Alert March 22, 2011

FRB Approves Goldman’s Retention of a 9.8% Interest in a Tennessee Bank Holding Company Subject to Passivity Commitments

The FRB issued an order (the “Order”) approving the retention by The Goldman Sachs Group, Inc. (“Goldman”), a bank holding company that has elected financial holding company status, of 9.8% of the outstanding common stock of a Tennessee bank holding company, Avenue Financial Holdings, Inc. (“Avenue”).  Goldman stated that it did not propose to control or exercise a controlling influence over Avenue, and the FRB approval under the Order is subject to passivity commitments from Goldman (the “Passivity Commitments”) that are set forth in an appendix to the Order.  The FRB states in the Order that the Passivity Commitments are

“substantially similar to those on which the Board has previously relied in determining that an investing bank holding company would not be able to exercise a controlling influence over another bank holding company or bank…”

The specific Passivity Commitments agreed to by Goldman are as follows:

“The Goldman Sachs Group, Inc. (“Goldman Sachs”), New York, New York, and its subsidiaries and affiliates (collectively, the “Goldman Sachs Group”), will not, without the prior approval of the Board or its staff, directly or indirectly:

  1. Exercise or attempt to exercise a controlling influence over the management or policies of Avenue Financial Holdings Inc. (“Avenue Financial”), Nashville, Tennessee, or any of its subsidiaries;
  2. Have or seek to have more than one representative of the Goldman Sachs Group serve on the board of directors of Avenue Financial or any of its subsidiaries;
  3. Permit any representative of the Goldman Sachs Group who serves on the board of directors of Avenue Financial or any of its subsidiaries to serve (i) as the chairman of the board of directors of Avenue Financial or any of its subsidiaries, (ii) as the chairman of any committee of the board of directors of Avenue Financial or any of its subsidiaries, (iii) as a member of any committee of the board of directors of Avenue Financial or any of its subsidiaries if the Goldman Sachs Group representative occupies more than 25 percent of the seats on the committee, or (iv) as a member of any committee of the board of directors of Avenue Financial or any of its subsidiaries with the authority to act on behalf of the full board of directors between formal meetings;
  4. Have or seek to have any employee or representative of the Goldman Sachs Group serve as an officer, agent, or employee of Avenue Financial or any of its subsidiaries;
  5. Take any action that would cause Avenue Financial or any of its subsidiaries to become a subsidiary of Goldman Sachs;
  6. Own, control, or hold with power to vote securities that (when aggregated with securities that the officers and directors of the Goldman Sachs Group own, control, or hold with power to vote) represent 25 percent or more of any class of voting securities of Avenue Financial or any of its subsidiaries:
  7. Own or control equity interests that would result in the combined voting and nonvoting equity interests of the Goldman Sachs Group and its officers and directors to equal or exceed 25 percent of the total equity capital of Avenue Financial or any of its subsidiaries, except that, if the Goldman Sachs Group and its officers and directors own, hold, or have the power to vote less than 15 percent of the outstanding shares of any class of voting securities of Avenue Financial, the Goldman Sachs Group and its officers and directors may own or control equity interests greater than 25 percent, but in no case more than 33.3 percent, of the total equity capital of Avenue Financial or any of its subsidiaries;
  8. Propose a director or slate of directors in opposition to a nominee or slate of nominees proposed by the management or board of directors of Avenue Financial or any of its subsidiaries;
  9. Enter into any agreement with Avenue Financial or any of its subsidiaries that substantially limits the discretion of Avenue Financial’s management over major policies and decisions, including, but not limited to, policies or decisions about employing and compensating executive officers; engaging in new business lines; raising additional debt or equity capital; merging or consolidating with another firm; or acquiring, selling, leasing, transferring, or disposing of material assets, subsidiaries, or other entities;
  10. Solicit or participate in soliciting proxies with respect to any matter presented to the shareholders of Avenue Financial or any of its subsidiaries;
  11. Dispose or threaten to dispose (explicitly or implicitly) of equity interests of Avenue Financial or any of its subsidiaries in any manner as a condition or inducement of specific action or non-action by Avenue Financial or any of its subsidiaries; or
  12. Enter into any other banking or nonbanking transactions with Avenue Financial or any of its subsidiaries, except that the Goldman Sachs Group may establish and maintain deposit accounts with Avenue Financial, provided that the aggregate balance of all such deposit accounts does not exceed $500,000 and that the accounts are maintained on substantially the same terms as those prevailing for comparable accounts of persons unaffiliated with Avenue Financial.

The terms used in these commitments have the same meanings as set forth in the Bank Holding Company Act of 1956 (“BHC Act”), as amended, and the Board’s Regulation Y.

Goldman Sachs understands that these commitments constitute conditions imposed in writing in connection with the Board’s findings and decisions in Goldman Sachs’s application to retain 9.8 percent of the outstanding common stock of Avenue Financial, pursuant to section 3(a)(3) of the BHC Act, and, as such, may be enforced in proceedings under applicable law. Goldman Sachs further understands that it generally must file an application and receive prior approval of the Board, pursuant to section 3(a)(3) of the BHC Act, for any subsequent acquisition of control of voting shares of Avenue Financial that would result in Goldman Sachs, directly or indirectly, owning or controlling additional voting shares in excess of 9.8 percent of the outstanding common shares of Avenue Financial.”

The Passivity Commitments, as the FRB stated, are substantially similar to those required in prior FRB orders, but in a few instances, as with other applicants or notificants, examples of restrictions within a commitment have been tailored to the specific application or notice.  For example, Commitment 9’s express limitation on interfering in Avenue’s policies or decisions regarding employing and compensating executive officers does not appear in many sets of passivity commitments and, in some sets of commitments, restrictions on interfering in “personnel decisions” appear.  We believe that the FRB’s Order in the Goldman Sachs matter provides a useful illustration of the FRB’s current thinking on passivity commitments.