(a)
Introduction and guiding principles. For many years, bank holding
companies, nonbank financial companies, private equity funds, and
other firms have made minority equity investments in banks and bank
holding companies. These investments often raise a common set of questions
about the extent to which the investment would cause the investor
to become subject to supervision, regulation, and the other requirements
applicable to bank holding companies under the Bank Holding Company
Act (“BHC Act” or the “Act”) and the Board’s Regulation Y. In general,
the BHC Act applies to any company that controls a bank or bank holding
company (“banking organization”). The BHC Act provides that a company
has control over a banking organiza
tion if (i) the company directly
or indirectly or acting through one or more other persons owns, controls,
or has power to vote 25 percent or more of any class of voting securities
of the banking organization; (ii) the company controls in any manner
the election of a majority of the directors or trustees of the banking
organization; or (iii) the Board determines, after notice and opportunity
for hearing, that the company directly or indirectly exercises a controlling
influence over the management or policies of the banking organization.
1 Minority equity investments in banking
organizations are designed not to trigger either of the first two
prongs of the definition of control. These investments often raise
questions, however, regarding whether the investor will be able to
exercise a controlling influence over the management or policies of
a banking organization.
2The text and legislative history of the control definition
in the BHC Act make manifest that possession by an investor of a modicum
of influence over a banking organization would not amount to a controlling
influence. At the same time, the definition does not require that
an investor have absolute control over the management and policies
of a banking organization. Instead, the Act requires that an investor
be able to exercise an amount of influence over a banking organization’s
management or policies that is significant but less than absolute
control in fact of the banking organization. Notably, the primary
definition of control in the Act is based on ownership of 25 percent
or more of the voting shares of a banking organization-an amount that
does not provide an investor in most cases with complete control over
decisions but would allow the investor to play a significant role
in the decisionmaking process.
In assessing whether an investor has the ability to exercise
a controlling influence over a banking organization, the Board has
been especially mindful of two key purposes of the BHC Act. First,
the BHC Act was intended to ensure that companies that acquire control
of banking organizations have the financial and managerial strength,
integrity, and competence to exercise that control in a safe and sound
manner. The BHC Act is premised on the principle that a company that
controls a banking organization may reap the benefits of its successful
management of the banking organization but also must be prepared to
provide additional financial and managerial resources to the banking
organization to support the company’s exercise of control. In this
way, the Act ties the potential upside benefits of having a controlling
influence over the management and policies of a banking organization
to responsibility for the potential downside results of exercising
that controlling influence. By tying control and responsibility together,
the Act ensures that companies have positive incentives to run a successful
banking organization but also bear the costs of their significant
involvement in the banking organization’s decisionmaking process,
thus protecting taxpayers from imprudent risk-taking by companies
that control banking organizations. Minority investors in banking
organizations typically seek to limit their potential downside financial
exposure in the event of the failure of the banking organization.
Concomitantly, the BHC Act requires that minority investors seeking
this protection limit their influence over the management and policies
of the banking organization.
Second, the BHC Act was intended to limit the mixing of
banking and commerce. In particular, the Act effectively prevents
commercial firms and companies with commercial interests from also
exercising a controlling influence over a banking organization. Many
minority investors in banking organizations own commercial investments
that conflict with this limitation.
(b)
Historical background. In 1982, the Board
issued a Policy Statement on Nonvoting Equity Investments by Bank
Holding Companies (the “1982 Policy Statement”) to provide guidance
on the Board’s interpretation of the “controlling influence” prong
of the control
definition in the BHC Act.
3 That statement for the first time outlined
the policies that the Board would consider in reviewing whether a
minority investment in a banking organization would result in the
exercise by the investor of a controlling influence over the management
or policies of the banking organization. The 1982 Policy Statement
focused on issues of particular concern in the 1980s in the context
of investments by bank holding companies in out-of-state banking organizations.
For example, the 1982 Policy Statement primarily addressed investments
that included a long-term merger or stock purchase agreement between
the investor and the banking organization that would be triggered
on a change in the interstate banking laws, and so-called “lockup”
arrangements designed to prevent another company from acquiring the
banking organization without the permission of the investor.
Many aspects of the 1982 Policy
Statement have broader applicability, however, and have served as
the foundation for the Board’s review more generally of whether a
minority investment in a banking organization would give the investor
a controlling influence over the management or policies of the banking
organization. In this regard, the 1982 Policy Statement identified
a number of structural measures that the Board believed would limit
the ability of an investor to exercise a controlling influence over
a banking organization. These included restricting the use of covenants
that constrain the discretion of banking organization management,
limiting the amount of voting and nonvoting shares of the banking
organization acquired by the investor, and limiting the ability of
the investor to transfer large blocks of voting shares.
