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Item 1.01
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Entry into a Material Definitive Agreement.
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On March 3, 2021, Severn Bancorp, Inc.,
a Maryland corporation (“Severn”), and Shore Bancshares, Inc., a Maryland corporation (“SHBI”), entered
into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Severn will be merged with and into
SHBI, with SHBI as the surviving corporation (the “Corporate Merger”). Immediately following the Corporate Merger,
Severn’s wholly-owned bank subsidiary, Severn Savings Bank, FSB (“SSB”), will be merged with and into Shore United
Bank (“Shore United”), which is the wholly-owned subsidiary of SHBI, with Shore United as the surviving bank (the “Bank
Merger”). Prior to the Bank Merger, Shore United must obtain the approval of the Office of the Comptroller of the Currency
to convert to a national banking association (the “Charter Conversion”). The Corporate Merger and the Bank Merger are
collectively referred to in this Current Report on Form 8-K as the “Proposed Transaction.” A copy of the Merger Agreement
is included as Exhibit 2.1 to this Current Report on Form 8-K. A summary of the material terms of the Merger Agreement follows.
Merger Consideration
The consideration payable to Severn shareholders
upon completion of the Proposed Transaction (the “Merger Consideration”) will consist of whole shares of SHBI common
stock, par value $0.01 per share (“SHBI Common Stock”), cash consideration, and cash in lieu of fractional shares of
SHBI Common Stock. Upon consummation of the Corporate Merger, each share of Severn common stock, par value $0.01 per share, (“Severn
Common Stock”), issued and outstanding immediately prior to the effective time of the Corporate Merger will be canceled and
converted into the right to receive 0.6207 shares of SHBI Common Stock (the “Exchange Ratio”) and $1.59 in cash.
Severn Options
Upon consummation of the Corporate Merger,
each outstanding and unexercised option to acquire shares of Severn Common Stock, whether vested or unvested, will be canceled
in exchange for the right to receive from Severn, immediately prior to the effective time of the Corporate Merger, a single-lump
sum cash payment, equal to the product of (i) the number of shares of Severn Common Stock subject to such Severn option immediately
prior to the Effective Time, and (ii) the excess, if any, of (A) $10.60 over (B) the exercise price per share of such Severn option,
less any applicable taxes required to be withheld with respect to such payment. If the exercise price per share of any such Severn
Option is equal to or greater than $10.60, such Severn Option shall be canceled without any cash payment being made in respect
thereof.
Shareholder Agreements
As an inducement for SHBI to enter into
the Merger Agreement, each director and executive officer of Severn entered into a shareholder agreement with SHBI, pursuant to
which he or she agreed, among other things, to vote their shares of Severn Common Stock in favor of adoption and approval of the
Merger Agreement and any other matters required to be approved by Severn’s shareholders for the consummation of the Proposed
Transaction. These shareholders also agreed to certain restrictions on their ability to transfer their shares of Severn Common
Stock until written consents reflecting at least a majority of all issued and outstanding shares of Severn Common Stock voting
in favor of the Merger Agreement, the Proposed Transaction and the transactions contemplated thereby have been irrevocably delivered
to Severn. In addition, subject to certain enumerated exceptions, those directors and executive officers of Severn who are not
being retained by SHBI have also agreed to refrain from soliciting customers and employees of Severn or its subsidiaries for a
period of one (1) year, subject to and following the closing of the Proposed Transaction. The shareholder agreement is substantially
in the form included as Annex A to the Merger Agreement, which is attached to this Current Report on Form 8-K as Exhibit 2.1.
SHBI directors and executive officers have
entered into agreements with Severn pursuant to which they have committed to vote their shares of SHBI Common Stock in favor of
the issuance of shares of SHBI Common Stock to Severn shareholders in connection with the Proposed Transaction.
Assumption of Severn Indenture Obligation
In connection with the closing of the Proposed
Transaction, SHBI will assume the obligations under the indenture (the “Indenture”) relating to Severn’s junior
subordinated debentures due in 2035. In connection with the assumption of the Indenture, SHBI and Severn will enter into a supplemental
indenture or other documents reasonably required by the trustee to make such assumption effective. Severn had $20.7 million in
junior subordinated debentures issued and outstanding as of December 31, 2020.
Appointment of Directors
Pursuant to the terms of the Merger Agreement,
SHBI is required to take all action necessary to appoint or elect, effective as of the effective time of the Proposed Transaction,
four (4) individuals who are members of the Severn board of directors immediately prior to the effective time of the Proposed Transaction,
each of whom must be mutually agreeable to SHBI and Severn and one of whom shall be Alan Hyatt, the Chairman, President and Chief
Executive Officer of Severn, as directors of SHBI and Shore United, with Mr. Hyatt being appointed as the Chairman of the SHBI
board of directors and Shore United board of directors. Each individual will be assigned to a SHBI board of directors class and
shall serve for a term that coincides with the remaining term of that class and until his or her successor is elected and qualified.
