FDIC and OTS Approve Private Equity Group's Acquisition of Failed Thrift, But Guidelines for Commercial Bank Investments Remain Unclear
By: Stanley V. Ragalevsky, Sean P. Mahoney
On May 20, 2009, the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”) approved the acquisition of a failed thrift institution, BankUnited, FSB, by a group of private equity investors. The FDIC, as receiver of the failed institution, accepted the private equity investors’ bid as the least cost resolution of the failure. In approving the transaction, the OTS permitted the transaction to be structured in a way that allowed the constituent members of the investor group to remain free of the regulatory restrictions that apply to those who control thrift institutions. The transaction thus offers important precedent as to how purchases of failed institutions may be accomplished by private equity firms. It also highlights significant uncertainty regarding private equity investments in commercial banks.
Historically, investors in depository institutions and their holding companies have sought to avoid investments that would be considered “controlling” under the federal banking laws. Control of a depository institution, either directly or indirectly, can lead to limitations on the activities of the controlling company, requirements to support financially the subsidiary depository institution, and also subject transactions between the depository institution and the affiliates of the controlling investor to certain restrictions. Moreover, investors deemed to have “control” of a depository institution generally must register as a bank, financial, or thrift holding company, with ongoing regulation and reporting requirements. These restrictions have discouraged investment in banks and holding companies at a time when these organizations desperately need to attract additional capital. (See also K&L Gates client alert, Non-Controlling Investments in Banking Institutions and Their Holding Companies).
In the BankUnited transaction, the investor group formed two holding companies (a top-tier and an intermediate-level entity) to acquire the bank’s shares, and the holding companies applied for regulatory approval as savings and loan holding companies, which was required to permit them to acquire control of the bank. At the same time, each of the constituent investors – none of whom had beneficial ownership of more than 25 percent of the voting securities of either the holding companies or the bank – disclaimed control of the bank by filing a Rebuttal of Control Agreement, along with a rebuttal of the presumption of control, with the OTS. Significantly, the OTS accepted the investors’ position that the investor group members were not acting in concert. By effectively determining that the act of forming an investment vehicle to acquire control of a bank was not concerted action, OTS appears to have eased the way for private equity club deals to acquire federal savings banks and state-chartered savings banks that elect to be regulated by the OTS.
In its press release announcing the resolution of the BankUnited matter, the FDIC indicated that it would publish guidance on eligibility for non-bank firms to bid on failed banks and the terms and conditions for such investments. Such guidance should prove valuable to private equity firms wishing to bid on failing banks.
Unfortunately, the structure approved in the BankUnited deal, while approved for a savings and loan holding company, may not translate to the commercial bank sector. Commercial bank holding companies are regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), which specifically declined to adopt guidance on simultaneous minority investments in depository institutions (i.e., “club” deals) in its September 22, 2008 guidance on non-controlling investments in banks. Thus, it remains unclear whether the Federal Reserve would accept, as OTS has, that investment firms could disclaim control when forming a common investment vehicle. This leaves significant uncertainty in the regulatory framework applicable to private equity investments in commercial banks. Also uncertain is the status of the so-called “silo” structure whereby individual investors in a private equity fund can invest in a bank thereby avoiding the private equity fund from taking control of the target bank. The Federal Reserve appears to disfavor the silo structure, and the Bank United order does not provide any guidance to how the OTS and FDIC view it.
Unless and until the Federal Reserve issues guidance on this issue or rules on a transaction similar to the BankUnited deal, it will remain unclear the extent to which groups of private equity firms will be able to take over and recapitalize failing commercial banks.
