Subsidiaries with respect to the Merger and, subject to the conditions set
forth in Article VIII of this Agreement, to consummate the transactions
contemplated by this Agreement and (b) to obtain (and to cooperate with the
other party to obtain) any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity and any other third party that is required
to be obtained by the Company or Buyer or any of their respective Subsidiaries
in connection with the Merger and the other transactions contemplated by this
Agreement, and to comply with the terms and conditions of such consent,
authorization, order or approval.
7.6 Affiliates. The Company shall use its commercially reasonable
efforts to cause each director, executive officer and other person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act) of the Company
to deliver to Buyer, as soon as practicable after the date of this Agreement, a
written agreement, in the form of Exhibit 7.6.
7.7 Stock Exchange Listing. Buyer shall use all commercially
reasonable efforts to cause the shares of Buyer Common Stock to be issued in the
Merger to be authorized for quotation on the Nasdaq/SCM, subject to official
notice of issuance, as of the Effective Time.
7.8 Employee Benefit Plans; Existing Agreements.
(a) Buyer agrees that those individuals who are employed by
the Company or any of the Company's Subsidiaries immediately prior to the
Effective Time (each, a "Company Employee") shall continue to be employees of
the Surviving Corporation or one of its Subsidiaries as of the Effective Time;
provided, however, that this Section 7.8 shall not be construed to limit the
ability of the applicable employer to terminate the employment of any Company
Employee at any time.
(b) Except to the extent required to continue the tax
qualification or legal compliance of an employee benefit plan or policy, (1) the
employee benefit plans and policies of Buyer and the Company in existence
immediately prior to the Effective Time shall be continued as the employee
benefit plans and policies of the Surviving Corporation, and (2) the employee
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benefit plans and policies of Buyer's Subsidiaries and of the Company's
Subsidiaries shall not change at the Effective Time; provided, however, that the
Surviving Corporation shall review the employee benefit plans and policies of
Buyer, the Company, and each of their Subsidiaries and, in its sole and absolute
discretion, may amend, freeze, or terminate any of such employee benefit plans
and policies, merge them together, or continue to maintain them separately on or
after the Effective Time.
7.9 Indemnification.
(a) In the event of any threatened or actual claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, including, without limitation, any such claim, action, suit,
proceeding or investigation in which any person who is now, or has been at any
time prior to the date of this Agreement, or who becomes prior to the Effective
Time, a director, officer or employee of the Company or any of its Subsidiaries
(the "Indemnified Parties") is, or is threatened to be, made a party based in
whole or in part on, or arising in whole or in part out of, or pertaining to (1)
the fact that he is or was a director, officer or employee of the Company, any
of the Subsidiaries of the Company or any of their respective predecessors or
(2) this Agreement or any of the transactions contemplated hereby, whether in
any case asserted or arising before or after the Effective Time, the parties
hereto agree to cooperate and use their best efforts to defend against and
respond thereto. It is understood and agreed that after the Effective Time, the
Surviving Corporation shall indemnify and hold harmless, as and to the extent
permitted by applicable federal and Maryland law, each such Indemnified Party
against any losses, claims, damages, liabilities, costs, expenses (including
reasonable attorney's fees and expenses in advance of the final disposition of
any claim, suit, proceeding or investigation to each Indemnified Party to the
fullest extent permitted by law upon receipt of any undertaking required by
applicable law), judgments, fines and amounts paid in settlement in connection
with any such threatened or actual claim, action, suit, proceeding or
investigation, and in the event of any such threatened or actual claim, action,
suit, proceeding or investigation (whether asserted or arising before or after
the Effective Time), the Indemnified Parties may retain counsel reasonably
satisfactory to them after consultation with the Surviving Corporation;
provided, however, that (I) the Surviving Corporation shall have the right to
assume the defense thereof and upon such assumption the Surviving Corporation
shall not be liable to any Indemnified Party for any legal expenses of other
counsel or any other expenses subsequently incurred by any Indemnified Party in
connection with the defense thereof, except that if the Surviving Corporation
elects not to assume such defense or counsel for the Indemnified Parties
reasonably advises that there are issues that raise conflicts of interest
between the Surviving Corporation and the Indemnified Parties, the Indemnified
Parties may retain counsel reasonably satisfactory to them after consultation
with the Surviving Corporation , and the Surviving Corporation shall pay the
reasonable fees and expenses of such counsel for the Indemnified Parties, (II)
the Surviving Corporation shall in all cases be obligated pursuant to this
paragraph to pay for only one firm of counsel for all Indemnified Parties, (III)
Buyer shall not be liable for any settlement effected without its prior written
consent (which consent shall not be unreasonably withheld), and (IV) the
Surviving Corporation shall have no obligation hereunder to any Indemnified
Party when and if a court of competent jurisdiction shall ultimately determine,
and such determination shall have become final and nonappealable, that
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. Any
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Indemnified Party wishing to claim Indemnification under this Section 7.9, upon
learning of any such claim, action, suit, proceeding or investigation, shall
promptly notify the Surviving Corporation thereof, provided that the failure to
so notify shall not affect the obligations of the Surviving Corporation under
this Section 7.9 except to the extent such failure to notify prejudices the
Surviving Corporation . The Surviving Corporation's obligations under this
Section 7.9 shall continue in full force and effect for a period of six (6)
years from the Effective Time; provided, however, that all rights to
indemnification in respect of any claim (a "Claim") asserted or made within such
period shall continue until the final disposition of such Claim.
(b) Prior to the Effective Time, the Company shall purchase,
and for a period of three years after the Effective Time, the Surviving
Corporation shall use its commercially reasonable efforts to maintain, directors
and officers liability insurance "tail" or "runoff" coverage with respect to
wrongful acts and/or omissions committed or allegedly committed prior to the
Effective Time; provided, however, that in no event shall the Surviving
Corporation be required to expend on an annual basis more than 150% of the
current amount expended by the Company to maintain or procure such coverage.
Subject to the foregoing, such coverage shall have an aggregate coverage limit
over the term of such policy in an amount no less than the annual aggregate
coverage limit under the Company's existing directors and officers liability
policy, and in all other respects shall be at least comparable to such existing
policy.
