Alert March 30, 2010

OCC Issues Interpretive Letter Concluding that National Bank, Which Elected Tennessee Law for Corporate Governance, May Reclassify Common Stock into New Classes of Preferred Stock

The OCC issued an interpretive letter (“Letter #1125”) in which it concluded that a national bank (the “Bank”), which elected to use Tennessee law for corporate governance purposes under 12 C.F.R. §7.2000(b), may reclassify common stock held by the Bank’s shareholders into two new classes of preferred stock.  The Bank desires to reclassify its shares of stock so that it can “transform from a reporting company under the Securities Exchange Act of 1934 to a nonreporting company and to reduce administrative expenses and costs of shareholder communications…” (the “Business Purpose”).

In analyzing the Bank’s proposal, the OCC found that Tennessee law permits share reclassification.  The OCC noted that it has previously authorized national banks to use comparable governance procedures authorized by the laws of various states to:  (1) divide a bank into two separate entities; (2) complete reverse stock splits; (3) effect share exchanges; and (4) issue blank check preferred stock.

The OCC found that permitting the share reclassification was consistent with its prior decisions.  The OCC states in Letter #1125 that reorganizing by effecting a share reclassification and giving different types of consideration to shareholders in the exchange is not inconsistent with federal banking law and raises no safety and soundness concerns.  The OCC further determined that the Bank was providing its shareholders with satisfactory dissenters’ rights and that the Bank’s Business Purpose was legitimate.  Accordingly, the OCC concluded in Letter #1125 that the Bank, after filing an application with the OCC under 12 C.F.R. §5.46 and receiving the OCC’s conditional approval, may effect the proposed reclassification.