DealLawyers.com Blog

January 12, 2010

FDIC Issues Revised Guidance on Policy Statement for Investments in Failed Banks

The Wachtell Lipton memo repeated below from Richard Kim and David Shapiro is one of many posted in our “Bank M&A” Practice Area on this development:

The FDIC issued revised guidance last week to private investors in connection with the acquisition of failed banks in the form of “Frequently Asked Questions” to its Statement of Policy on the Acquisition of Failed Insured Depository Institutions. These FAQs replace an earlier set of FAQs which were posted in December and subsequently withdrawn. The new FAQs provide helpful guidance and also potentially signal some important policy shifts. While the guidelines do not provide as much flexibility as many private equity investors will desire, they do suggest new interest by the regulator to attract private equity capital to financial institutions, albeit under certain constraints.

The Policy Statement imposed a number of restrictions on private investors seeking to invest in or acquire a failed bank from the FDIC, including:

– Capital Support. Investors are required to commit that an acquired bank be capitalized at a minimum 10% Tier 1 common equity ratio for at least three years following the acquisition.

– Minimum Holding Period. Investors are prohibited from selling or transferring securities that they hold in the failed bank or its holding company for a three-year period following the acquisition, unless the FDIC has approved the sale or transfer.

– Extensive Disclosure. Investors must submit to the FDIC detailed information about themselves, all entities in the proposed ownership chain, the size of the capital funds, their diversification, the return profile, the marketing documents, the management team and the business model.

By its terms, the Policy Statement does not apply to any investor that holds five percent or less of the voting power of an acquired failed bank if the investor is not acting in concert with other investors. The FAQs confirm that nonvoting shares will not count toward the five percent limit if the nonvoting shares are either not convertible into voting shares or are convertible only upon transfer to an unaffiliated third party. In addition, the FAQs provide that where an investment is made in a failed bank through a holding company, the FDIC will take into account the views of the primary regulator of the holding company – i.e., the Federal Reserve or the Office of Thrift Supervision – as to whether the investors are acting in concert.

In an important shift in policy, the FDIC also expresses a preference in the FAQs for ownership structures with at least some large shareholders, each with a greater than 5 percent voting stake. The FDIC noted concerns that ownership structures that fall outside the scope of the Policy Statement by limiting investors to less than 5 percent of the voting stock may raise the same capital and prudential concerns which prompted the development of the Policy Statement.

Consequently, the FDIC stated that it will presume concerted action among investors that hold less than 5 percent voting stakes where they hold more than two-thirds of the total voting power of the structure. The presumption may be rebutted if there is sufficient evidence that the investors are not in fact acting in concert. The FAQs also provide guidance as to how to this presumption may be rebutted.

The Policy Statement encourages investment structures where private equity investors acquire a failed bank in conjunction with a bank or thrift holding company with a successful track record where the bank/thrift holding company has a strong majority in the resulting bank or thrift. The FAQs add that where private investors co-invest with a bank/thrift holding company through a partnership or joint venture structure, the structure will not be subject to the Policy Statement as long as the private investors hold no more than one-third of its total equity and the voting equity. Where private investors are investing in the acquiring bank/thrift holding company rather than through a partnership or joint venture structure, the FAQs provide that the Policy Statement will not apply as long as the private investors in the bank/thrift holding company pre-dating the proposed acquisition have at least two-thirds of the total equity of the company post-acquisition.

The FDIC’s stated preference for ownership structures that consist of fewer rather than more investors may signal an opening for private equity structures which have suffered from negative regulatory perceptions. In designing potential structures, it will be important to also take into account Federal Reserve policies regarding noncontrolling investors.