(c) In the event the Surviving Corporation or any of its
successors or assigns (1) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (2) transfers or conveys all or substantially all of
its properties and assets to any person, then, and in each such case, to the
extent necessary, proper provision shall be made so that the successors and
assigns of the Surviving Corporation assume the obligations set forth in this
Section.
(d) The provisions of this Section 7.9 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
7.10 Evans Shares. Prior to the Effective Time, the Company shall
cause to be issued to Thomas Evans all Evans Shares, whether or not vested
pursuant to the terms of the Evans Employment Agreement.
7.11 Additional Agreements. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary action
as may be reasonably requested by Buyer.
7.12 Advice of Changes. Buyer and the Company shall promptly advise
the other party of any change or event having a Material Adverse Effect on it or
that it believes would or would be reasonably likely to cause or constitute a
material breach of any of its representations, warranties or covenants contained
herein. From time to time prior to the Effective Time (and on the date prior to
the Closing Date), each party will promptly supplement
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or amend the Disclosure Schedules delivered in connection with the execution of
this Agreement to reflect any matter that, if existing, occurring or known at
the date of this Agreement, would have been required to be set forth or
described in such Disclosure Schedules or that is necessary to correct any
information in such Disclosure Schedules that has been rendered inaccurate
thereby. No supplement or amendment to such Disclosure Schedules shall have any
effect for the purpose of determining satisfaction of the conditions set forth
in Sections 8.2(a) or 8.3(a) of this Agreement, as the case may be, or the
compliance by the Company or Buyer, as the case may be, with the respective
covenants and agreements of such parties contained herein.
7.13 Current Information. During the period from the date of this
Agreement to the Effective Time, the Company will cause one or more of its
designated representatives to confer on a regular and frequent basis (not less
than monthly) with representatives of Buyer and to report the general status of
the ongoing operations of the Company and its Subsidiaries. The Company will
promptly notify Buyer of any material change in the normal course of business or
in the operation of the properties of the Company or any of its Subsidiaries and
of any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of significant litigation involving the Company or any of its Subsidiaries, and
will keep Buyer fully informed of such events.
7.14 Directorship. Prior to Closing, Buyer shall take all action as
may be necessary or appropriate to cause W. Edwin Kee, Jr. to be a director of
the Surviving Corporation as of the Effective Time and to hold office in
accordance with the Articles of Incorporation and By-Laws of Buyer until his
successor is duly elected or appointed and qualified.
ARTICLE VIII
CONDITIONS PRECEDENT
8.1 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have been
approved and adopted by the requisite vote of the holders of Company Common
Stock under applicable law.
(b) Nasdaq/SCM Listing. The shares of Buyer Common Stock that
shall be issued to the stockholders of the Company upon consummation of the
Merger shall have been authorized for quotation on the Nasdaq/SCM, subject to
official notice of issuance.
(c) Other Approvals. All regulatory approvals required to
consummate the transactions contemplated hereby (including the Merger) shall
have been obtained and shall remain in full force and effect and all statutory
waiting periods in respect thereof shall have expired (all such approvals and
the expiration of all such waiting periods being referred to herein as the
"Requisite Regulatory Approvals").
(d) S-4. The S-4 shall have become effective under the
Securities Act and no stop order suspending the effectiveness of the S-4 shall
have been issued and no proceedings
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for that purpose shall have been initiated or threatened by the SEC.
(e) No Injunctions or Restraints; Illegality. No order,
injunction or decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition (an "Injunction") preventing the
consummation of the Merger or any of the other transactions contemplated by this
Agreement shall be in effect. No statute, rule, regulation, order, injunction or
decree shall have been enacted, entered, promulgated or enforced by any
Governmental Entity that prohibits, restricts or makes illegal consummation of
the Merger.
(f) Federal Tax Opinion. Buyer and the Company shall have
received an opinion of Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC,
counsel to Buyer ("Buyer's Counsel"), addressed jointly to Buyer and the
Company, in form and substance reasonably satisfactory to Buyer and the Company,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion that are consistent with the state of
facts existing at the Effective Time, the Merger will be treated as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code. In
rendering such opinion, Buyer's Counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of Buyer, the Company, and others reasonably satisfactory in form and
substance to such counsel.
8.2 Conditions to Obligations of Buyer. The obligation of Buyer to
effect the Merger is also subject to the satisfaction or waiver by Buyer at or
prior to the Effective Time of the following conditions:
(a) Representations and Warranties. (1) Subject to Section
3.2, the representations and warranties of the Company set forth in this
Agreement (other than the representations and warranties set forth in Sections
4.2, 4.3(a), 4.6, 4.12 and 4.13) shall be true and correct as of the date of
this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date, and (2) the representations and warranties of the Company set
forth in Sections 4.2, 4.3(a), 4.6, 4.12 and 4.13 of this Agreement shall be
true and correct in all material respects (without giving effect to Section 3.2
of this Agreement) as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date. Buyer shall have
received a certificate signed on behalf of the Company by the Chief Executive
Officer and the Chief Financial Officer of the Company to the foregoing effect.
(b) Performance of Obligations of the Company. The Company
shall have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Closing Date, and Buyer
shall have received a certificate signed on behalf of the Company by the Chief
Executive Officer and the Chief Operating Officer of the Company to such effect.
(c) No Pending Governmental Actions. No proceeding initiated
by any federal agency or state banking authority seeking an Injunction shall be
pending.
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(d) Termination of Regulatory Agreements. Each Company
Regulatory Agreement disclosed in Section 4.16 of the Company Disclosure
Schedule shall have been terminated by the applicable Regulatory Agency.