Representations and Warranties
The Merger Agreement contains customary
representations and warranties from Severn to SHBI, which are qualified by the confidential disclosure schedules provided by Severn
to SHBI, and customary representations and warranties from SHBI to Severn.
Business Pending the Proposed Transaction
Severn is required under the Merger Agreement
to conduct its business in the ordinary and usual course, consistent with past practice, to use reasonable best efforts to preserve
its business organization, keep available the present services of its employees, and preserve for itself and SHBI the goodwill
of the customers of Severn and others with whom business relations exist.
Conditions to the Proposed Transaction
The consummation of the Proposed Transaction
is subject to a number of conditions, which include:
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(i)
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the approval of the Merger Agreement by Severn’s shareholders and the approval of the issuance of shares of SHBI Common
Stock by SHBI’s shareholders;
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(ii)
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the receipt of all necessary regulatory approvals for the Charter Conversion
and the Proposed Transaction, without the imposition of conditions or requirements that would require SHBI or Severn to take any
action or commit to take any action that would (x) reasonably be likely to have a Material Adverse Effect (as defined in the Merger
Agreement) on SHBI or Severn, (y) reasonably be likely to impose a Burdensome Condition (as defined in the Merger Agreement) on
SHBI or any of its subsidiaries (including, after the effective time of the Proposed Transaction, Severn and its subsidiaries)
or (z) require the sale by SHBI or any of its subsidiaries (including, after the effective time of the Proposed Transaction, Severn
and its subsidiaries) of any material portion of their respective assets;
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(iii)
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the absence of any regulation, judgment, decree, injunction or other order
of a governmental authority which prohibits the consummation of the Proposed Transaction or which prohibits or makes illegal the
consummation of the Proposed Transaction;
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(iv)
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the effective registration of the shares of SHBI Common Stock to be issued
to Severn’s shareholders with the Securities and Exchange Commission (the “SEC”) and the approval of such shares
for listing on the Nasdaq Global Market;
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(v)
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all representations and warranties made by SHBI and Severn in the Merger
Agreement must remain true and correct, except for certain inaccuracies that would not have, or would not reasonably be expected
to have, a Material Adverse Effect; and
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(vi)
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SHBI and Severn must have performed their respective obligations under
the Merger Agreement in all material respects.
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Termination
The Merger Agreement contains certain termination
rights for both SHBI and Severn, including if (i) the Corporate Merger is not consummated by December 31, 2021, (ii) the necessary
regulatory approvals are not obtained, or (iii) there has been a breach by the other party that is not cured such that the applicable
closing conditions are not satisfied.
In certain circumstances, Severn may terminate
the Merger Agreement, including in the event that (i) the SHBI Average Share Price (as defined in the Merger Agreement) is less
than $9.01 and (ii) the SHBI Average Share Price underperforms the Nasdaq Bank Index by greater than 15%.
Termination Fee
Severn must pay SHBI a termination fee in
the amount of $5.0 million if the Merger Agreement is terminated under certain circumstances set forth in the Merger Agreement.
Expenses of the Proposed Transaction
Each party will bear all expenses incurred
by it in connection with the Merger Agreement and the transactions contemplated thereby.
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The foregoing description of the Merger
Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement,
which is attached as Exhibit 2.1 to this Current Report on Form 8-K and is incorporated herein by reference.
The representations, warranties and covenants
of each party set forth in the Merger Agreement have been made only for purposes of, were and are solely for the benefit of the
parties to, the Merger Agreement, may be subject to limitations agreed upon by the contracting parties, including being qualified
by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead
of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that
differ from those applicable to investors.
In addition, such representations and warranties
(i) will not survive consummation of the Proposed Transaction, and cannot be the basis for any claims under the Merger Agreement
by the other party after termination of the Merger Agreement, except as a result of fraud or willful breach of the provisions of
the Merger Agreement, and (ii) were made only as of the date of the Merger Agreement or such other date as is specified in the
Merger Agreement. Information concerning the subject matter of the representations and warranties may change after the date of
the Merger Agreement, which subsequent information may or may not be fully reflected in the parties’ public disclosures.
Accordingly, the Merger Agreement is included with this filing only to provide investors with information regarding the terms of
the Merger Agreement, and not to provide investors with any other factual information regarding SHBI, Shore United, Severn, SSB,
or their respective affiliates or their respective businesses.