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Banking and
Financial Institutions Law Update November 12, 2008
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Team Members
William G. Asimakis,
Jr.
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UNDER THE
"TARP"
TROUBLED ASSET RELIEF PROGRAM
CPP PARTICIPATION AND
EXECUTIVE COMPENSATION
Are the Rules Really the
Rules?
The U.S. Treasury Department's Capital
Purchase Program ("CPP") mandates adherence to specific
provisions with respect to executive compensation and corporate
governance which are applicable so long as Treasury holds an equity
or debt position in a financial institution acquired under the
CPP. Treasury has issued executive
compensation guidelines (the "Guidelines")
providing guidance on the executive compensation requirements
applicable to CPP participants. (Click
here for an analysis of the current guidelines.)
However, an important discussion is currently taking place among
bankers regarding the ability of the Federal government to change the
rules in the middle of the game with respect to institutions
participating in the CPP.
The debate
concerns the interpretation of two specific provisions of the Securities
Purchase Agreement (the "SPA") which any
financial institution is required to execute before it may
participate in the CPP. Section 4.10 of the SPA states in
relevant part:
"The
Company shall take all necessary action to ensure that its Benefit
Plans with respect to its Senior Executive Officers comply in all
respects with Section 111(b) of the EESA as implemented by any guidance or
regulation thereunder that has been issued
and is in effect as of the Closing Date." [emphasis
added]
However,
Section 5.3 of the SPA provides in relevant part that the Treasury
"may unilaterally amend any provision of this Agreement to the extent required to comply with any
changes after the Signing Date in applicable federal statutes." [emphasis
added]
The concern
that has been raised is that Congress could amend the Emergency
Economic Stabilization Act to make the executive compensation
provisions (or, for that matter, any other provisions) stricter than
what the law and guidelines now require, and a participating
financial institution would be forced to comply. The concern of
bankers was brought to Treasury Secretary Henry Paulson's attention
last week through a
letter to Paulson from the Executive Director of the
American Association of Bank Directors.
The bankers'
concerns were further expressed at the American Bankers Association
conference being held this week in San Francisco. A
Bloomberg.com report states that almost half of the
bankers participating in a survey at the conference (49%) said they
would not apply for the CPP, many citing concerns about the ability
of the Federal government to change the terms of their contracts
after they have agreed to participate. 31% of respondents said
they would participate in the CPP and 20% were undecided.
According to the report, about 1,700 people, most of them community
bankers, attended the conference.
Clark Hill
will strive to keep you consistently updated and informed about the
Troubled Asset Relief Program and the government's evolving response
to the turmoil in our capital markets (including any changes to the
SPA as a result of the discussions referred to in this newsletter).
Click
here to view our previous newsletters. Please
contact one of our Clark Hill banking and financial institutions team
members should you have any questions about TARP or the CPP.
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To find out
more about Clark Hill and our Banking and Financial Institutions
Law Group, visit clarkhill.com
or call 800.949.3124
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