8.3 Conditions to Obligations of the Company. The obligation of the
Company to effect the Merger is also subject to the satisfaction or waiver by
the Company at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. (1) Subject to Section
3.2, the representations and warranties of Buyer set forth in this Agreement
(other than the representations and warranties set forth in Sections 5.2,
5.3(a), 5.6, 5.10 and 5.12) shall be true and correct as of the date of this
Agreement and (except to the extent such representations and warranties speak as
of an earlier date) as of the Closing Date as though made on and as of the
Closing Date and (2) the representations and warranties of Buyer set forth in
Sections 5.2, 5.3(a), 5.6, 5.10 and 5.12 of this Agreement shall be true and
correct in all material respects (without giving effect to Section 3.2 of this
Agreement) as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date. The Company shall have
received a certificate signed on behalf of Buyer by the Chief Executive Officer
and the Chief Financial Officer of Buyer to the foregoing effect.
(b) Performance of Obligations of Buyer. Buyer shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and the Company shall
have received a certificate signed on behalf of Buyer by the Chief Executive
Officer and the Chief Financial Officer of Buyer to such effect.
(c) No Pending Governmental Actions. No proceeding initiated
by any federal agency or state banking authority seeking an Injunction shall be
pending.
ARTICLE IX
TERMINATION AND AMENDMENT
9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the matters presented
in connection with the Merger by the stockholders of both the Company and Buyer:
(a) by mutual consent of the Company and Buyer in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board;
(b) by either Buyer or the Company upon written notice to the
other party (1) 60 days after the date on which any request or application for a
Requisite Regulatory Approval shall have been finally denied by any Governmental
Entity that must grant such Requisite Regulatory Approval, unless within the
60-day period following such denial or withdrawal a petition for rehearing or an
amended application has been filed with the applicable Governmental Entity,
provided, however, that no party shall have the right to terminate this
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Agreement pursuant to this Section 9.1(b)(1) if such denial shall be due to the
failure of the party seeking to terminate this Agreement to perform or observe
the covenants and agreements of such party set forth herein, or (2) if any
Governmental Entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the Merger;
(c) by either Buyer or the Company if the Merger shall not
have been consummated on or before July 31, 2004, unless the failure of the
Closing to occur by such date shall be due to the failure of the party seeking
to terminate this Agreement to perform or observe the covenants and agreements
of such party set forth herein;
(d) by either Buyer or the Company (provided that if the
Company is the terminating party, it shall not be in material breach of any of
its obligations under Section 7.4) if the approval of the stockholders of the
Company required for the consummation of the Merger shall not have been obtained
by reason of the failure to obtain the required vote at a duly held meeting of
such stockholders or at any adjournment or postponement thereof;
(e) by either Buyer or the Company (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall have been
a material breach of any of the representations or warranties set forth in this
Agreement on the part of the other party, which breach is not cured within
thirty days following written notice to the party committing such breach, or
which breach, by its nature, cannot be cured prior to the Closing; provided,
however, that neither party shall have the right to terminate this Agreement
pursuant to this Section 9.1(e) unless the breach of representation or warranty,
together with all other such breaches, would entitle the party receiving such
representation not to consummate the transactions contemplated hereby under
Section 8.2(a) (in the case of a breach of representation or warranty by the
Company) or Section 8.3(a) (in the case of a breach of representation or
warranty by Buyer);
(f) by either Buyer or the Company (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall have been
a material breach of any of the covenants or agreements set forth in this
Agreement on the part of the other party, which breach shall not have been cured
within thirty days following receipt by the breaching party of written notice of
such breach from the other party hereto, or which breach, by its nature, cannot
be cured prior to the Closing;
(g) by Buyer, if the Board of Directors of the Company does
not publicly recommend in the Proxy Statement that the Company's stockholders
approve this Agreement or if, after recommending in the Proxy Statement that
stockholders approve this Agreement, the Board of Directors of the Company shall
have withdrawn, modified or amended such recommendation in any respect
materially adverse to Buyer;
(h) by Buyer, if Company's independent public accountants are
unable to issue an unqualified opinion of their audit of the consolidated
financial statements of the Company and its Subsidiaries for the calendar year
2003; or
(i) by the Company if the Average Buyer Common Stock Price
shall be
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less than $26.63 per share; provided, however, that this Agreement shall not
terminate as provided in this Section 9.1(i) if Buyer agrees in such case, in
its sole and absolute discretion, to pay to each holder of a Certificate who
would, but for the Company's termination, be entitled to receive Stock
Consideration pursuant to Article II of this Agreement, an amount in cash or
stock (valued at the Average Buyer Common Stock Price) equal to the difference
between (1) $24.00 and (2) the value of the Stock Consideration determined by
multiplying the Average Buyer Common Stock Price by 0.9015, which such
additional payment shall be in addition to, and not in lieu of, the Stock
Consideration and the Cash Consideration payable pursuant to this Agreement.
9.2 Effect of Termination; Expenses. In the event of termination of
this Agreement by either Buyer or the Company as provided in Section 9.1, this
Agreement shall forthwith become void and have no effect, except that (a) the
last sentence of Section 7.2(a), and Sections 7.2(c), 9.2 and 10.4, shall
survive any termination of this Agreement, and (b) notwithstanding anything to
the contrary contained in this Agreement, no party shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Agreement.
9.3 Amendment. Subject to compliance with applicable law, this
Agreement may be amended by the parties hereto, by action taken or authorized by
their respective Boards of Directors, at any time before or after approval of
the matters presented in connection with the Merger by the stockholders of
either the Company or Buyer; provided, however, that after any approval of the
transactions contemplated by this Agreement by the Company's stockholders, there
may not be, without further approval of such stockholders, any amendment of this
Agreement that reduces the amount or changes the form of the consideration to be
delivered to the Company stockholders hereunder other than as contemplated by
this Agreement. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
9.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
ARTICLE X
GENERAL PROVISIONS
10.1 Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") will take place at 10:00 a.m. on the
first day that is (a) the last business day of a month and (b) at least two (2)
business days after the satisfaction or waiver
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(subject to applicable law) of the latest to occur of the conditions set forth
in Article VIII of this Agreement (other than those conditions that relate to
actions to be taken at the Closing) (the "Closing Date"), at the offices of
Buyer's Counsel unless another time, date or place is agreed to in writing by
the parties hereto.
