The federal Change in Bank Control Act may be the most often overlooked — and one of the most often violated — of all banking regulations. Inadvertent violations have grown more common given the increase in estate planning-related stock transfers by shareholders planning the next generation of ownership.
Complex ownership structures often make it difficult to determine whether a filing is required. A review of the act's basic requirements suggests some steps to avoid problems.
CIBC Act Requirements
The act requires an application to be submitted to an institution's primary federal bank regulator at least 60 days before any person acquiring "control" of a state or national bank or bank holding company. Control refers to the acquisition of 25 percent or more of the outstanding shares of any class of voting securities of the bank or holding company. Applications for a bank holding company or state member bank are submitted to the Federal Reserve, while the Comptroller of the Currency approves applications for national banks and the Federal Deposit Insurance Corp. handles applications for insured state nonmember banks.
The CIBC Act applies to acquisitions by any "person," which includes individuals, trusts and other entities. An acquisition of control may occur from a direct purchase of shares or indirectly, such as by an increase in a shareholder's ownership percentage resulting from the redemption of shares owned by another shareholder.
Where an acquirer is "acting in concert" with others, the parties will be viewed as a single group making the acquisition, and their ownership will be aggregated to determine whether prior approval is required. This determination most commonly involves a purchasing group acting as part of a coordinated acquisition transaction.
Presumptions
For privately held institutions, a person is presumed to control the bank or holding company if, after the acquisition, he or she will own or control 10 percent or more of any class of voting securities of the company and be the largest single shareholder. For public companies, presumption of control applies when a shareholder reaches a 10 percent threshold.
An individual and his or her immediate family members are presumed to be acting in concert in any acquisition. The definition of immediate family is broad, including in-laws and step relatives. If a family's aggregate ownership exceeds that of any other single shareholder of the company, then the family group itself must file a CIBC Act application. Where a family group includes trusts, each trustee is treated as controlling all shares owned by the trust.
Application Requirements
The act requires the acquiring person or group to submit an application to the applicable federal regulator including a general description of the transaction, pre- and post-transaction ownership percentages, terms of the acquisition and financing, and copies of relevant transaction documents. Any member of the group that will own 2 percent or more of the bank's shares after the transaction may be required to submit an Interagency Biographical & Financial Report and submit to a background check.
While regulators can impose penalties for violations of the act, most inadvertent violations are corrected by submission of a late application. These accidental violations are often caught when a holding company seeks to acquire another bank. Although they can generally be remedied without much heartache, they may prove costly in delaying a planned acquisition.
What to Do
- Organizations should review shareholder lists at least quarterly to ensure that any changes will not require a CIBC application. The Federal Reserve, in its review of a proposed acquisition, will typically compare the current shareholder list to prior Fed filings. Any changes within a control group may require a late application.
- Companies should ensure that their shareholders agreements restrict transfers that require federal or state approval. Language should state that any proposed transfer is void without a required pre-transfer approval. While this does not eliminate the the application process hassle, it puts the company in a better position with regulators by showing that it is taking steps to police compliance. Shareholders agreements should also require prior notice of a proposed transfer to the institution's board of directors.
- The shareholder list and any regulatory issues or application requirements should be discussed with regulatory contacts before the transfer.
(Robert T. Smith is a partner in the Little Rock office of Friday Eldredge & Clark. Email him at RSmith@FridayFirm.com.)