The Board made clear in the 1982
Policy Statement that the complexity of legitimate business arrangements
precluded establishing rigid rules designed to cover all situations
and that decisions regarding the presence or absence of control must
take into account the specific facts and circumstances of each case.
Accordingly, since the 1982 Policy Statement, the Board has determined
whether an equity investor in a banking organization has a controlling
influence over the management or policies of the banking organization
by considering carefully all the facts and circumstances surrounding
the investor’s investment in, and relationship with, the banking organization.
Large minority investors in a banking organization typically have
avoided acquiring a controlling influence over the banking organization
by providing the Board with a set of passivity commitments and by
avoiding certain control-enhancing mechanisms. Specifically, minority
investors have avoided acquiring control over a banking organization
by, among other things:
- restricting the size of their voting and total equity
investment in the banking organization;
- avoiding covenants that would enable the investor
to restrict the ability of the banking organization’s management to
determine the major policies and operations of the banking organization;
- not attempting to influence the banking organization’s
process for making decisions about major policies and operations;
- limiting director and officer interlocks with the
banking organization; and
- limiting business relationships between the investor
and the banking organization.
(c)
Specific approaches
to avoid control. Since issuing the 1982 Policy Statement, the
Board has reviewed a significant number of noncontrolling investments
in banking organizations and now believes it would be useful and appropriate
to update its guidance in this area. The Board continues to believe
that investors may acquire a minority equity investment in a banking
organization without exercising a controlling influence over the banking
organization within the meaning of the BHC Act. Based on its experience
in assessing minority investments in banking organizations, the Board
has reviewed the consistency of a number of features of these investments
with the Act. In particular, the Board has reviewed its experience
with director interlocks, limits on the amount of nonvoting shares
that can be held in combination with voting shares, and
the scope
of discussions that minority investors may have with management of
the banking organization. As noted, the Board continues to believe
that a determination whether an investor has a controlling influence
over a banking organization depends on all the facts and circumstances
of each case.
4(1) Director representation. The Board generally
has not permitted a company that acquires between 10 and 24.9 percent
of the voting stock of a banking organization (a “minority investor”)
to have representation on the board of directors of the banking organization.
The principal exception to this guideline has been in situations in
which the investor owns less than 15 percent of the voting stock of
the banking organization and another person (or group of persons acting
together) owns a larger block of voting stock of the banking organization.
The Board has reexamined its
precedent in this area and, based on its experience with minority
investors and director representation, believes that a minority investor
generally should be able to have a single representative on the board
of directors of a banking organization without acquiring a controlling
influence over the management or policies of the banking organization.
Typically, boards of directors of banking organizations have 9 or
10 members. Although having a representative on the board of the banking
organization enhances the influence of a minority investor, the Board’s
experience has shown that, in the absence of other indicia of control,
it would be difficult for a minority investor with a single board
seat to have a controlling influence over the management or policies
of the banking organization.
5Moreover, a minority investor
that has up to two representatives on the board of directors of the
banking organization is unlikely, absent other indicia of control,
to be able to exercise a controlling influence over the banking organization
when the investor’s aggregate director representation is proportionate
to its total interest in the banking organization
6 but
does not exceed 25 percent of the voting members of the board,
7 and another shareholder of the
banking organization is a bank holding company that controls the banking
organization under the BHC Act.
8 The presence of another larger, controlling shareholder of
the banking organization that has been approved by the Board, is subject
to supervision and regulation by the Board, and is obligated to serve
as a source of strength for the banking organization should serve
as a powerful countervailing force to whatever influence the minority
investor may have as a result of its investment and proportional director
representation.
The Board continues to believe
that a representative of a minority investor that serves on the board
of directors of the banking organization should not serve as the chairman
of the board of the banking organization or as the chairman of a committee
of the board of the banking organization. The Board generally believes,
however, that representatives of a noncontrolling minority investor
may serve as members of committees of the board of the banking organization
when those representatives do not occupy more than 25 percent of the
seats on any committee and do not have the authority or practical
ability unilaterally to make (or block the making of) policy or other
decisions that bind the board or management of the banking organization.
(2)
Total equity. The three-prong control test
in the BHC Act makes no explicit reference to nonvoting equity investments.