10.2 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Effective Time, Buyer shall be
entitled to revise the structure of the Merger and related transactions to (a)
substitute a subsidiary of Buyer as a Constituent Corporation in the Merger or
(b) provide that a different entity shall be the surviving corporation in a
merger provided that each of the transactions comprising such revised structure
shall (1) qualify as, or be treated as part of, one or more tax-free
reorganizations within the meaning of Section 368(a)(1)(A) of the Code, and not
reduce the amount of consideration to be received by such stockholders, and (2)
be capable of consummation in as timely a manner as the structure contemplated
herein. This Agreement and any related documents shall be appropriately amended
in order to reflect any such revised structure.
10.3 Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties, covenants and agreements in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for those covenants and agreements contained herein and
therein that by their terms apply in whole or in part after the Effective Time.
10.4 Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense, provided, however, that the costs and expenses of
printing and mailing the Proxy Statement to the stockholders of the Company
shall be borne equally by Buyer and the Company, provided further, however, that
nothing contained herein shall limit either party's rights to recover any
liabilities or damages arising out of the other party's willful breach of any
provision of this Agreement.
10.5 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(with confirmation), mailed by registered or certified mail (return receipt
requested) or delivered by an express courier (with confirmation) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Buyer, to:
Shore Bancshares, Inc.
18 East Dover Street
Easton, Maryland 21601
Attn: Chief Executive Officer
with a copy to:
Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
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The Garrett Building
233 East Redwood Street
Baltimore, Maryland 21202
Attn: Carla Stone Witzel, Esq.
and
(b) if to the Company, to:
Midstate Bancorp, Inc.
120 West Main Street
Felton, Delaware 19943
Attn: Chairman of the Board of Directors
with a copy to:
Kennedy, Baris & Lundy, L.L.P.
4701 Sangamore Road
Suite P-15
Bethesda, Maryland 20816
Attn: David Baris, Esquire
10.6 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrases "the date of this Agreement", "the date hereof" and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to November 12, 2003.
10.7 Counterparts. This Agreement may be executed by facsimile or
otherwise in counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
10.8 Entire Agreement. This Agreement (including the documents and
the instruments referred to herein), together with the Confidentiality
Agreement, constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement.
10.9 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Maryland without regard
to conflicts of law provisions that would apply the law of another jurisdiction.
A-43
10.10 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that the provisions contained in the
last sentence of Section 7.2(a) and in Section 7.2(c) of this Agreement were not
performed in accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the last sentence of Section 7.2(a) and
Section 7.2(c) of this Agreement and to enforce specifically the terms and
provisions thereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
10.11 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.12 Publicity. Except as otherwise required by law or the rules of
the Nasdaq/SCM, so long as this Agreement is in effect, neither Buyer nor the
Company shall, or shall permit any of its Subsidiaries to, issue or cause the
publication of any press release or other public announcement with respect to,
or otherwise make any public statement concerning, the transactions contemplated
by this Agreement without the consent of the other party, which consent shall
not be unreasonably withheld.
10.13 Assignment: No Third Party Beneficiaries. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns. Except
as otherwise expressly provided herein, this Agreement (including the documents
and instruments referred to herein) is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
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IN WITNESS WHEREOF, Buyer and the Company have caused this Agreement
to be executed by their respective officers thereunto duly authorized as of the
date first above written.
SHORE BANCSHARES, INC.
By: /s/ W. Moorhead Vermilye
------------------------------------------
Name: W. Moorhead Vermilye
Title: President & Chief Executive Officer
Attest:
/s/ Susan E. Leaverton
- ----------------------------
Name: Susan E. Leaverton
MIDSTATE BANCORP, INC.
By: /s/ W. Edwin Kee, Jr.
------------------------------------------
Name: W. Edwin Kee, Jr.
Title: Chairman
Attest:
/s/ Robin M. Deputy
- ----------------------------
Name: Robin M. Deputy
A-45
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment to Agreement and Plan of Merger (this "Amendment") is
entered into this 15th day of January, 2004 by and between Shore Bancshares,
Inc., a Maryland corporation ("Shore Bancshares"), and Midstate Bancorp, Inc., a
Delaware corporation ("Midstate Bancorp").
WHEREAS, Shore Bancshares and Midstate Bancorp entered into a Agreement
and Plan of Merger dated November 12, 2003 (the "Merger Agreement") pursuant to
which Midstate Bancorp will merge with and into Shore Bancshares, with Shore
Bancshares being the successor corporation (the "Merger").
WHEREAS, the Merger Agreement provides that shares of Midstate Bancorp
common stock held by persons who own fewer than 50 shares immediately prior to
the effective time of the Merger will be converted into the right to receive an
amount in cash, whereas shares held by all other stockholders will be converted
into the right to receive an amount in cash and a number of Shore Bancshares
common stock.
WHEREAS, the parties hereto desire to amend the Merger Agreement so that
all Midstate Bancorp stockholders will receive the same merger consideration in
the Merger.
WHEREAS, Section 9.3 of the Merger Agreement provides that, subject to
applicable law, the parties may amend the Merger Agreement in writing without
restriction at any time prior to the date the stockholders of Midstate Bancorp
approve the Merger, and such approval has not yet occurred.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
