Alert January 19, 2010

FDIC Issues Revised Questions and Answers on Policy Statement on Qualifications for Failed Bank Acquisitions

The FDIC issued revised Questions and Answers (the “Q&A”) regarding its Final Statement of Policy on Qualifications for Failed Bank Acquisitions (the “Policy Statement”).  For more information on the Policy Statement, please see the August 26, 2009 Alert.  The Q&A replaces a previous version of the Q&A that was issued by the FDIC in December 2009, but then subsequently withdrawn shortly after its issuance.

The Policy Statement provides that it will not apply to private investors “in partnerships or similar ventures with bank or thrift holding companies or in such 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.”  (Emphasis added.)  With respect to partnerships with existing holding companies, the Q&A provides that a “strong majority interest” in such context means that the private investors may have (1) no more than one-third of the total equity, and (2) no more than one-third of the voting equity, of the partnership or joint venture post acquisition of the failed depository institution.  Similarly, with respect to direct investments in an established bank or thrift holding company acquiring a failed depository institution, the Q&A provides that the Policy Statement would not apply provided that the shareholders of the holding company pre‑dating the acquisition of the failed bank or thrift hold at least two-thirds of the total equity of the resulting holding company immediately following the acquisition.  (Note that while the limitation with respect to partnerships and joint ventures references limits on both total equity and voting equity, the limitation with respect to direct investments references only total equity.)  In making the determination of whether either of these exclusions from the Policy Statement is applicable, the Q&A notes that the FDIC will also take into account the impact of any special rights provided to the private investors through covenants, agreements, special voting rights or other similar mechanisms.

The Policy Statement also provides an exception from its applicability to any private investor with 5% 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.  However, the Q&A reflects the FDIC’s concern that acquisitions will be structured such that all, or substantially all, of the investors will own less than 5% of the voting stock, so that none of the private investors, or the acquired institution, will be subject to the Policy Statement.

Accordingly, the Q&A provides that the FDIC will presume concerted action among such private investors with less than 5% of the voting power of an acquired depository institution or its holding company if, in the aggregate, such investors hold more than two-thirds of the total voting power.  This presumption may be rebutted if the investors or placement agent provides sufficient evidence to the FDIC that the investors are not participating in concerted action.  The Q&A notes that the determination of whether investors are engaging in concerted action will be based on a “facts and circumstances analysis,” and that participation in “widespread offerings” will not generally be considered to be evidence of concerted action by the resulting investors.  Furthermore, the Q&A provides eight factors that the FDIC will consider when evaluating whether a presumption of concerted action has been rebutted, including (1) whether each investor was among many potential investors contacted by the bank/thrift or its agent, and each investor reached an independent decision to invest in the bank/thrift, and (2) whether the investor has engaged, or anticipates engaging, as part of a group consisting of substantially the same entities as are shareholders of the bank/thrift, in substantially the same combination of interests, in any additional banking or non-banking activities in the United States.

While many of the specified factors are similar to those that the various federal banking agencies traditionally use in making concerted action determinations, the FDIC will not defer to the applicable primary federal banking regulator’s evaluation as to whether investors are acting in concert for purposes of applying the Bank Holding Company Act and the Change in Bank Control Act.  Instead, the Q&A provides that the FDIC will “take into account” the views of the primary federal banking regulator in making its own determination for the purpose of applying the Policy Statement.  Accordingly, although the presumption of concerted action in structures in which such 5% or less investors hold greater than two-thirds of the total voting power may be rebutted, such structures will nevertheless result in some uncertainty for investors, and therefore may be more difficult to complete.

Finally, the Q&A provides guidance as to how the FDIC will treat non-voting convertible equity interests held by a private investor that holds less than 5% of the voting stock of a depository institution or its holding company.  More specifically, non-voting equity interests that are convertible to voting shares at the election of the investor (or any affiliate of the investor), and that are not required to be immediately transferred from such investor’s control following such conversion, would be aggregated with the holder’s voting stock in determining whether such investor owns 5% or more of the applicable voting stock for purposes of determining the applicability of the Policy Statement.