[Federal Register Volume 59, Number 21 (Tuesday, February 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2235]
[[Page Unknown]]
[Federal Register: February 1, 1994]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Proposed Statement of Policy on Mutual to Stock Conversions
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of Proposed Policy Statement.
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SUMMARY: The FDIC solicits comments on a proposed policy statement
setting forth guidance with respect to the conversion from mutual to
stock ownership of State chartered savings banks and the FDIC's
supervisory concerns on the matter.
DATES: Comments must be received by March 18, 1994.
ADDRESSES: Send comments to the Executive Secretary, FDIC, 550 17th
Street, NW., Washington, DC 20429. Comments may be hand delivered to
room F-400, 1776 F Street NW., Washington, DC on business days between
8:30 a.m. and 5 p.m. [Fax number (202) 898-3838]. Comments will be
available for inspection and photocopying in room 7118, 550 17th
Street, NW., Washington, DC between 9 a.m. and 4:30 p.m. on business
days.
FOR FURTHER INFORMATION CONTACT: Robert F. Miailovich, Associate
Director (202-898-6918), Garfield Gimber III, Examination Specialist
(202-898-6913), Division of Supervision, or Walter P. Doyle, Counsel
(202-898-3682), Legal Division, FDIC, 550 17th Street, NW., Washington,
DC 20429.
SUPPLEMENTARY INFORMATION:
I. Request for Public Comment
The FDIC is considering adoption of a policy statement on
conversion from mutual to stock form of ownership. Comment is requested
on all aspects of the subject and, in particular, the proposed policy
statement.
All state authorities provide some degree of oversight over mutual
to stock conversion transactions involving institutions under their
jurisdiction, and a number of statutes exist that deal with securities
disclosure and changes of management and/or control and acquisitions.
With respect to state oversight, comment is requested on whether or not
such oversight is sufficiently uniform and adequate across states to
protect the interests of the public, or whether federal oversight is
necessary.
In light of existing federal and state securities laws and state
conversion laws, comment is requested on what abusive practices are
prevalent or likely and whether and why the FDIC should take action. If
so, should the focus of FDIC attention be on the long-standing
accountholders/members or are other interests, such as those of
borrowers, trustees, management and employees, also important?
Comment is requested on whether the following proposed policy
statement contains enough specificity to be effective in providing
worthwhile guidance and preventing potentially objectionable practices.
If the proposed or even a strengthened policy statement providing
guidance to the industry is not considered adequate, should mutual to
stock conversions be governed by an enforceable regulation? If so,
should such a regulation closely follow the existing regulation of the
Office of Thrift Supervision on this subject, with specific percentage
limitations, such as on insider investments, or should a regulation
more closely resemble a guidance format as embodied in the proposed
policy statement? Should the FDIC seek or support congressional action
in this matter?
II. Background
In recent years a number of state chartered mutual savings banks
have converted to stockholder owned state savings banks. Many of these
institutions first converted from federally chartered mutual savings
associations to state chartered savings banks. In some cases, the
conversion results in an acquisition by or merger into another
institution, with accountholders/members obtaining stock in the
acquiring institution and not the converting savings bank.
One consequence of these conversions to state charter is that the
FDIC may replace the Office of Thrift Supervision as the primary
federal regulator. The mutual to stock conversion process is then
subject to the rules and protections of state law. The Office of Thrift
Supervision regulations governing conversions from mutual to stock form
were enacted in 1974 in reaction to instances of abusive conversion
transactions wherein insiders and their interests captured a large
share of the converting institution's capital stock for considerably
less than fair market value. The Office of Thrift Supervision
regulation was structured to protect the interest of the converting
mutual's accountholders/members in the current equity and perceived
future value of the institution against abusive insiders and
opportunistic depositors.
III. Reasons for FDIC Policy
Conversion rules under state law are not identical to and may be
less stringent than Office of Thrift Supervision regulations. Absent
effective state laws or some federal oversight over state mutual
savings banks converting to capital stock form, the opportunity for
inconsistency and abuse is ever present.
The areas of particular concern for potential abuse in conversion
include: (1) Pricing the shares, (2) Apportioning the stock
subscription rights, and (3) Disclosure of information needed to make
an informed investment decision.
Offering the shares at too low of a price may unjustly enrich the
recipients, increase the temptation by insiders to acquire more shares
than they are fairly entitled to, and deny the institution all of the
additional capital it should receive to protect depositors and the
insurance fund. Setting the share price too high may result in poor
investment decisions by accountholders/ members that may lack
investment expertise.