1. Amendments to the Merger Agreement.
(a) Paragraph (a) of Section 1.4 of the Merger Agreement is hereby
deleted in its entirety and the following is hereby inserted in lieu thereof:
"(a) At the Effective Time, subject to Section 2.2(e) and Section
9.1(i) of this Agreement, each share of the common stock, par value
$1.00 per share, of the Company (the 'Company Common Stock') issued
and outstanding immediately prior to the Effective Time (other than
shares of Company Common Stock held directly or indirectly by Buyer
or the Company or any of their respective Subsidiaries (as defined
below) (except for Trust Account Shares and DPC Shares, as such
terms are defined in Section 1.4(d) of this Agreement)) shall, by
virtue of this Agreement and without any action on the part of the
holder thereof, be converted into and
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exchangeable for the right to receive both (1) the Stock
Consideration (as defined in Section 1.4(b) of this Agreement) and
(2) $31.00 in cash (the 'Cash Consideration'). Each share of Company
Common Stock converted into the Stock Consideration and Cash
Consideration pursuant to this Article I shall no longer be
outstanding and shall automatically be cancelled and shall cease to
exist, and each certificate (each a 'Certificate') previously
representing any such shares of Company Common Stock shall
thereafter represent only the right to receive (I) the number of
whole shares of Buyer Common Stock into which the shares of Company
Common Stock represented by such Certificate are convertible
pursuant to this Section 1.4(a), (II) the cash in lieu of fractional
shares into which the shares of Company Common Stock represented by
such Certificate have been converted pursuant to this Section 1.4(a)
and Section 2.2(e) of this Agreement, and (III) the Cash
Consideration payable pursuant to this Section 1.4(a). Certificates
previously representing shares of Company Common Stock shall be
exchanged for certificates representing whole shares of Buyer Common
Stock, cash in lieu of fractional shares of Buyer Common Stock
issued in consideration therefor, and Cash Consideration upon the
surrender of such Certificates in accordance with Section 2.2 of
this Agreement, without any interest thereon. If, between the date
of this Agreement and the Effective Time, the outstanding shares of
Buyer Common Stock shall be changed into a different number or class
of shares by reason of any reclassification, recapitalization,
split-up, combination, exchange of shares or readjustment, or a
stock dividend thereon shall be declared with a record date within
said period, the Stock Consideration shall be adjusted to result in
the same aggregate consideration being delivered to the Company's
stockholders as would have been received had such event not
occurred."
(b) Paragraph (c) of Section 1.4 of the Merger Agreement is hereby
deleted in its entirety and the following is hereby inserted in lieu thereof:
"(c) For purposes of this Agreement, the aggregate Stock
Consideration, the aggregate Cash Consideration, and the aggregate
amount of cash, if any, payable pursuant to Section 9.1(i) of this
Agreement with respect to all Certificates shall collectively be
referred to as the 'Merger Consideration'."
(c) Section 2.1 of the Merger Agreement is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
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"2.1 Buyer to Make Shares Available. At or prior to the Effective
Time, Buyer shall deposit, or shall cause to be deposited, with an
independent third party bank or trust company (which may not be a
Subsidiary or affiliate of Buyer) (the 'Exchange Agent'), selected
by Buyer and reasonably satisfactory to the Company, for the benefit
of the holders of Certificates, and who shall act as Exchange Agent
pursuant to an agreement in form and substance reasonably
satisfactory to Buyer and the Company, for exchange in accordance
with this Article II, (a) certificates representing the total number
of whole shares of Buyer Common Stock to be issued as Stock
Consideration pursuant to Article I of this Agreement, and (b) cash
representing (i) the total Cash Consideration to which holders of
Company Common Stock shall have become entitled pursuant to the
provisions of Article I of this Agreement, (ii) the amount of cash
in lieu of fractional shares, if any, that such holders have the
right to receive in respect of their Company Common Stock pursuant
to the provisions of this Agreement, and (iii) the amount of cash,
if any, to which holders of Company Common Stock shall have become
entitled pursuant to Section 9.1(i) of this Agreement (such cash and
certificates for shares of Buyer Common Stock, together with any
dividends or distributions with respect thereto, being hereinafter
referred to as the 'Exchange Fund')."
(d) Section 2.2 of the Merger Agreement is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
"2.2. Exchange of Shares. (a) As soon as practicable after the
Effective Time, and in no event more than five business days
thereafter, the Exchange Agent shall mail to each holder of record
of a Certificate or Certificates a form letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent) advising such holder of the
effectiveness of the Merger and instructions for use in effecting
the surrender of the Certificates in exchange for the Cash
Consideration and Stock Consideration into which the shares of
Company Common Stock represented by such Certificate shall have been
converted pursuant to Article I of this Agreement. Upon surrender of
a Certificate for exchange and cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, the holder
of such Certificate shall be entitled to receive in exchange
therefor (I) a certificate representing that number of whole shares
of Buyer Common Stock to which such holder of Company Common Stock
shall have become entitled pursuant to
A-48
the provisions of Article I of this Agreement and (II) a check
representing that portion of the Cash Consideration to which such
holder of Company Common Stock shall have become entitled pursuant
to the provisions of Article I of this Agreement and the amount of
cash in lieu of fractional shares, if any, that such holder has the
right to receive in respect of the Certificate surrendered pursuant
to the provisions of this Agreement, and the Certificate so
surrendered shall forthwith be cancelled. No interest will be paid
or accrued on the Cash Consideration, the cash in lieu of fractional
shares, or unpaid dividends and distributions, if any, payable to
holders of Certificates."
2. Ratification of Terms. The parties hereto each ratify and confirm the
Merger Agreement, as hereby amended, and agree that the Merger Agreement, as
hereby amended, is and shall remain in full force and effect.
3. Successors and Assigns. This Amendment shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.
4. Governing Law. This Amendment shall be governed by and interpreted in
accordance with the laws of the State of Maryland without regard to conflicts of
law provisions that would apply the law of another jurisdiction.
IN WITNESS WHEREOF, Buyer and the Company have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
Attest: SHORE BANCSHARES, INC.
/s/ Susan E. Leaverton By: /s/ W. Moorhead Vermilye
- ------------------------------- ---------------------------------
Name: Susan E. Leaverton Name: W. Moorhead Vermilye
Title: President & CEO
Attest: MIDSTATE BANCORP, INC.
/s/ Lisa Dorey By: /s/ W. Edwin Kee, Jr.
- ------------------------------- ---------------------------------
Name: Lisa Dorey Name: W. Edwin Kee, Jr.
Title: Chairman
A-49
APPENDIX B
FAIRNESS OPINION FROM RP FINANCIAL, LC
February __, 2004
Board of Directors
Midstate Bancorp, Inc.
