When it approved GMAC LLC (“GMAC”) as a bank holding company (“BHC”) in December 2008 (the “December Order”) (see the December 30, 2008 Alert), the FRB also discussed the necessary actions by the two principal owners of GMAC, entities controlled by or affiliated with the private equity firm Cerberus Capital Management, L.P. (“Cerberus entities”), and General Motors Corporation (“GM”), to avoid the Cerberus entities or GM themselves being deemed BHCs. The FRB has issued two interpretive letters, each dated March 24, 2009, to provide further detail on the necessary actions of the Cerberus entities and GM, respectively.
Cerberus entities. The interpretive letter relating to the Cerberus entities first lists the historical factors that create a BHC status concern for them: (1) ownership of 51% of the voting interests in GMAC, (2) having 5 GMAC board members, and (3) maintaining substantial business relationships with GMAC and its subsidiaries. To address the first of these concerns, the Cerberus entities would distribute a portion of those voting interests to unaffiliated investors, such that the Cerberus entities would own less than 25% of the voting interests in GMAC, and the unaffiliated investors would each own less than 5%. In the December Order, consistent with the FRB’s 2008 Policy Statement on equity investments in banks and bank holding companies (“Policy Statement”) (see the September 23, 2008 Alert), the Cerberus entities would hold less than 15% of the voting interests and 33% of the total equity in GMAC. In the interpretive letter, the Cerberus entities committed to own approximately 22% of GMAC’s voting interests (and no other equity), which also is consistent with the Policy Statement. Moreover, in the interpretive letter the Cerberus entities committed that the co-investors would have unencumbered rights to vote and dispose of their shares, that there would be no voting agreements, and that Cerberus would not advise co-investors regarding the voting of shares.
As to the second concern (GMAC director representation), consistent with the Policy Statement, the Cerberus entities would reduce their representation on the GMAC board to one director, and that director would not serve as Chairman of the Board or the Chairman of any committee. Any employee interlocks and advisory agreements with GMAC also would be eliminated.
Finally, as to the third concern (business relationships), the Cerberus entities would limit their business relationships with GMAC to those maintained historically (largely lending related). The Cerberus entities also agreed to enter into passivity commitments similar to those historically approved by the FRB (modified to address the Policy Statement), which were attached as exhibits to the interpretive letter.
GM. In the GM interpretive letter, the FRB addressed the additional concern that GM has controlled GMAC since the latter’s formation, and GM and GMAC have been integral to each other’s operations. Under analogous circumstances, the FRB has determined that the controlling company remained able to exert a controlling influence on the other even after a significant divestiture, and thus to avoid being deemed a BHC has required the controlling company to reduce its ownership below 5% of voting equity and only permitted the controlling company to maintain “minimal ongoing business relationships.” 12 CFR 225.138.
To address this concern while also recognizing the “unique circumstances surrounding the proposal by GMAC” and, perhaps, the more lenient stance of the Policy Statement, the interpretive letter permits GM to reduce its holdings to less than 10% of the voting and total equity of GMAC, and to transfer the remainder of its equity interest to a trust with an independent trustee. The trustee will be required to dispose of those shares within 3 years, and will have sole discretion to vote and dispose of the shares in the interim. GM also will have to treat GMAC as an affiliate for purposes of the FRB’s affiliate transaction rules until GM, either directly or as beneficiary of the trust, owns less than 10% of the voting or total equity of GMAC.
In addition, GM would surrender all of its representatives on GMAC’s board of directors, although it would have a nonvoting observer. Furthermore, the contracts establishing the relationship would be amended to eliminate restrictions on GMAC engaging in business with others.