FDIC Raises Further Obstacles to Private Equity Investments in Failed Institutions
By: Sean P. Mahoney
As 2010 begins, the FDIC has indicated that private equity investors will face increased challenges in making investments in failed institutions, as certain approaches to making such investments without becoming subject to onerous FDIC requirements will not be approved.
In August 2009, the FDIC issued its “Statement of Policy on Qualifications for Failed Bank Acquisitions” (the “Policy Statement,” issued August 26, 2009 and available here), which generally subjects private investors in failed institutions to, among other things, increased capital requirements at the bank level, limits on transactions with their affiliates, prohibitions on silo ownership structures, and mandatory holding periods. The Policy Statement contained exceptions to its applicability, and many investors have been structuring their transactions to take advantage of these exceptions.
On January 6, 2010, the FDIC released a set of Frequently Asked Questions (“FAQs”) on the Policy Statement (available here) that appear to make it more difficult to accomplish this.
One approach to avoiding the Policy Statement’s restrictions has been to structure an investment so that no stockholder, directly or indirectly, acquired more than five percent of the voting interests of the investment vehicle. This may no longer be viable, given the statement in the FAQs that the FDIC will presume that the investors in such a structure are acting in concert, subject to rebuttal according to eight specified factors, which are themselves very similar to those considered by the Office of Thrift Supervision and Federal Reserve in evaluating rebuttals of presumptions of concerted action. The FAQs indicate that the FDIC will take into account the Federal Reserve’s evaluation of concerted action for bank holding company acquisitions or the Office of Thrift Supervision’s evaluation for thrift holding company acquisitions. This may provide more certainty around such rebuttals because both the Federal Reserve and the Office of Thrift Supervision have established procedures for rebutting presumptions of concerted action.
Another exception to the Policy Statement is for joint venture transactions with existing bank or thrift holding companies to acquire failed institutions, in which the bank or thrift holding company retains a “strong majority interest.” The FAQs state that to come within this exception, new private investors in the aggregate must hold less than one-third of both the total equity and the voting equity of the venture, post-acquisition. Pre-acquisition investors would need to hold at least two-thirds of the total and voting equity interests in the company post-acquisition.
Notably, neither the Policy Statement nor the FAQs apply to acquisitions of open banks where failed bank acquisitions are not contemplated. Although such transactions do not benefit from FDIC loss sharing arrangements, in some cases open bank transactions may offer attractive investment opportunities to private equity investors.