120 West Main Street
Felton, Delaware 19943
Members of the Board:
You have requested RP Financial, LC. ("RP Financial") to provide you with
its opinion as to the fairness from a financial point of view to the
shareholders of Midstate Bancorp, Inc., Felton, Delaware ("Midstate"), the bank
holding company for The Felton Bank, Felton, Delaware ("Felton"), of the
Agreement and Plan of Merger (the "Agreement") dated November 11, 2003 and
amended as of January 15, 2004, by and between Midstate and Shore Bancshares,
Inc., Easton, Maryland ("Shore" or the "Buyer"), whereby at the Effective Time
Midstate will merge with and into Shore pursuant to which the Midstate
shareholders will receive cash and stock of Shore (the "Merger"), as described
below. The Agreement, inclusive of exhibits, is incorporated herein by
reference. Unless otherwise defined, all capitalized terms incorporated herein
have the meanings ascribed to them in the Agreement.
Summary Description of Merger Consideration
At the Effective Time, each share of Midstate's Common Stock (the
"Midstate Common Stock") issued and outstanding, other than shares owned by
Midstate or Shore (except for Trust Account Shares and DPC Shares), and
Dissenting Shares ("Dissenters' Shares") shall become and be converted into the
right to receive the "Merger Consideration" of (1) the number of shares of Shore
Common Stock (the "Shore Common Stock") based on the Exchange Ratio, as defined
below (the "Stock Consideration") and (2) $31.00 in cash without interest (the
"Cash Consideration"). The Exchange Ratio shall be equal to (A) 0.9015 if the
Average Buyer Common Stock Price is greater than or equal to $26.63 and equal to
or less than $30.95, (B) equal to the ratio of $27.90 divided by the Average
Buyer Common Stock Price if the Average Buyer Common Stock Price is $30.96 or
more and less or equal to $31.94, (C) 0.8732 if the Average Buyer Common Stock
Price is equal to or greater than $31.95 but less than or equal to $39.05, (D)
equal to the ratio of $34.10 divided by the Average Buyer Common Stock Price if
the Average Buyer Common Stock Price is equal to or greater than $39.06 but less
than or equal to $40.04, or (E) 0.8513 if the Average Buyer Common Stock Price
is equal to or greater than $40.05. For purposes of the Agreement, the term
"Average Buyer Common Stock Price" means the average of the daily average bid
and ask quotations of Shore's common stock as reported on the Nasdaq SmallCap
Market for each of the 20 consecutive trading days ending on the fifth day
B-1
immediately preceding the day of the Effective Time. No fractional shares of
Shore Common Stock will be issued and instead will receive cash (rounded to the
nearest whole cent) determined by multiplying such fraction by the Average Buyer
Common Stock Price. Shore may increase the Stock Consideration and decrease the
Cash Consideration proportionally so that the Stock Consideration (exclusive of
cash in lieu of fractional shares) measured at the Average Buyer Common Stock
Price will represent at least 40% of the value of the Merger Consideration
payable to Midstate stockholders at the Effective Time for federal income tax
purposes. At the Effective Time, all shares of Midstate Common Stock that are
owned directly or indirectly by Shore or Midstate or any of their subsidiaries
shall be cancelled and will not be exchanged for any Merger Consideration. As of
the date of the Agreement, there were 97,360 shares of Midstate Common Stock
issued and outstanding, of which 3,510 shares were owned by Shore.
Prior to the Effective Time, the 1,200 Midstate Common Stock shares
granted to Midstate's president but not vested shall be issued to Midstate's
president, whether or not vested to the terms of the Midstate president's
employment agreement.
Midstate may terminate the Merger if the Average Buyer Common Stock Price
is less than $26.63, unless Shore agrees to pay to each holder of a Midstate
Common Stock share an amount in cash or stock equal to the difference between
(1) $24.00 and (2) the value of the Stock Consideration determined by
multiplying the Average Buyer Common Stock Price by 0.9015, which such
additional shall be in addition to, and not in lieu of, the Stock Consideration
and the Cash Consideration payable pursuant to the Agreement.
RP Financial Background and Experience
RP Financial, as part of its financial institution valuation and consulting
practice, is regularly engaged in the valuation of insured financial institution
securities in connection with mergers and acquisitions, initial and secondary
stock offerings, mutual-to-stock conversions of thrift institutions, and
business valuations for financial institutions for other purposes. As
specialists in the valuation of securities of insured financial institutions, RP
Financial has experience in, and knowledge of, the markets for the securities of
such institutions, including institutions operating in the eastern U.S.,
including Delaware and Maryland.
Materials Reviewed
In rendering this opinion, RP Financial reviewed the following materials:
(1) the Agreement, dated November 11, 2003 and amended as of January 15, 2004,
including exhibits; (2) the following information for Midstate - (a) the annual
audited financial statements for the fiscal years ended December 31, 2000 and
2001 included in the Annual Report for the respective years, and the audited
financial statements for the fiscal year ended December 31, 2002; (b) the annual
proxy statement for fiscal year 2001; and, (c) shareholder, regulatory and
internal financial and other reports through December 31, 2003, including the
Confidential Private Offering Memorandum dated August 28, 2000, (3) the
following information for Shore - (a) the annual audited financial statements
for the fiscal years ended December 31, 2001 and 2002,
B-2
included in the Annual Report and other securities filings, (b) shareholder,
regulatory and internal financial and other reports through September 30, 2003,
(c) the annual shareholder proxy statements for the last two fiscal years, and
(d) other securities filings; (4) discussions with management of Midstate and
Shore regarding the past and current business, operations, financial condition,
and future prospects of both institutions; (5) an analysis of the pro forma
value of alternative strategies for Midstate as an independent institution; (6)
the competitive, economic and demographic characteristics nationally, regionally
and in the local market area; (7) the potential impact of regulatory and
legislative changes on financial institutions; (8) the financial terms of other
recently completed and pending acquisitions of banks regionally and nationally
with similar characteristics as Midstate, including regionally based banks and
banks nationwide with similar financial characteristics; (9) Shore's financial
condition as of September 30, 2003 regarding the perceived financial ability to
complete the Merger from a cash and capital perspective; (10) the estimated pro
forma financial impact of the Merger to Shore, including the pro forma per share
data and the pro forma pricing ratios based on Shore's current market price; and
(11) the prospective strategic benefits of the Merger to Midstate, including,
but not limited to, expanded market area, enhanced delivery channels, broadened
products and services, increased stock liquidity, expanded management team, the
opportunity to realize cost reductions and increased platform for future
expansion.
