The Change in Bank Control Act ("CIBC Act") may be the most often overlooked (and, likely, one of the most often violated) of all banking regulations. Inadvertent violations have recently become more common in Arkansas given the increase in estate planning related stock transfers by shareholders planning for the next generation of ownership. These transfers commonly run afoul of the provisions of the CIBC Act.
Our firm has worked with a number of banks, holding companies and shareholders in complying with the CIBC Act application requirements. The complexity of ownership structures can make a determination of whether a filing is required difficult. This article reviews the basic requirements of the CIBC Act along with recommendations of proactive steps to avoid problems.
Requirements of the CIBC Act
The CIBC Act requires that an application be submitted to an institution's primary federal bank regulator at least 60-days prior to any person acquiring “control” of a state or national bank or bank holding company. Control refers to the acquisition of 25% or more of the outstanding shares of any class of voting securities of the bank or holding company. Applications related to a bank holding company or state member bank are submitted to the Federal Reserve, while the Office of the Comptroller of the Currency approves applications for national banks and the Federal Deposit Insurance Corporation handles applications relating to 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 in determining whether prior approval is required. This determination can be based on various factors, but most commonly involves a purchasing group acting as part of a coordinated acquisition transaction.
The regulations implementing the CIBC Act apply two important rebuttable presumptions. First, for privately held institutions, a person is presumed to have control of the bank or holding company if, after the acquisition, he or she will own or control 10% or more of any class of voting securities of the company and be the largest single shareholder of the institution. For public companies, the presumption of control applies anytime a shareholder reaches the 10% threshold.
The second presumption is that an individual and his or her immediate family members are presumed to be acting in concert with one another in any acquisition. The definition of immediate family is very broad and includes in-laws and step-relatives. If a family group’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 (even if there are other co-trustees).
The CIBC Act requires that the acquiring person (or group) submit an application to the applicable federal regulator that includes a general description of the transaction, pre- and post-transaction ownership percentages, terms of the acquisition and related financing, and copies of the relevant transaction documents. Any member of the group that will own 2.00% or more of the bank’s shares following the transaction may be required to submit an Interagency Biographical and Financial Report (FR 2081c) and submit to a background check.
While regulators have the ability to impose penalties for violations of the CIBC Act, most inadvertent (unintentional) violations are corrected by submission of a late application. These accidental violations are frequently caught when a holding company is seeking to acquire another bank. Although they can generally be remedied without much heartache, they may prove costly in delaying approval of a planned acquisition.
What to do
We encourage clients to take a few steps in an attempt to avoid these issues altogether. First, someone within the organization should regularly, at least quarterly, review the company’s current shareholder list to ensure that any proposed changes will not require a CIBC Act application. The Federal Reserve, in its normal review of a proposed acquisition, will typically obtain and review the current shareholder list from the company and compare it to prior Fed filings. Any changes within a control group may necessitate that a late application be submitted. Second, the company’s shareholders agreement should be reviewed to determine whether adequate language is included restricting transfers that require federal or state approval. We advise clients to include language that any proposed or attempted transfer is void if the required pre-transfer approval has not been obtained. While this does not eliminate the hassle of completing the application process, it at least places the company in a better position with regulators in demonstrating that it is taking proactive steps to police CIBC Act compliance. The shareholders agreement should also require prior notice of a proposed transfer to the institution’s Board of Directors to ensure that any CIBC Act requirements are satisfied. Lastly, we strongly encourage pre-transfer discussions with regulatory contacts to review the company’s shareholder list and confirm any regulatory issues, concerns or application requirements.
For more information about the Bank Control Act, contact Attorney Robert T. Smith at Friday, Eldredge & Clark, LLP.
Robert is a partner in the Little Rock office of the firm. Robert regularly advises banks and bank holding companies on corporate and securities matters, merger and acquisition transactions, and regulatory compliance. Robert can be reached at (501)370-1559 or firstname.lastname@example.org.
This news alert is created by the attorneys in Mergers and Acquisitions Practice Group at Friday, Eldredge & Clark, LLP. The information provided is not a substitute for legal advice and should be considered for general guidance only. Please contact one of our attorneys for specific legal advice regarding this matter.