GrandSouth Bancorporation Seeks Approval to Go Private

GrandSouth is theholding company for GrandSouth Bank, based in Greenville,S.C. Ithad $375.1 million inassets at the end of June, $296.8 million in deposits and $32.8 million in shareholders' equity.

We're watching GrandSouth because on Jan. 9 it got$9 million from the Treasury Department through the Troubled Asset Relief Program. In exchange for the money,it issued preferred stock and warrants to the government. As of May 31, it has paid $171,700 in dividends to the Treasury.

GrandSouth'sfiling explains:

"We are proposing the amendment and reclassification because our Board of Directors has concluded, after careful consideration, that the direct and indirect costs associated with being a reporting company with the Securities and Exchange Commission ('SEC') outweigh any of the advantages. OUR BOARD RECOMMENDS THAT YOU VOTE 'FOR' THE AMENDMENT TO OUR ARTICLES OF INCORPORATION. THE PROPOSED AMENDMENT WILL NOT BE ADOPTED UNLESS IT IS APPROVED." [Emphasis in the original.]

If GrandSouth's shareholders approve the proposal, their new status will depend on how much stock they own. Those with 2,001 or more shares of common stock on the effective date "will continue to own the same number of shares of common stock." But shareholders who own less than 2,001 shares of common stock will be given "a number of shares of Series A Preferred Stock equal to the same number of shares of common stock [they] held before the reclassification."

The directors and officers - who've said they will vote for the amendment - own nearly a third of GrandSouth's outstanding shares; if they exercise all of their vested options, they will own just under 37 percent. However, in order for the amendment to pass, at least two-thirds of the owners of the outstanding common stock must approve the proposal.

The company states that shareholders who oppose the proposal have rights under South Carolina law, but it hasn't determined a fair market value for the common stock, nor has it set a date yet for the special meeting.

By reducing the number of shareholders ofcommon stock toless than 300, GrandSouth can suspend its public reporting obligations under the Securities Exchange Act. It expects "significant cost savings" by not having to file regular reports with the SEC or meet the requirements under the Sarbanes-Oxley Act (SOX). GrandSouth acknowledged that the move will reduce the amount of information about the company that is readily available to the public. But it said the company plans to send shareholders an annual report, albeit one that will be "somewhat less detailed than the report we have historically sent."

Actually, GrandSouth has been considering going private for a couple of years. The company went public in 2000, but it realized after Sarbanes-Oxley was enacted in 2002that it would be expensive to meet the new requirements the legislationimposed on executives,directors and auditors of publicly heldcompanies.

According to the filing, discussions about going private picked up in the fall of 2007 and continued throughout 2008.

Concerning last year's economic upheaval,the company's filing said, "During the third and fourth quarters of 2008, the now familiar crisis hit the financial industry with full force. Although the effect on the Company was minor at first, by October 2008, it was apparent to the officers of the Company that the desirability of raising additional capital was a much higher priority than achieving the cost savings of going private."

After the Treasury Department began providing aidto banks and other financial companies through TARP'sCapital Purchase Program, "the officers of the Company believed that it would be in the best interest of the Company to focus on positioning it to participate in the Capital Purchase Program and on increasing the Company's capital. Accordingly, going private was put on hold to be reconsidered, if possible, after the capital situation had been resolved." The company's shareholders ultimately approved its participation in the CPP.

After GrandSouth got the Treasury's infusion of capital, its officers "consulted counsel to determine whether it would be possible for the Company to go private while preferred stock was held by the Department of the Treasury. It was determined that the Company could go private, but that it would be appropriate to request that the Department of the Treasury concur that the Company's agreement with the Department of the Treasury would not preclude any net reduction of capital of $200,000 or less as a result of payments to any dissenting shareholders in connection with the transaction." It said that it "received the Department of Treasury's consent to such a transaction in July, 2009."