In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Midstate and Shore furnished by the respective institutions to RP Financial for
review for purposes of its opinion, as well as publicly-available information
regarding other financial institutions and economic and demographic data.
Midstate and Shore did not restrict RP Financial as to the material it was
permitted to review. RP Financial did not perform or obtain any independent
appraisals or evaluations of the assets and liabilities and potential and/or
contingent liabilities of Midstate or Shore.
RP Financial expresses no opinion on matters of a legal, regulatory, tax
or accounting nature or the ability of the Merger as set forth in the Agreement
to be consummated. In rendering its opinion, RP Financial assumed that, in the
course of obtaining the necessary regulatory and governmental approvals for the
proposed Merger, no restriction will be imposed on Shore that would have a
material adverse effect on the ability of the Merger to be consummated as set
forth in the Agreement.
Opinion
It is understood that this letter is directed to the Board of Directors of
Midstate in its consideration of the Agreement, and does not constitute a
recommendation to any shareholder of Midstate as to any action that such
shareholder should take in connection with the Agreement, or otherwise.
It is understood that this opinion is based on market conditions and other
circumstances existing on the date hereof.
B-3
It is understood that this opinion may be included in its entirety in any
communication by Midstate or its Board of Directors to the stockholders of
Midstate. It is also understood that this opinion may be included in its
entirety in any regulatory filing by Midstate or Shore, and that RP Financial
consents to the summary of this opinion in the proxy materials of Midstate, and
any amendments thereto. Except as described above, this opinion may not be
summarized, excerpted from or otherwise publicly referred to without RP
Financial's prior written consent.
Based upon and subject to the foregoing, and other such matters we
consider relevant, it is RP Financial's opinion that, as of the date hereof, the
Merger Consideration to be received by the holders of Midstate Common Stock, as
described in the Agreement, is fair to such shareholders from a financial point
of view.
Respectfully submitted,
RP FINANCIAL, LC.
B-4
APPENDIX C
DELAWARE CODE ANNOTATED
Copyright (C) 1975-2003 by The State
of Delaware.
All rights reserved.
*** THIS DOCUMENT IS CURRENT THROUGH ALL 2003 REGULAR SESSION LEGISLATION ***
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER, CONSOLIDATION OR CONVERSION
8 Del. C. ss. 262 (2003)
ss. 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
C-1
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss. ss. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation
C-2
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to ss. 228 or ss.
253 of this title, then either a constituent corporation before the effective
date of the merger or consolidation or the surviving or resulting corporation
within 10 days thereafter shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constitutent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constitutent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constitutent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or consolidation,
the record date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be the close
of business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of
C-3
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Maryland General Corporation Law permits a corporation to indemnify
its present and former directors, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their services in those capacities, unless it is established that:
(1) the act or omission of the director was material to the matter
giving rise to such proceeding and
(A) was committed in bad faith or
(B) was the result of active and deliberate dishonesty;
(2) the director actually received an improper personal benefit in
money, property, or services; or
(3) in the case of any criminal proceeding, the director had reasonable
cause to believe that the act or omission was unlawful.
Maryland law permits a corporation to indemnify a present and former officer to
the same extent as a director.
In addition to the foregoing, a court of appropriate jurisdiction may
under certain circumstances order indemnification if it determines that the
director or officer is fairly and reasonably entitled to indemnification in view
of all of the relevant circumstances, whether or not the director or officer has
met the standards of conduct set forth in the preceding paragraph or has been
declared liable on the basis that a personal benefit improperly received in a
proceeding charging improper personal benefit to the director or the officer. If
the proceeding was an action by or in the right of the corporation or involved a
determination that the director or officer received an improper personal
benefit, however, no indemnification may be made if the director or officer is
adjudged liable to the corporation, except to the extent of expenses approved by
a court of appropriate jurisdiction.
In addition, the Maryland General Corporation Law permits a corporation to
pay or reimburse, in advance of the final disposition of a proceeding,
reasonable expenses incurred by a present or former director or officer made a
party to the proceeding by reason of his or her service in that capacity,
provided that the corporation shall have received:
(1) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for
indemnification by the corporation; and
II-1
(2) a written undertaking by or on behalf of the director to repay the
amount paid or reimbursed by the corporation if it shall ultimately
be determined that the standard of conduct was not met.
Shore Bancshares, Inc. (the "Company") has provided for indemnification of
directors, officers, employees and agents in Article Seventh, Section (a)(5) of
its Articles of Incorporation, as amended and restated (the "Charter"). This
provision of the Charter reads as follows:
(5) The Corporation shall indemnify (A) its directors and officers,
whether serving the Corporation or at its request any other entity, to the
full extent required or permitted by the General Laws of the State of
Maryland now or hereafter in force, including the advance of expenses
under the procedures and to the full extent permitted by law and (B) other
employees and agents to such extent as shall be authorized by the Board of
Directors or the Corporation's Bylaws and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled. The Board
of Directors may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve
and amend from time to time such by-laws, resolutions or contracts
implementing such provisions or such further indemnification arrangements
as may be permitted by law. No amendment of the Charter of the Corporation
or repeal of any of its provisions shall limit or eliminate the right to
indemnification provided hereunder with respect to acts or omissions
occurring prior to such amendment or repeal.
The Maryland General Corporation Law authorizes a Maryland corporation to
limit by provision in its Articles of Incorporation the liability of directors
and officers to the corporation or to its stockholders for money damages except
to the extent:
(1) the director or officer actually receives an improper benefit or
profit in money, property, or services, for the amount of the
benefit or profit actually received, or
(2) a judgment or other final adjudication adverse to the director or
officer is entered in a proceeding based on a finding in the
proceeding that the director's or officer's action, or failure to
act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding.
The Company has limited the liability of its directors and officers for
money damages in Article Seventh, Section (a)(6) of the Charter. This provision
reads as follows:
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer of the
Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate
the limitation on liability provided to directors and officers hereunder
with respect to any act or omission occurring prior to such amendment or
repeal.
