Banking in the Ninth

Control of Entity Prior to Consummation

Applications Filing Tips - November 2012

Published November 30, 2012  |  November 2012 issue

Federal Reserve staff sometimes identify aspects of sale agreements that would allow buyers of banks to control operations of the target entity before they are allowed to. These features of the sales agreement can slow down the applications process and, if not corrected, could even prevent consummation. This article provides guidance on how to avoid such “prior control concerns.”

The prior control concerns arise in our review of sales agreements between the acquiring bank holding company (Buyer) and the selling entity/individual (Seller). The agreements often contain provisions meant to protect the Buyer from actions by the Seller that would adversely affect the value of the target institution. However, these restrictions may raise issues of prior control.

In particular, sale agreements we review frequently include provisions that require the Seller to obtain the Buyer’s approval or consent to take an action or conduct a transaction. The following are examples of such provisions:

  • Making or committing to a capital expenditure in excess of a given dollar amount;
  • Making, renewing or committing to any loan in excess of a given dollar amount;
  • Selling or transferring any portion or all of the bank’s loan portfolio or investment portfolio; or
  • Granting any increase in employee salaries or benefits.

A Buyer can avoid concerns of exercising prior control by ensuring that provisions do not restrict the target entity from conducting normal and ordinary business activities. For example, dollar thresholds contained in restrictive provisions should be large enough to capture only unusual transactions for the target. Provisions that allow the Buyer the right to review the books and records of the Seller or target bank with respect to litigation may also raise a prior control issue. In particular, such access may effectively waive the Seller/target bank’s attorney-client privilege. Applicants can avoid this concern by including a clause prohibiting disclosure of attorney-client privileged information to the Buyer prior to consummation.

When restrictive provisions raise prior control issues, we will require the Buyer to address the matter by taking one of the following actions:

  • Amending or removing the provision from the agreement;
  • Committing not to enforce the provision; or
  • Demonstrating that the provision does not restrict the Seller from conducting normal and ordinary business activities and transactions. This may require that the Buyer provide details (such as the number of loans made in a recent period that would have triggered the provision) as to the extent to which the provision has been or is likely to be triggered prior to approval of the proposal.

Questions pertaining to potential prior control issues in sale agreements can be directed to staff of the Applications section. Our contact information is available here.

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