UNDER THE
"TARP"
TROUBLED ASSET RELIEF PROGRAM
Capital
Purchase Program -- Term Sheet for Non-Public Financial
Institutions
The U.S. Treasury Department on Monday
released a
term sheet ("Term Sheet") and FAQs for
non-public financial institutions (excluding S corporations and
mutual organizations, which Treasury is still considering) interested
in participating in the Capital Purchase Program
("CPP"). Qualifying financial institutions must file
the CPP
application with Treasury on or before December 8,
2008. In addition, institutions that have filed a bank or
thrift holding company application on or before December 8, 2008 may
apply to the CPP on a conditional basis by the December 8 deadline.
The terms
applicable to qualified non-public financial institutions
("Private QFIs") are similar to
those applicable to publicly-held financial institutions with the
following exceptions:
1.
Dividends and repurchases of shares, other than the preferred stock
issued by Private QFIs to Treasury (the
"Preferred"), are subject to more specific restrictions
beyond the three year restrictions generally applicable to both
Private QFIs and publicly-held financial
institutions. Most notably, (a) between the third and tenth
anniversary of Treasury's investment, common dividends may not be
increased by more than 3% per annum without Treasury's consent, (b)
repurchases of shares (other than repurchases of Preferred and
repurchases in connection with any benefit plan in the ordinary
course and consistent with past practices) require Treasury's consent
until the tenth anniversary of Treasury's investment, and (c) after
the tenth anniversary of Treasury's investment, a Private QFI is completely prohibited from paying common
dividends or repurchasing shares other than shares of the Preferred
and preferred shares issued upon the exercise of the warrants
described below (the "Warrant Preferred"). In each
case, none of these restrictions apply if the Preferred and Warrant
Preferred are redeemed in whole or transferred by Treasury to
third parties.
2. Along
with the Preferred, Treasury will receive warrants to purchase
preferred stock of a Private QFI having an
aggregate liquidation preference equal to 5% of the Preferred amount
on the date of Treasury's investment. The Term Sheet states
that Treasury intends to immediately exercise these warrants.
The Warrant Preferred has the same rights, preferences, privileges,
voting rights and other terms as the Preferred except that (a) the
Warrant Preferred will pay dividends at a rate of 9% per annum and
(b) the Warrant Preferred may not be redeemed until all the Preferred
has been redeemed.
The language
of the Term Sheet raises some interesting questions. First, how
will dividends on the Warrant Preferred be treated? The Term
Sheet states that the Warrant Preferred has the same rights and
preferences as the Preferred. However, the Term Sheet's "Restrictions
on Dividends" section does not specifically allow for the
payment of dividends on the Warrant Preferred and the restrictions
outlined in the Term Sheet apply "for as long as any Preferred
is outstanding." This raises a question as to what the
terms are with respect to dividends on the Warrant Preferred, both
while Preferred is outstanding and after the Preferred has been
redeemed but while Warrant Preferred remains outstanding. In
addition, the Term Sheet clearly states that Treasury's consent is
required for any repurchases of equity securities other than
"repurchases of the Preferred." Does this mean that
before a Private QFI can redeem the Warrant
Preferred, the Private QFI must obtain
Treasury's consent? Clearly, the Preferred must be redeemed
prior to the Warrant Preferred. But if a Private QFI has satisfied that obligation and wishes to
redeem the Warrant Preferred, does it have to seek Treasury's
approval first? These questions should certainly be clarified
by Treasury before a Private QFI agrees to
participate in the CPP.
As with
respect to publicly-held financial institutions, the Preferred and
Warrant Preferred are generally non-voting and fully transferable
(although Treasury and its transferees may not effect any transfer
which would require a Private QFI to become
subject to the reporting requirements of the Securities and Exchange
Act). Also, any Private QFI
participating in the CPP would become subject to the same executive
compensation requirements and restrictions applicable to
publicly-held participants.
The foregoing
review and analysis of the CPP as it relates to Private QFIs is not intended to be a complete description
of the CPP or the Term Sheet. Please see the Term Sheet, FAQs
and Treasury
website for more information.
How can Clark
Hill help?
The Troubled Asset Relief Program and the CPP raise a number of
diverse and complicated legal issues, including corporate,
securities, tax, regulatory and employee benefit questions. The
professionals at Clark Hill stand ready to use our knowledge to help
you evaluate these programs and to assist you going forward should you
elect to participate. This is new, uncharted territory for
banks and financial institutions. Clark Hill has the
Compass: We will provide the necessary experience and expertise
to help you benefit from the opportunities being provided under the
TARP.
With respect
to Private QFIs seeking to participate in
the CPP, Clark Hill will:
· Review
your current capital structure, organizational documents, shareholder
agreements and applicable state and Federal law relating to your
ability to issue preferred stock, and assist with any necessary
shareholder, board or governmental approvals and/or organizational
amendments to bring your capital structure within the parameters of
the CPP
· Review
your existing contractual arrangements to look for restrictions on
your ability to alter your capital structure and assist you in
obtaining any necessary consents
· Assist you
in obtaining all necessary information and clarifications from your
state and Federal regulators
· Review
existing benefit plans to ensure compliance with the executive
compensation provisions of the CPP and assist with any necessary
modifications
· Establish
a framework to ensure you are meeting all CPP
requirements
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. 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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