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Financial Services & Products ADVISORY n
DECEMBER 15, 2015
Federal Reserve Releases Guidance on Shareholder Protection Arrangements
On December 3, 2015, the Board of Governors of the Federal Reserve System released Supervision and Regulation
Letter 15-15, “Supervisory Concerns Related to Shareholder Protection Arrangements” (SR 15-15), offering guidance
regarding shareholder protection arrangements that are likely to raise supervisory issues at bank holding companies
and savings and loan holding companies. This guidance makes explicit the Federal Reserve’s emerging stance of
disfavor towards such arrangements in recent years.
Specifically, the Federal Reserve’s concern is that these shareholder protection arrangements would have negative
implications on a holding company’s capital or financial position, limit a holding company’s financial flexibility and
capital-raising capacity, or otherwise impair a holding company’s ability to raise additional capital and impede the
ability of a holding company to serve as a source of strength to its insured depository subsidiaries in violation of the
Dodd-Frank Act and Regulations Y and LL.
Background
Pursuant to Section 616(d) of the Dodd-Frank Act and the Board’s Regulations Y and LL, a holding company is required
to serve as a source of financial strength for its insured depository subsidiaries and should not conduct its operations
in an unsafe or unsound manner. Specifically, a holding company should stand ready to use available resources to
provide adequate capital funds to its subsidiary banks and thrifts during periods of financial stress or adversity.
The Federal Reserve reports that it has observed an increase in interest by some holding companies to establish
arrangements that are designed to benefit certain shareholders, enhance short-term investor returns and/or provide
a distinct disincentive for investors to acquire or increase ownership in a holding company’s common stock and other
capital instruments. In fact, these types of arrangements have been in place for many years, but the Federal Reserve
likely became increasingly concerned about these arrangements following the financial crisis of 2008–2009. Many
holding companies experiencing losses in recent years adopted tax benefit preservation plans (TBPPs) designed to
preserve net operating losses within the requirements of Section 382 of the Internal Revenue Code. In essence, while
these TBPPs are designed to protect valuable deferred tax assets under the Code, they also have the effect of deterring
ownership changes, and therefore raise Federal Reserve concerns about a holding company’s ability to raise capital.
This alert is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends. It is intended
to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney
advertising under court rules of certain jurisdictions.
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Summary of Key Points
•
Examples: The following non-exhaustive list of shareholder protection arrangements have raised supervisory issues:
–– “Down-round” provisions where the holding company either (1) agrees to provide an investor with cash
payments reflecting the difference between the price paid by the investor and a lower price per share paid
by investors in subsequent transactions; or (2) agrees to provide an investor with additional shares of stock
for minimal or no additional cost in the event that the holding company issues shares at a price below the
price paid by the investor.
–– Poison pills where existing shareholders of the holding company are able to acquire additional shares at
significant discounts off market value in a new offering if any shareholder crosses a specific ownership
threshold (including TBPPs).
–– Transfer restrictions where (1) investors with less-than-majority control are granted the contractual right to
restrict or prevent the holding company from issuing additional shares; or (2) the holding company’s board
of directors has the authority to nullify share purchases under certain circumstances, require the holding
company to repurchase the shares of the company from a new owner of the shares or take other actions
that would significantly inhibit secondary market transactions in the shares of the holding company.
•
Applicability: The Federal Reserve may object to a shareholder protection arrangement based on the facts and
circumstances and the features of the particular arrangement, regardless of the holding company’s size.
•
Examiner focus: The Federal Reserve may become aware of such a proposed or existing arrangement either in the
context of an application process or other review of capital raising or expansion proposals, or through ongoing
supervision of the company. Holding companies are encouraged to bring all such existing or proposed arrangements
to the attention of relevant supervisory and applications staff when appropriate. Federal Reserve supervisory or
applications staff are directed to consult with Board supervisory staff to determine appropriate action when a
particular shareholder protection arrangement may impair the ability of a holding company to raise or maintain
capital, particularly during a period of stress on the firm, or when provisions of the arrangement are in violation of
applicable supervisory enforcement actions. Despite the obvious emphasis on ferreting out these arrangements,
the Federal Reserve states that SR 15-15 is intended to guide supervisory actions going forward and is not intended
to require holding companies or examiners to demonstrate that such an arrangement does not exist.
•
Corrective action: The Federal Reserve may direct a holding company’s board of directors to modify or remove
a shareholder protection arrangement that gives rise to safetyandsoundness concerns. The corrective actions, if
any, will vary depending on the facts and circumstances of the holding company, as well as applicable state and
federal laws and regulations, corporate charter and bylaws and other considerations such as applicable holding
company capital requirements.
Conclusion
SR 15-15 provides helpful guidance regarding which shareholder protection arrangements are likely to face supervisory
concern, when such issues are likely to be discovered, the expected corrective action and mechanisms for compliance.
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If you have any questions or would like additional information, please contact your Alston & Bird attorney or any member of our
Financial Services & Products Group.
Cliff Stanford
404.881.7833
cliff.stanford@alston.com
John Gerl
404.881.4958
john.gerl@alston.com
Swathi Padmanabhan
404.881.7855
swathi.padmanabhan@alston.com
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