Nevertheless, the Board has long subscribed to the view that the overall
size of an equity investment, including both voting and nonvoting
equity, is an important indicator of the degree of influence an investor
may have. Accordingly, the Board traditionally has taken account of
the presence and size of nonvoting equity investments in its controlling
influence analysis. For example, in the 1982 Policy Statement, the
Board set forth a guideline that nonvoting equity investments that
exceed 25 percent of the total equity of a banking organization generally
raise control issues under the BHC Act.
9 The Board has recognized in a few limited circumstances,
however, that ownership by a minority investor of 25 percent or more
of a banking organization’s total equity may not confer a controlling
influence, usually in situations when another controlling investor
is present or other extenuating circumstances indicate that the exercise
of a controlling influence by the minority investor is unlikely.
The Board continues to believe
that an investor that makes a very large equity investment in a banking
organization is likely to have a controlling influence over the banking
organization’s management or policies. Investors with large equity
investments have a powerful incentive to wield influence over the
banking organization in which they have invested. They have a substantial
amount of money at stake in the enterprise, are among the first to
absorb losses if the banking organization has financial difficulties,
and participate in the profits of the banking organization going forward.
Moreover, a banking organization is likely to pay heed to its large
shareholders to help ensure it has the ability to raise equity capital
in the future and to prevent the negative market signal that would
be created by the sale of a large block of equity by an unhappy existing
shareholder.
On the other hand, the Board
recognizes that nonvoting equity does not provide the holder with
voting rights that empower the holder to participate directly in the
selection of banking organization management or otherwise in the banking
organization’s decisionmaking process. Moreover, as noted above, the
BHC Act defines control in terms of ownership of 25 percent or more
of a class of voting securities but does not impose an express limit
on ownership of nonvoting shares. The Board continues to believe that,
in most circumstances, an investor that owns 25 percent or more of
the total equity of a banking organization owns enough of the capital
resources of a banking organization to have a controlling influence
over the management or policies of the banking organization. The Board
continues to recognize, however, that the ability of an investor to
exercise a controlling influence through nonvoting equity instruments
depends significantly on the nature and extent of the investor’s overall
investment in the banking organization and on the capital structure
of the banking organization.
In particular, the Board would
not expect that a minority investor would have a controlling influence
over a banking organization if the investor owns a combination of
voting shares and nonvoting shares that, when aggregated, represents
less than one-third of the total equity of the organization (and less
than one-third of any class of voting securities, assuming conversion
of all convertible nonvoting shares held by the investor) and does
not allow the investor to own, hold, or vote 15 percent or more of any class
of voting securities of the organization. In these situations, the
limitation on voting rights reduces the potential that the investor
may exercise influence that is controlling.
In previous cases, investors
that have acquired nonvoting shares often have sought the right to
convert those shares to voting shares under various circumstances.
The Board continues to believe that nonvoting shares that may be converted
into voting shares at the election of the holder of the shares, or
that mandatorily convert after the passage of time, should be considered
voting shares at all times for purposes of the BHC Act. However, in
previous cases, the Board has recognized that nonvoting shares that
are convertible into voting shares carry less influence when the nonvoting
shares may not be converted into voting shares in the hands of the
investor and may only be transferred by the investor: (i) to an affiliate
of the investor or to the banking organization; (ii) in a widespread
public distribution; (iii) in transfers in which no transferee (or
group of associated transferees) would receive 2 percent or more of
any class of voting securities of the banking organization; or (iv)
to a transferee that would control more than 50 percent of the voting
securities of the banking organization without any transfer from the
investor. Ownership of this form of nonvoting, convertible shares,
within the limits discussed above, allows investors to provide capital
to a banking organization in a way that is useful to the organization,
minimizes the opportunity for the investor to exercise a controlling
influence over the organization, and allows the investor to exit the
investment without conveying control to another party outside the
parameters of the BHC Act.
(3) Consultations
with management. In many previous cases, minority investors have
agreed not to attempt to influence the operations, management, or
strategies of the banking organization in which they have invested;
not to threaten to sell their shares in the banking organization as
a method for influencing decisions of banking organization management;
and not to solicit proxies on any matter from the other shareholders
of the banking organization. These commitments were designed to limit
the exercise by a minority investor of a controlling influence over
the management or policies of a banking organization.
The Board believes that it
would be useful to provide additional guidance on the extent of communications
between a minority investor and a banking organization’s management
that would be consistent with a noncontrol determination. The Board
believes that a noncontrolling minority investor, like any other shareholder,
generally may communicate with banking organization management about,
and advocate with banking organization management for changes in,
any of the banking organization’s policies and operations. For example,
an investor may, directly or through a representative on a banking
organization’s board of directors, advocate for changes in the banking
organization’s dividend policy; discuss strategies for raising additional
debt or equity financing; argue that the banking organization should
enter into or avoid a new business line or divest a material subsidiary;
or attempt to convince banking organization management to merge the
banking organization with another firm or sell the banking organization
to a potential acquirer. These communications also generally may include
advocacy by minority investors for changes in the banking organization’s
management and recommendations for new or alternative management.
