Alert July 14, 2009

U.S. Court of Appeals for D.C. Circuit Upholds OTS Anti-Takeover Rule

The U.S. Court of Appeals for the District of Columbia Circuit (the “Court”) upheld a new OTS rule that allows mutual holding company subsidiaries to adopt charter provisions that limit any given minority shareholder to 10 percent of the subsidiary’s total minority stock (the “Charter Rule”).  The Court found that the Charter Rule is “reasonable and reasonably explained.”

Joseph Stilwell, a private investor (whom the Court described as a regular buyer of minority stakes in mutual holding company subsidiaries) challenged the Charter Rule as arbitrary and capricious under the Administrative Procedure Act (the “APA”).  Stilwell, who had also opposed the Charter Rule during the rulemaking process, asserted that the OTS failed to present empirical evidence justifying the Charter Rule and that the Charter Rule would aggravate the already existing problem of management granting itself lavish stock benefit plans. 

The Court struck down Stillwell’s first argument regarding the OTS’s failure to present empirical evidence justifying the Charter Rule.  The Court noted that the APA imposes no such obligation on agencies; rather, the agency must simply justify a rule it promulgates with a reasoned explanation.  The Court stated that the OTS had satisfied this requirement.  Specifically, the OTS had thoroughly explained that the Charter Rule was prompted by the agency’s concern that activist minority shareholders of mutual holding company subsidiaries could use (and were using) their leverage to take unfair advantage of voting rules that require a majority of minority shareholders to approve management stock benefit plans.  In particular, the OTS was concerned that large minority shareholders would use their voting power pursuant to such rules in order to interfere in certain corporate governance areas, e.g., by pressuring the mutual holding company to effect stock repurchases or a sale of the institution. Stillwell’s second argument similarly failed to pass muster with the Court since the Charter Rule does not affect the separate voting rules requiring a majority of minority shareholders to approve stock benefit plans.  In this way, the Court stated that minority shareholders as a class continue to have the power to vote down stock benefit plans they consider ill-advised. 

The Court concluded that the OTS “struck a permissible balance between the goals of deterring management’s self-dealing and preventing abusive short-term investment strategies.”  In addition, the Court stated that, under the statutory scheme under which the OTS operates, the OTS has discretion “to balance the power of majority and minority shareholders in order to achieve [the OTS’s] multiple regulatory objectives.”  Joseph Stilwell v. Office of Thrift Supervision, Case No. 08-1259 (July 7, 2009).  For the text of the Charter Rule, see Optional Charter Provision in Mutual Holding Company Structures, 73 Fed. Reg. 39,216 (July 9, 2008) (final rule).