Final Statement of Policy on Qualifications for Failed Bank Acquisitions - PDF (PDF Help)
Q&As Posted In January 2010
The statement of policy excludes: "investors in partnerships or similar ventures with bank or thrift holding companies or in such holding companies (excluding shell holding companies) where the holding company has a strong majority interest in the resulting bank or thrift and an established record for successful operation of insured banks or thrifts."
What would the FDIC consider to be a "strong majority interest"?
Generally, the FDIC will not apply the statement of policy to investments by private investors through a partnership or venture with an established bank or thrift holding company for the purpose of acquiring the assets and liabilities of a failed bank or thrift from an FDIC receivership unless the private investors have more than one-third of both the total equity or the voting equity of the partnership or joint venture post acquisition. In making the determination of whether this exclusion from the Policy Statement is applicable, the FDIC will take into account the impact of any special rights provided to the private investors through covenants, agreements, special voting rights, or other such mechanisms.
In the circumstance described above, how does the statement of policy apply if private investors make their investment directly in an established bank or thrift holding company acquiring the assets and liabilities of a failed bank or thrift rather than through a partnership or joint venture with an established holding company?
The same standard, stated above, would apply to direct investments in an established bank or thrift holding company.
The statement of policy does not apply to any Investor with 5 percent or less of the total voting power of an acquired depository institution or its bank or thrift holding company provided there is no evidence of concerted action among these Investors. How does the FDIC determine concerted action among Investors?
When situations arise in which the FDIC will need to determine the existence of evidence of concerted action, the determination of "no evidence of concerted action" will be made based on a facts and circumstances analysis.
Participation in widespread offerings will not generally be considered to be evidence of concerted action by the resulting investors. For example, the FDIC will not consider contemporaneous share purchases by multiple Investors, each of whom will hold 5 percent or less of the total voting power in an acquired institution or holding company, as concerted action when such Investors will hold two-thirds or less of the total voting power.
The FDIC has concerns, however, that ownership structures in which all or substantially all of the investors own 5% or less of the voting stock, resulting in neither the investors nor, in some cases, the applicable depository institution itself being subject to the statement of policy, may raise some of the same capital and prudential concerns which underlay the need to adopt the statement of policy.
Accordingly, the FDIC will presume concerted action among such Investors where, in the aggregate, they hold more than two-thirds of the total voting power. This presumption may be rebutted, however, if the Investors or placement agent provides sufficient evidence to the FDIC that the Investors' are not participating in concerted action. In evaluating whether this presumption has been rebutted, the FDIC will consider the following factors:
- Whether each investor was among many potential investors contacted by bank/thrift or its agent, and each investor reached an independent decision to invest in bank/thrift;
- Whether an investor is managed or advised by an investment manager or investment advisor who performs the same services for another investor;
- Whether the investors has engaged, or anticipates engaging, as part of a group consisting of substantially the same entities as are shareholders of bank/thrift, in substantially the same combination of interests, in any additional banking or non-banking activities in the United States;
- Whether an investor has any significant ownership interest in any other investor in the bank/thrift;
- Whether an investor is entitled to acquire any other investor's shares;
- Whether there are any agreements or understandings between any of the investors for the purpose of controlling bank/thrift;
- Whether the investors (and each director representing each investor) will consult with other investors concerning the voting of bank/thrift shares; and
- Whether the directors representing the investors will represent only the particular Investor which nominated him or her, and will not represent any combination of investors.
The FDIC will take into account a primary federal banking regulator's evaluation of whether the Investors are acting in concert for purposes of applying the Bank Holding Company Act and the Change in Bank Control Act as part of the FDIC's assessment of the facts and circumstance of the proposed investment in determining, for the purpose of applying the Policy Statement, whether there is "no evidence of concerted action" by the Investors.
If an investor owns less than 5% of the voting power, but owns more than 5% of the resulting bank's equity, does the "5% exclusion" apply, provided there is no concerted action?
If the non-voting equity interests are not convertible to voting shares at any time or under any circumstances, the FDIC will not aggregate them with the amount of voting shares to determine if the statement of policy applies to such situations.
If the non-voting equity interests are convertible to voting share under certain circumstances at the election of the investor or any affiliate of the investor, and following such conversion, are not required to be transferred immediately from the control of the investor, the non-voting equity interests would be aggregated.
If any investor owns 5% or more of the voting equity of a depository institution or its bank, financial, or thrift holding company, then the applicable provisions of the statement of policy would apply to that investor as well to the acquiring insured depository institution.
Additional Questions & Answers Proposed to Address Recent Questions – April 23, 2010:
Applicability – Strong Majority Interest.
The statement of policy excludes: "investors in partnerships or similar ventures with bank or thrift holding companies or in such holding companies (excluding shell holding companies) where the holding company has a strong majority interest in the resulting bank or thrift and an established record for successful operation of insured banks or thrifts."
In the circumstances described above, in determining whether the Investors in the established bank or thrift holding company pre-dating the proposed failed institution acquisition hold a "a strong majority interest in the resulting bank or thrift" is there any requirement that the pre-existing Investors have held their ownership interests for a specific amount of time?
There is no requirement that pre-existing Investors must have held their ownership interests for a specific amount of time in evaluating application of the Statement of Policy. The FDIC will take into consideration whether a significant portion of the total equity shares or voting equity shares held by Investors in the established bank or thrift holding company pre-dating the proposed failed institution acquisition was recently acquired or was part of a recapitalization of the existing institution.
