On January 30, 2020, the Board of Governors of the Federal Reserve System adopted a final rule to revise the Board’s regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act (the “BHC Act”)*. The final rule expands the number of presumptions for use in such determinations, clarifying and somewhat relaxing the definition of control.
Under the BHC Act, a company has control over another company if the first company (i) directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25% or more of any class of voting securities of the other company; (ii) controls in any manner the election of a majority of the directors or trustees of the other company; or (iii) directly or indirectly exercises a controlling influence over the management or policies of the other company. While the first two prongs of the definition of control create bright line tests, the third requires a facts and circumstances determination and has led to uncertainty.
This relaxation is good for banking organizations making investments in other companies and good for companies and private equity firms seeking to invest in banking organizations because no firm may lawfully acquire “control” of a banking organization without prior Board approval, and any acquisition of such “control” would subject to the acquirer to Board regulation and supervisory oversight, which includes examinations, regular financial reporting, capital and liquidity requirements, source of strength obligations, activities restrictions, and restrictions on affiliate transactions.
However, the relaxed rules may create risk for banking organizations worried about the threat of a takeover or challenges from activist investors. Banking organizations should review and consider revising the change in control protection triggers in their stock incentive plans, employment and change in control agreements, and other compensation arrangements.
* The same definition applies for purposes of the Home Owners’ Loan Act
-Mike Melbinger, CompensationStandards.com February 18, 2020
