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From Banking and Finance Law Daily, December 4, 2015

Fed warns holding companies over special deals for favored investors

By Richard A. Roth, J.D.

The Federal Reserve Board is warning bank and thrift holding companies that it may require them to modify or eliminate shareholder protection arrangements that pose safety and soundness concerns. “Down-round” provisions, poison pills, and other types of agreements can hurt a holding company’s capital or financial position or make it harder for a company to raise capital in the future, according to the Fed. These effects could reduce the company’s ability to be a source of strength to its subsidiary depository institutions, thereby threatening the subsidiaries’ safety and soundness (SR 15-15).

The Fed listed five examples of problematic arrangements:

  1. A company agrees to make payments to an investor if later investors are allowed to buy shares at a price lower than the investor paid.
  2. A company agrees to provide an investor additional shares at little to no cost if later investors are allowed to buy shares at a price lower than the investor paid.
  3. Investors are allowed to buy additional shares at lower than market prices if any shareholder’s interest crosses a percentage threshold.
  4. Investors who control a holding company but do not have a majority interest in the company have a right to prevent the company from issuing more shares or have the ability to restrict the company’s ability to do so.
  5. The company’s board of directors can nullify share purchases, require the company to buy shares back from a purchaser, or take other steps that would inhibit secondary market transactions in the company’s shares.

  6. These arrangements are intended to protect the investments of particular shareholders rather than the viability of the company, or to give an advantage to current shareholders, in the Fed’s opinion.

    The response to a shareholder protection arrangement will depend on the holding company’s circumstances, as well as on other federal and state laws and rules. The Fed noted, however, that the new guidance is not intended to require either its examiners or a holding company to confirm routinely that no shareholder protection arrangement exists.

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