In some conversion transactions insiders may appear to have
received preferential treatment over the interests of accountholders/
members who have supported the mutual savings bank. Management and
directors, it can be argued, should not be preempted from receiving a
fair portion of the stock rights since they have contributed to the
value of the institution and should properly be induced to remain with
the institution. However, management and directors also will continue
to receive salaries and fees for their services to the institution.
In addition, mutual savings banks that convert to stock form
undertake a major restructuring that possibly can lead to significant
changes in the nature or volume of business conducted. In the past,
some institutions, in leveraging capital raised through a conversion
and reaching for a return on equity, have vigorously competed for loans
and liberalized underwriting standards which led to loan losses that in
many instances depleted more capital than was raised through
conversion. Because of this potential, the FDIC feels the need to know
at an early date the institution's business plan for post-conversion
operation, growth and investment of any newly injected capital.
IV. Statement of Policy
Proposed Statement of Policy on Mutual To Stock Conversions By State
Chartered Banks
State chartered mutual savings banks converting to capital stock
ownership should afford adequate protection to the interests of long-
standing accountholders/members in the current equity and perceived
future value of the institution against insiders and opportunistic
depositors. Such protection should include: (1) Correctly pricing the
shares, (2) Equitably apportioning the stock subscription rights, and
(3) Adequately and timely disclosing all relevant and pertinent
information needed to make an informed investment decision.
A thorough independent appraisal by a qualified appraiser is
appropriate in order to establish and justify a fair offering price for
the shares of stock in the converted institution. The appraisal should
include consideration of earnings projections, future prospects for a
rate of return including any new capital, other recent stock offerings
and conversion transactions, and the historic and current relationship
of market price to book value and price/earnings ratio for nearby and
similar sized institutions.
Accountholders/members who have supported the mutual savings bank
over some reasonable period should be given considerable deference in
the apportionment of stock subscription rights. Management and
directors who are accountholders/members are entitled to the same
rights as non-insider accountholders/members. Any additional deference
accorded to insiders, including employment contracts and other benefits
in an acquisition or merger into another institution, should be only as
part of an adequate compensation program and thus be limited, justified
and documented. Apportioning that leads to individual windfall gains
should be avoided. Directors are reminded of their duty of loyalty to
the converting institution.
The holders of stock subscription rights should be adequately and
timely notified of their rights to buy. Offering the shares through a
firm that is independent of the converting institution's insiders and
their interests is one way to help insure that this takes place. Full
disclosure of all relevant information should be made. Accountholders/
members should be able to easily use funds on deposit to fund their
purchases. In addition, accountholders/members should be fully informed
of the risk inherent in purchasing stock. If stock sales are conducted
on the institution's premises, care should be exercised to make sure
accountholders/members clearly understand that stock purchases are not
deposits and are not insured by FDIC.
State chartered mutual savings banks that contemplate converting to
stock form are requested to notify the FDIC region in which the head
office is located at an early date and submit for comment all the
relevant terms and conditions, financial information and documents
inherent in the conversion, including a business plan for post-
conversion operation, growth and investment of any newly injected
capital. The FDIC will work closely with the state authority in
preparing any comments.
The FDIC review of transactions on a case-by-case basis will
include consideration of whether the directors and management of the
institution have fairly and effectively discharged their fiduciary
duties of due care and loyalty to the institution and its
accountholders/members.
Should the FDIC determine that the proposed conversion may raise
safety and soundness concerns, or otherwise subject the bank to
substantial legal liability, it may request additional information from
the bank and/or may seek appropriate modifications in the terms and
conditions of the proposal to alleviate those concerns. In situations
where abusive insider self-dealing, fraud or other violations are
suspected, stronger enforcement measures may be considered.
Depending on the terms and outcome of the transaction, the
conversion may require formal federal approval under the Bank Holding
Company Act or the Bank Merger Act, or appropriate notice under the
Change in Bank Control Act.
Conversions to stock form, involving undercapitalized institutions,
at the direction or control of a regulatory authority are sometimes
called ``supervisory conversions''. This FDIC statement applies equally
to such conversions.
By order of the Board of Directors. Dated at Washington, DC this
day of January, 1994.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-2235 Filed 1-31-94; 8:45 am]
BILLING CODE 6714-01-P