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Does the Statement of Policy apply to recapitalizations of existing banks? Would it apply if the recapitalized institution acquired a failed insured institution?
Recapitalizations of existing institutions are not subject to the Statement of Policy. Where new Investors have recently recapitalized an institution and the institution seeks to acquire a failing bank, the FDIC will review whether the additional capital was provided contingent on completion of failing bank acquisitions. The Statement of Policy will apply if any acquisition of one or more failed institutions occurs that in combination exceed 100% of the recapitalized institution's total assets within an eighteen-month period following the recapitalization. Irrespective of the foregoing, any acquisitions will remain subject to otherwise applicable supervisory considerations or requirements.
Applicability – De Minimis Investors.
The statement of policy does not apply to any Investor with 5 percent or less of the total voting power of an acquired depository institution or its bank or thrift holding company provided there is no evidence of concerted action among these Investors.
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Does the FDIC require that a certain percentage of investors be bound by the terms of the Statement of Policy? If so, what is the requirement?
The Statement of Policy is designed, in part, to ensure that the ownership and management of insured depository institutions remain stable to provide guidance and continuity for safe and sound operation of the bank or thrift. To help accomplish this goal, Investors holding a minimum of one-third of the total voting equity shares or total equity shares of an acquired institution or its bank or thrift holding company must be bound by the terms of the Statement of Policy.
Is the 1/3 test for investors based upon voting equity shares or total equity shares?
Investors may satisfy the one-third test through an 'anchor group' of Investors that comply with the terms of the Statement of Policy. The 'anchor group' may consist of one-third or more of the total voting equity shares or one-third or more of a combination of total voting equity shares and total equity shares as a proportion of total equity shares. The 'anchor group' includes Investors who must comply by the terms of the Statement of Policy (i.e. Investors with more than 5 percent of the total voting power) and any additional Investors who agree to comply in order to meet the one-third test.
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Does the 1/3 ownership test only have to be met at the time of offering or on an ongoing basis?
The 1/3 ownership test only needs to be met at the time of the failed bank acquisition. However, as provided in the Statement of Policy, Investors subject to it are prohibited from selling or otherwise transferring their securities for a 3 year period of time following the acquisition absent the FDIC's prior approval.
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Can investors with 5% or less of voting equity shares elect to be subject to the statement of policy in order to meet the 1/3 test?
Yes, investors with 5% or less of voting equity shares and therefore not subject to the statement of policy may elect to be subject themselves to the Statement of Policy in order to contribute towards meeting the 1/3 anchor investment.
Are investors that have the right to designate a board member subject to the statement of policy even if they hold 5% or less of the voting equity shares?
Yes, if an investor has a right to designate a board member then that investor will be subject to the Statement of Policy.
- Is senior management automatically subject to the statement of policy, regardless of the amount of voting equity shares they may own?
Would a right of first refusal, which would give a shareholder the right to acquire another shareholder's shares at the same price and on the same terms be permissible?
Rights of first refusal are permitted for those investors who do not make up the 1/3 anchor group. However, if the purchase results in the Investor holding more than 5% of the voting equity shares, the Investor would become subject to the Statement of Policy.
What information is required from investors who hold 5% or less of the voting equity?
Investors holding 5% or less of the voting equity are not subject to detailed questionnaires such as those requested of the Investors who are subject to the Statement of Policy or who are otherwise included in the 1/3 'anchor group.' However, investors holding 5% or less of the voting equity are subject to being included on the List of Investors provided to the FDIC. This list provides: each Investor's name; type of Investor (i.e. mutual fund, hedge fund, individual); domicile; the number of shares of voting stock and total equity held by the Investor both prior to the capital raise and subsequent to the capital raise; options, warrants, interests convertible into voting stock, and rights to control voting stock owned by others; and shares held by affiliates or immediate family members.
- Secrecy Law Jurisdiction Issues.
Does the FDIC review tax information from investors operating through US subsidiaries, but whose parent company operates through or is domiciled in Secrecy Law Jurisdictions for compliance with tax laws?
The FDIC will not make determinations as to whether an Investor is in compliance with all relevant tax laws. In applying the Statement of Policy's secrecy law jurisdiction requirements to anchor Investors utilizing entities domiciled in bank secrecy jurisdictions (Offshore Investors), the FDIC will consider those entities to be in compliance with the Statement as long as each Offshore Investor makes its investment in the bank or the bank or thrift holding company through at least one wholly-owned subsidiary established under the laws of any state of the United States (Domestic Subsidiary), as further explained below.
Each Offshore Investor and its Domestic Subsidiary must agree: (1) to maintain in the United States at the offices of its subsidiary or subsidiaries (i) its business books and records (or duplicates thereof) and (ii) an exact duplicate of the books and records of the Offshore Investor; (2) to maintain in the United States at the offices of its Domestic Subsidiary a current list of all investors in the Offshore Investor; and (3) to make the required books, records, and lists identified in (1) and (2) above available to the FDIC upon request as may be necessary to implement and enforce the provisions of the Statement or the FDIC's supervisory, deposit insurance or receivership obligations.
It is expected that any Offshore Investor will pay U.S. federal income tax on the income from their ownership, including dividends and capital gains, at the same time, at the same tax rate, and to the same extent as if it had made its investment directly in the bank or the bank holding company.
No, senior management is not automatically subject to the Statement of Policy simply due to their position as senior management. However, they may be subject to the Statement of Policy if they would otherwise be subject to its provisions by virtue of their equity share ownership, ability to designate a board member, some combination of such rights, or evidence of concerted action.