10 Although these types of discussions
represent attempts by an investor to influence the management or policies
of the banking organization, discussions alone are not the type of
controlling influence targeted by the BHC Act.
To avoid the exercise of a
controlling influence, in all cases, the decision whether or not to
adopt a particular position or take a particular action must remain
with the banking organization’s shareholders as a group, its board
of directors, or its management, as appropriate. The role of the minority
investor in these decisions must be limited to voting its shares in
its discretion at a meeting of the shareholders of the banking organization
(directly or by proxy, including in connection with a proxy solicitation
launched by another shareholder), and by exercising voting privileges
as a member of the board of directors of the banking organization
(to the extent permitted as discussed above). Importantly, communications
by minority investors should not be accompanied by explicit or implicit
threats to dispose of shares in the banking organization or to sponsor
a proxy solicitation as a condition of action or non-action by the
banking organization or its management.
(4) Other indicia
of control.
(i) Business
relationships. The Board traditionally has prohibited a noncontrolling
minority investor in a banking organization from having any material
business transactions or relationships with the banking organization.
The Board historically has taken the view that a major supplier, customer,
or lender to a banking organization can exercise considerable influence
over the banking organization’s management and policies-especially
when coupled with a sizeable voting stock investment—by threatening
to terminate or change the terms of the business relationship.
The Board has recognized over
the years, however, that not all business relationships-even when
accompanied by a material investment-provide the investor a controlling
influence over the management or policies of the banking organization.
Accordingly, the Board has frequently allowed business relationships
that were quantitatively limited and qualitatively nonmaterial, particularly
in situations where an investor’s voting securities percentage in
the banking organization was closer to 10 percent than 25 percent.
The Board continues to believe that business relationships should
remain limited and will continue to review business relationships
on a case-by-case basis within the context of the other elements of
the investment structure. In that review, the Board will pay particular
attention to the size of the proposed business relationships and to
whether the proposed business relationships would be on market terms,
non-exclusive, and terminable without penalty by the banking organization.
(ii)
Covenants. Because the BHC Act explicitly
defines control (and many of its other thresholds) in terms that include
a percentage of voting securities, companies often have structured
their investments in banking organizations in the form of nonvoting
securities and have attempted to substitute contractual agreements
for the rights that normally are obtained through voting securities.
The Board has taken and continues to hold the view that covenants
that substantially limit the discretion of a banking organization’s
management over major policies and decisions suggest the exercise
of a controlling influence.
11 In particular, the Board has been
concerned about covenants or contractual terms that place restrictions
on, or otherwise inhibit, the banking organization’s ability to make
decisions about the following actions: hiring, firing, and compensating
executive officers; engaging in new business lines or making substantial
changes to its operations; raising additional debt or equity capital;
merging or consolidating; selling, leasing, transferring, or disposing
of material subsidiaries or major assets; or acquiring significant
assets or control of another firm.
12On the other hand, the Board
generally has not viewed as problematic for control purposes those
covenants that give an investor rights permissible for a holder of
nonvoting securities as described in section 2(q)(2) of Regulation
Y.
13 These would include covenants that prohibit
the banking organization from issuing senior securities or borrowing
on a senior basis, modifying the terms of the investor’s security,
or liquidating the banking organization. Noncontrolling covenants
also could include covenants that provide the investor with limited
financial information rights and limited consultation rights.
(d) Conclusion. As noted above, whether a minority investor in a banking organization
has a controlling influence over the management or policies of the
banking organization depends on all the facts and circumstances surrounding
the investor’s investment in, and relationship with, the banking organization.
This policy statement sets forth some of the most significant factors
and principles the Board will consider in determining whether investments
in a banking organization are noncontrolling for purposes of the BHC
Act.
Importantly, controlling-influence determinations depend
not just on the contractual rights and obligations of the investor
and the banking organization; they also depend on the amount of influence
the investor in fact exercises over the banking organization. Accordingly,
the Board has and will continue to monitor carefully minority investments
in banking organizations to ensure that investors do not, in fact,
exercise a controlling influence over the management or policies of
the banking organizations in which they invest. The Board also continues
to evaluate its policies in this area and will modify them as appropriate
going forward to ensure that minority investments in banking organizations
remain consistent with the BHC Act.
Policy
statement of Sept. 22, 2008.
