On November 17, 2008, the U.S. Treasury Department (“Treasury”) announced its Capital Purchase Program (CPP) for privately held financial institutions. The application deadline is December 8, 2008. The application can be found on the Treasury website at http://www.ustreas.gov/initiatives/eesa/docs/application-guidelines.pdf. The information below is a summary of the primary provisions of the Term Sheet issued by the Treasury.
Eligible Institutions
Qualifying Financial Institutions include:
· top tier bank holding companies or savings and loan companies that are not publicly traded;
· banks or savings associations organized in a stock form that are neither publicly traded not controlled by a holding company;
· banks or savings associations that are not publicly traded and is controlled by a savings and loan holding company that is not publicly traded and does not engage solely or predominantly in activities that are permitted for financial holding companies. (Please note that S-corporations and mutual organizations are not eligible for CPP at this time.)
Amount of Capital an Institution May Obtain
An eligible institution may issue an amount of preferred shares of stock between one percent and three percent of risk-weighted assets, up to a maximum amount of $25 billion.
Preferred Stock
· Each preferred share will have a liquidation preference of $1,000 per share (depending on the institution’s available authorized shares in which case the Treasury may agree to purchase the shares at a higher liquidation preference per share).
· Preferred stock will be senior to common stock and equal to existing preferred shares (unless the preferred shares, by their terms, rank junior to any existing preferred shares).
· The preferred shares shall be non-voting (other than class voting rights affecting the rights of preferred stocks or the issuance of shares ranking senior to the preferred shares).
Dividends
· Preferred shares will pay quarterly cumulative dividends at a rate of five percent per annum until the fifth anniversary of the date of the investment and at nine percent per annum thereafter. (Please note that dividends will be non-cumulative for preferred shares issued by banks which are not subsidiaries of holding companies.)
· If dividends are not paid in full for six dividend periods (whether or not the periods are consecutive) the holder of the preferred shares will have the right to elect two directors until (1) in the case of cumulative preferred, all prior dividend periods are paid; or (ii) in the case for non-cumulative preferred, four consecutive dividend periods have been paid)
Redemption
· Preferred shares may not be redeemed until three years have passed from the date of the investment. After the third anniversary, the preferred shares may be redeemed at the option of the institution in whole or in part at any time.
· All redemptions must be at 100 percent of the issue price plus (1) any accrued and unpaid dividends (in the case of cumulative preferred shares) or (ii) accrued and unpaid dividends for the then current dividend period (in the case of non-cumulative preferred).
· An institution may redeem preferred shares prior to the third anniversary of the investment if the institution uses the proceeds of sale of Tier 1 qualifying perpetual preferred stock or common stock for cash (Qualified Entity Offering). However, the aggregate gross proceeds must amount to 25 percent or more of the issue price of the preferred.
Restrictions on Dividends
· For the period in which any preferred shares are outstanding, no dividends may be declared or paid on junior preferred shares, common shares or equal ranking preferred shares (other than dividends on a pro rata basis with the preferred shares) unless all dividends have been paid in full on the preferred shares.
· An institution may not repurchase or redeem any common, junior ranked preferred or equally ranked shares unless all unpaid dividends are first paid in full on the preferred shares.
· Until the third anniversary of the date of the investment, an institution must obtain the consent of the Treasury to increase common dividends. After the third anniversary and prior to the tenth anniversary, an institution must obtain the consent of the Treasury for an increase in aggregate common dividends per share greater than three percent per annum (provided that no increase in common dividends may be made as a result of any dividends paid on common shares, any stock split or similar transaction). [Please note: the restrictions described in this paragraph are no longer applicable if preferred shares and warrant preferred are redeemed in whole or if the Treasury transfers all of the preferred shares and warrants to third parties.
· Prior to the 10th anniversary of the investment, repurchases require the consent of the Treasury (there are some exceptions). After the 10th anniversary of the investment, the preferred shares must be redeemed in whole before any dividends on common shares may be paid or before any common or other preferred shares can be repurchased.
Executive Compensation
· As a condition of closing an investment by the Treasury, an institution must agree to certain restrictions on executive compensation for the entire period the Treasury holds any equity or debt securities in the institution.
· Like the CPP for publicly traded institutions, the executive compensation rules apply to the CEO, the CFO and the three other highest paid senior executives of the institution.
· The Treasury has not yet issued specific guidance regarding private institutions, however the Treasury has issued guidelines on executive compensation for publicly held institutions and there will likely be similar restrictions for privately held institutions such as:
o A review, within 90 days of investment, of senior executive compensation agreements to ensure the arrangements do not encourage officers to take unnecessary and excessive risks that threaten the institutions value. Thereafter, the compensation committee must meet at least annually with senior risk officers to discuss and review the relationship between the institutions risk management policies and the incentive compensation arrangements. Finally, the compensation committee must certify that it completed the reviews.
o CPP imposes a clawback requirement on any bonus and incentive compensation plan paid to a senior executive officer based on materially inaccurate financial statements.
Related Party Transactions
· For as long as the Treasury holds any equity securities of the institution, the institution and its subsidiaries must not enter into transactions with related persons unless such transactions (1) are on terms no less favorable to the institution and its subsidiaries than could be obtained from an unaffiliated third party, and, (ii) have been approved by the audit committee or comparable body of independent directors of the institution.
Conclusion
This advisory summarizes the key provisions of the CPP term sheet applicable to privately held institutions. If you have any questions regarding these terms and the December 8, 2008 deadline, please do not hesitate to contact James Ryan at jryan@cullenanddykman.com or Cynthia Augello at caugello@cullenanddykman.com.
