November 2013

Publicly traded bankDid you know that banks can go public and trade on Nasdaq and not have to file reports on the SEC’s EDGAR filing system?  Well, they can, but it may not be such a good thing.  You get this result when a bank goes public without a holding company.  These banks are instead required to register with their primary federal regulator (i.e., the FDIC, the Federal Reserve or the Office of the Comptroller of the Currency) and these regulators do not use the SEC’s EDGAR filing system.  So no EDGAR filings are required for these banks.

The problem is that EDGAR helps public companies satisfy SEC and other requirements.  For example, the national exchanges have listing requirements that are in addition to the reporting requirements of the SEC and the bank regulators. To comply, listed banks and bank holding companies must, on or before the applicable due date, file copies of all reports and other documents filed with the SEC or their appropriate regulatory authority. For listed bank holding companies, compliance with these requirements is easy because they file on EDGAR, which provides public access and download capabilities at no cost. Due to electronic links with the EDGAR system, most national exchanges generally provide that their filing requirements are considered fulfilled if the bank holding company files a required report or document with the SEC on EDGAR.  This is the result for the vast majority of publicly traded banks in the U.S.  According to the Federal Reserve, currently, about 84% of commercial banks in the U.S. are part of a bank holding company, and in addition, only a limited few publicly traded banks don’t have holding companies.

But what about banks that do not have holding companies? These banks can still go public by registering with their primary federal bank regulator, but they don’t get the benefit of the EDGAR system.  Instead, the bank regulatory authorities have their own filing requirements and the banks must comply with these rules to maintain their good standing as a public company. Where does this leave these publicly traded banks when it comes to their Nasdaq or national exchange filing requirements?  The answer is that these banks must still comply with the reporting requirements of Nasdaq or the national exchanges by undertaking an alternative filing process. For example, the Nasdaq requires these banks to provide it with three paper copies of the applicable filing. So there are more filings involved and more room for error.

Another problem with not using the EDGAR system is that Continue Reading Publicly Traded Banks Illustrate the Side Benefits of EDGAR

forum selection bylawsMore and more plaintiff lawyers are suing issuers outside of an issuer’s state of incorporation, which requires issuers to defend substantially identical claims in multiple forums at added expense with little to no benefit to the shareholders.  While plaintiff lawyers enjoy this lucrative source of revenue, the increasing amount of time and money expended on this multiforum shareholder litigation drives the need for a creative solution for issuers.  A 2010 Delaware court decision, provided such a solution by suggesting that Delaware corporations could amend their organizational documents to provide that Delaware courts are the exclusive jurisdiction for settling intracorporate disputes, including derivative claims.  Thus, dozens of issuers have adopted so called “forum selection” clauses in their bylaws.  Generally, these clauses are similar to Chevron’s:

Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VII.

And while the 2010 Delaware court decision suggested these clauses were permissible, it was not until earlier this year that a Delaware court specifically ruled that the forum selection clause adopted by Chevron was valid. Although the Delaware Supreme Court hasn’t ruled on the issue (the plaintiff dropped its appeal in the Chevron case), it is clear that Delaware corporations have the power to adopt these forum selection clauses.  What is not clear is Continue Reading Do forum selection clauses in bylaws make sense for companies not incorporated in Delaware?

FDIC Statement of Policy on Bank Stock OfferingsWith the costs of compliance on the rise, we are seeing some significant consolidation in the banking industry, particularly among community banks. In a recent article on www.bankdirector.com, Rick Maroney writes that although bank M&A has been tepid thus far in 2013, some key drivers of M&A activity are starting to emerge and he predicts that we are likely to see increased merger and consolidation activity in the industry as smaller banks need to grow to remain viable. Additionally, the heightened regulatory capital requirements that are expected to be adopted as a result the Basel III accord may be an additional driver of consolidation in the banking sector.

In these merger transactions, it is fairly common for acquiring institutions to offer its common stock to target shareholders as part of the consideration to be paid. Depending on the organizational structure of the acquiring institution, there are a few options for offering stock to target shareholders as merger consideration. If the acquiror is a bank with a holding company structure, the stock portion of the merger consideration is almost always common stock of the holding company. The most significant issue when offering bank holding company stock is that the transaction must either (i) be registered on an S-4 registration statement, which involves substantial time and cost for the acquiror and would subject the acquiror to periodic reporting requirements under the Securities Exchange Act of 1934 or (ii) alternatively, the holding company stock must be issued pursuant to an exemption from registration (typically the Rule 506 safe-harbor for the Section 4(a)(2) private offering exemption). Many smaller banks, to the extent possible, will attempt to avoid registering the transaction due to the high costs and rely on an exemption to registration. If an acquiror considers privately placing holding company securities in a merger transaction, there are a number of considerations to address, some of which may be slightly alleviated by the recent changes under the JOBS Act as described in Kobi Kasitel’s recent blog post regarding stock issuances in M&A transactions after the JOBS Act.

For state-chartered banks regulated by the FDIC that do not have a holding company, the issuance of bank stock in connection with an acquisition may, at first glance, appear simpler. Under section 3(a)(2) of the Securities Act of 1933, securities issued or guaranteed by a bank are exempt securities and may be issued Continue Reading The FDIC should consider updating its outdated statement of policy on bank stock offerings