II-2
As permitted under Section 2-418(k) of the Maryland General Corporation
Law, the Company has purchased and maintains insurance on behalf of its
directors and officers against any liability asserted against such directors and
officers in their capacities as such, whether or not the Company would have the
power to indemnify such persons under the provisions of Maryland law governing
indemnification.
Section 8(k) of the Federal Deposit Insurance Act (the "FDI Act") provides
that the Federal Deposit Insurance Corporation (the "FDIC") may prohibit or
limit, by regulation or order, payments by any insured depository institution or
its holding company for the benefit of directors and officers of the insured
depository institution, or others who are or were "institution-affiliated
parties," as defined under the FDI Act, to pay or reimburse such person for any
liability or legal expense sustained with regard to any administrative or civil
enforcement action which results in a final order against the person. The FDIC
has adopted regulations prohibiting, subject to certain exceptions, insured
depository institutions, their subsidiaries and affiliated holding companies
from indemnifying officers, directors or employees for any civil money penalty
or judgment resulting from an administrative or civil enforcement action
commenced by any federal banking agency, or for that portion of the costs
sustained with regard to such an action that results in a final order or
settlement that is adverse to the director, officer or employee.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits:
A list of the exhibits included as part of this registration statement is
set forth on the list of exhibits immediately preceding such exhibits and is
incorporated herein by reference.
(b) Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the SEC have been omitted because they are not required, amounts
which would otherwise be required to be shown with respect to any item are not
material, are inapplicable or the required information has already been provided
elsewhere or incorporated by reference in the registration statement.
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide public offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other that the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes the information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Easton,
State of Maryland, on the 5th day of February, 2004.
SHORE BANCSHARES, INC.
By: /s/ W. Moorhead Vermilye
-----------------------------------
W. Moorhead Vermilye
President/Chief Executive Officer
Pursuant to the requirements of Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Herbert L. Andrew, III* Director February 5, 2004
- ---------------------------
Herbert L. Andrew, III
/s/ Blenda W. Armistead* Director February 5, 2004
- ---------------------------
Blenda W. Armistead
/s/ Lloyd L. Beatty, Jr.* Director February 5, 2004
- ---------------------------
Lloyd L. Beatty, Jr.
II-5
/s/ Paul M. Bowman* Director February 5, 2004
- ---------------------------
Paul M. Bowman
/s/ David C. Bryan* Director February 5, 2004
- ---------------------------
David C. Bryan
/s/ Daniel T. Cannon* Director February 5, 2004
- ---------------------------
Daniel T. Cannon
/s/ Richard C. Granville* Director February 5, 2004
- ---------------------------
Richard C. Granville
Director January 15, 2004
- ---------------------------
Kevin P. LaTulip
/s/ Susan E. Leaverton Treasurer/ February 5, 2004
- --------------------------- Principal Accounting Officer
Susan E. Leaverton
/s/ Neil R. LeCompte* Director February 5, 2004
- ---------------------------
Neil R. LeCompte
/s/ Jerry F. Pierson* Director February 5, 2004
- ---------------------------
Jerry F. Pierson
/s/ David L. Pyles* Director February 5, 2004
- ---------------------------
David L. Pyles
/s/ W. Moorhead Vermilye Director/ February 5, 2004
- --------------------------- Chief Executive Officer
W. Moorhead Vermilye
* By: /s/ Susan E. Leaverton
--------------------------
Attorney-in-Fact
II-6
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Shore Bancshares, Inc. Amended and Restated Articles of
Incorporation (incorporated by reference to Exhibit 3.1 on
Form 8-K filed by Shore Bancshares, Inc. on December 14, 2000)
3.2 Shore Bancshares, Inc. Amended and Restated By-Laws
(incorporated by reference to Exhibit 3.2 on Form 8-K filed by
Shore Bancshares, Inc. on December 14, 2000)
5.1 Opinion of Gordon, Feinblatt, Rothman, Hoffberger & Hollander,
LLC regarding legality**
8.1 Form of Tax Opinion of Gordon, Feinblatt, Rothman, Hoffberger
& Hollander, LLC**
10.1 Form of Employment Agreement with W. Moorhead Vermilye
(incorporated by reference to Appendix XIII of Exhibit 2.1 on
Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000)
10.2 Form of Employment Agreement with Daniel T. Cannon
(incorporated by reference to Appendix XIII of Exhibit 2.1 on
Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000)
10.3 Form of Employment Agreement between Avon Dixon Agency, LLC
and Kevin P. LaTulip (incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10K for the year
ended December 31, 2002)
10.4 Form of Executive Supplemental Retirement Plan Agreement
between The Centreville National Bank of Maryland and Daniel
T. Cannon (incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.5 Form of Life Insurance Endorsement Method Split Dollar Plan
Agreement between The Centreville National Bank of Maryland
and Daniel T. Cannon (incorporated by reference to Exhibit
10.5 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2003)
23.1 Consent of Stegman & Company**
23.2 Consent of Gordon, Feinblatt, Rothman, Hoffberger & Hollander,
LLC (included in Exhibits 5.1 and 8.1)
24.1 Power of Attorney*
99.1 Shore Bancshares, Inc. 1998 Employee Stock Purchase Plan, as
amended and restated (incorporated by reference to Appendix A
of the Company's Definitive Proxy Statement on Schedule 14A
for the 2003 Annual Meeting of Stockholders, filed on March
31, 2003).
99.2 Shore Bancshares, Inc. 1998 Stock Option Plan (incorporated by
reference from the Shore Bancshares, Inc. Registration
Statement on Form S-8 filed on September 25, 1998
(Registration No. 333-64319)).
99.3 Talbot Bancshares, Inc. Employee Stock Option Plan
(incorporated by reference from the Shore Bancshares, Inc.
Registration Statement on Form S-8 filed on May 4, 2001
(Registration No. 333-60214)).
99.4 Form of Midstate Bancorp, Inc. Proxy**
----------
* Filed with the initial Registration Statement on Form S-4 filed on
January 16, 2004
** Filed herewith