On January 7, 2010, the Federal Deposit Insurance Corporation (FDIC) issued frequently asked questions (FAQs) regarding its Final Statement of Policy on Qualifications for Failed Bank Acquisitions (Policy Statement). See FDIC Adopts Modified Guidelines for PE Investments in Failed Institutions: The Debate Continues 21st Century Money, Banking & Commerce Alert® (Aug. 28, 2009). The FAQs are available here. These FAQs follow, with some important modifications, the FAQs that the FDIC issued on December 11, 2009, and quickly withdrew. See FDIC Issues and Withdraws FAQs Regarding Its Private Equity Policy Statement, 21st Century Money, Banking & Commerce Alert® (Dec. 23, 2009).
The Policy Statement encourages private equity investors (PE Investors) to co-invest with established banking organizations, and the FAQs clarify when such co-investments are exempt from the financial and operational requirements imposed by the Policy Statement on bidders for the assets and liabilities of failed banks. The FAQs also address when the FDIC may determine that several PE Investors, each of which holds less than 5% of the voting shares of an organization, are engaging in concerted action and will have their ownership interests aggregated. The FDIC continues to exercise great caution when dealing with PE Investors in such circumstances.
On the first issue, co-investment with an established banking organization, the FAQs and the withdrawn version are essentially identical. Partnerships or joint ventures between PE Investors and such organizations are exempt from the Policy Statement when the organization holds a "strong majority interest" in the enterprise—i.e., when the PE Investors hold no more than one-third of the voting equity and total equity. Similarly, when PE Investors invest directly in an established banking organization, shareholders pre-dating that investment must retain at least two-thirds of the total equity of the organization in order to avoid the application of the Policy Statement.
Regarding the factors that may lead to a conclusion that PE Investors are engaging in concerted action, the FDIC has stated that it will make its determination based on a "facts and circumstances analysis" and will "take into account" any evaluation of the issue by the primary federal banking agency for the banking organization. This position clearly creates the possibility that the FDIC, by establishing eight factors in the FAQs that will be considered to determine whether "concerted action" has occurred for purposes of the Policy Statement, is creating standards that differ from the concept of "acting in concert," which has long been interpreted by the Federal Reserve Board, the Office of Thrift Supervision and the Office of the Comptroller of the Currency under federal banking laws. For example, the FDIC implies in the FAQs that some actions of the investors at the organizational stage of an investment are relevant to a finding of concerted action. This seems to conflict with the long-held principle of the other federal banking agencies that, generally, a determination of "acting in concert" focuses on actions taken to influence or control the operation or management of a banking organization once it is acquired. It also is not clear how such inconsistencies among the federal banking agencies will be resolved if, for example, the FDIC determined that two 6% shareholders were engaged in concerted action.
The FAQs also indicate concern by the FDIC that the problem that the Policy Statement was intended to address—transactions that bring together a "club" of PE Investors to acquire the assets and liabilities of a failed bank—may re-emerge when all the PE Investors hold less than 5% of the voting stock of a banking organization and, therefore, would otherwise be exempt from the Policy Statement. The FAQs state that the FDIC presumes that a group of such PE Investors is taking concerted action when it holds more than two-thirds of the total voting power of a banking organization. Again, this is not a presumption supported by traditional federal bank control rules.
Finally, the FDIC has confirmed how it will treat non-voting convertible securities held by a PE Investor that holds less than 5% of the voting stock. Non-voting equity interests that may be converted at the election of the holder or its affiliates are aggregated with the holder's voting stock, unless the converted shares must be immediately transferred from the holder's control. This provision does not include a requirement that such shares be distributed in a manner that would prevent a transfer of control, as is generally included under traditional federal bank control rules.
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