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Activist shareholder's call for sale of Middleburg was precursor to Access deal

The call by Middleburg Financial Corp. activist shareholder David Sokol for the company to sell served as the precursor for Middleburg's eventual deal with Access National Corp.

According to the background of the two institutions' pending merger included in a Form S-4 filed Dec. 12, the ball started rolling in February, when Middleburg contacted Sandler O'Neill & Partners to assist in a potential sale of stock by one of the company's largest shareholders, David Sokol, who told management that he was looking to sell his stake in Middleburg. On March 30, Sokol met with representatives of the company to talk about various alternatives to selling the shares, as well as Middleburg's operating performance and outlook and the banking industry in general.

The following day, Sokol submitted a public filing to the SEC where he suggested that Middleburg pursue strategic alternatives. Middleburg did so in the spring, where issues such as possible ways to accelerate growth in the company's relatively low loan to deposits ratio, as well as strategic alternatives with third parties — including M&A — were discussed.

Following Sokol's SEC filing, Access National contacted Middleburg in April. A small team of Access' officers assessed the possibility of doing a deal with Middleburg, reviewing public available information and ultimately concluding that a transaction with Middleburg could have mutual appeal given the perceived benefits from the combined balance sheet, complementary business lines and familiarity of both banks with overlapping markets.

Access reached out to Middleburg in May to ask if the latter would be open to a strategic discussion, which in turn, worked for Middleburg as its review of strategic options included a deal with Access as a viable course of action.

More discussions were held in the following weeks and months, and on June 23, it was agreed Access would refrain from comprehensive due diligence involving the time and expense of third parties until company representatives could meet, interview and forge a favorable opinion concerning the potential relationship with Sokol. Middleburg then entered into a nondisclosure agreement with Sokol on June 25.

After several meetings and preliminary due diligence information exchanges, Access issued a nonbinding term sheet that indicated an illustrative exchange ratio based on post-transaction fully diluted ownership of 55% to 45% by current Access and Middleburg shareholders, respectively, and the proposed consideration mix and organization structure. The term sheet addressed proposed governance of Access following a merger by increasing the Access board of directors from 7 to 13 members and by adding 6 members of the Middleburg board.

Sometime later, Middleburg proposed that the exchange ratio range be based on the fully diluted ownership split between Access and Middleburg expressed in terms of an ownership split floor and ceiling. The two parties later agreed to proceed with discussions after it was agreed that the overlap of each party's desired post-transaction fully diluted ownership was 53.5% by Access shareholders to 46.5% fully diluted ownership by Middleburg shareholders. Access requested a meeting and interview with Sokol, both individually and with Middleburg.

Following several more discussions, Access entered into a nondisclosure agreement with Sokol on Sept. 2 in order to facilitate the sharing of material nonpublic information.

On Sept. 19, representatives of both companies met with Sokol and his financial advisers, Donnelly Penman & Partners, to discuss progress of the proposed transaction. The meeting began with an overview and background of Access followed by a presentation of the proposed combination at an exchange ratio of 1.3314, which represented post-transaction fully diluted ownership of 53.5% to 46.5% by current Access and Middleburg shareholders, respectively. Access representatives also met privately with the activist investor afterward.

After all the parties got back together, it was agreed there was compelling case to continue discussing a potential deal. A timeline and activity overview of the requisite due diligence to reach a final agreement between the boards was discussed and agreed upon.

Discussions and negotiations continued in the following weeks, and on Oct. 18, the parties agreed to an exchange ratio of 1.3314 Access common shares for each Middleburg common share, or a post-transaction fully diluted ownership of 53.5% to 46.5% by current Access and Middleburg shareholders, respectively. The merger agreement was eventually executed Oct. 21, with the deal announcement made Oct. 24 before markets opened.