CHANGE IN BANK CONTROL— Policy Statement on Act of 1978

The Change in Bank Control Act of 1978, title VI of the Financial Institutions Regulatory and Interest Rate Control Act of 1978, gives the federal bank supervisory agencies the authority to disapprove changes in control of insured banks and bank holding companies.¹ The Federal Reserve Board is the responsible federal banking agency for changes in control of bank holding companies and state member banks, and the Federal Deposit Insurance Corporation and the Comptroller of the Currency are responsible for insured state nonmember and national banks, respectively.

The act requires any person (broadly defined) seeking to acquire control of any insured bank or bank holding company to provide 60 days’ prior written notice to the appropriate federal banking agency. This requirement applies to all covered transactions that will be consummated after March 9, 1979. The act specifically exempts transactions that are subject to section 3 of the Bank Holding Company Act of 1956 or section 18 of the Federal Deposit Insurance Act, since these transactions are covered by existing regulatory approval procedures. Accordingly, changes in control due to acquisitions by bank holding companies and changes in control of insured banks resulting from mergers, consolidations, or other similar transactions are not covered by the act.

The act describes the factors that the Federal Reserve and the other federal banking agencies are to consider in determining whether a transaction covered by the act should be disapproved. These factors include the financial condition, competence, experience, and integrity of the acquiring person (or persons acting in concert) and the effect of the transaction on competition. The Federal Reserve Board’s objectives in its administration of the act are to enhance and maintain public confidence in the banking system by preventing identifiable serious adverse effects resulting from anticompetitive combinations of interests, inadequate financial support, and unsuitable management in these institutions. The Board will review each notice to acquire control of a state member bank or bank holding company and will disapprove transactions that are likely to have serious harmful effects. It is the Board’s intention to administer the act in a manner that will minimize delays and government regulation of private-sector transactions.

If the Board disapproves a change in control, the Board will notify the proposed acquiring party in writing within three days after its decision. The notice of disapproval will contain a statement of the basis for disapproval. The act provides that the acquiring party may request a hearing by the Board in the event of a disapproval and provides a procedure for further review by the courts.

Forms for filing notices of proposed transactions covered by the act will be available from the Federal Reserve Banks. When a substantially complete notice is received by the Federal Reserve Bank, a letter of acknowledgement will be sent to the acquiring person indicating the date of receipt. The transaction may be completed 61 days or more after that date unless the acquiring person has been notified by the Board that the acquisition has been disapproved or that the 60-day period has been extended as provided for in the act. To avoid undue interference with normal business transactions, the Board may issue a notice of its intention not to disapprove a proposal, after consulting the relevant state banking authorities as the act requires.

Information to be contained in notices. The act requires a “person” proposing to acquire control of a bank holding company or state member bank to file a notice with the Federal Reserve Board containing personal and biographical information, detailed financial information, details of the proposed acquisition, information on any structural or managerial change contemplated for the institution, and other relevant information required by the Board. The elements of a notice, as prescribed by paragraph 6 of the act, are set forth in the appendix to this statement, and prescribed forms for filing notice will be available from the Federal Reserve Banks.

In order to be filed properly in accordance with the act, a notice must be substantially complete and responsive to every item specified in paragraph 6 of the act. When the acquiring party is an individual, or a group of individuals acting in concert, the requirement for five years’ personal financial data is deleted in favor of a current statement of assets and liabilities, a brief income summary, and a statement of any material changes since the date thereof, but the Board reserves the right to require up to five years of financial data from any acquiring person.

Transactions requiring submission of notice. The act defines “control” as the power—directly or indirectly—to vote 25 percent or more of any class of voting securities, or to direct the management or policies, of a bank holding company or insured bank. Therefore, any transaction, unless exempted by the act, that results in the acquiring party having voting control of 25 percent or more of any class of voting securities, or results in the power to direct the management or policies, of such an institution would trigger the notice requirement. However, any person who on March 9, 1979 controls a bank holding company or state member bank shall not be required to file a notice to maintain or increase control positions in the same institution. In addition, the Board’s regulations allow persons who on March 9, 1979 fall within a presumption described in the next paragraph to acquire additional shares of an institution without filing notice so long as they will not have voting control of 25 percent or more of the institution. In connection with transactions that would result in greater voting control, such persons may file the required notice or request that the Board make a determination that they already control the institution.

With respect to persons who have the power to vote less than 25 percent of an institution’s shares, the Board has established the following rebuttable presumptions for purposes of the notice requirements under the act:

 Other transactions resulting in a person’s control of less than 25 percent of a class of voting shares of a bank holding company or state member bank would not result in control for purposes of the act. In addition, customary one-time proxy solicitations and the receipt of pro rata stock dividends are not subject to the act’s notice requirements.

In some cases corporations, partnerships, certain trusts, associations, and similar organizations that are not already bank holding companies may be uncertain whether to proceed under this act or under the Bank Holding Company Act with respect to a particular acquisition. These organizations should comply with the notice requirements of this act if they are not required to secure prior Board approval under the Bank Holding Company Act. However, some transactions, particularly foreclosures by institutional lenders, fiduciary acquisitions by banks, and increases of majority holdings by bank holding companies, described in sections 2(a)(5)(D) and 3(a)(A) and (B) of the Bank Holding Company Act, do not require the Board’s prior approval, but they are considered subject to section 3 of the Bank Holding Company Act and do not require notices under this act.

Persons contemplating an acquisition that would result in a change in control of a bank holding company or state member bank should request appropriate forms and instructions from the Federal Reserve Bank in whose District the affected institution is located. If there is any doubt whether a proposed transaction requires a notice, the acquiring person should consult the Federal Reserve Bank for guidance. The act places the burden of providing notice on the prospective acquiring person and substantial civil penalties can be imposed for willful violations.

Certain control transactions exempt from prior-notice requirements. The Board’s regulations exempt the following transactions from the prior-notice requirements of the act:

 Under these regulations, a person acquiring control in the situations described above is required to furnish certain information to the Federal Reserve Bank promptly after the transaction, and the affected institution must report promptly any changes or replacement of its chief executive officer or of any director, in accordance with paragraph 12 of the act.

Under these regulations, acquisitions of control of foreign bank holding companies are also exempt from the prior-notice requirements of the act, but this exemption does not extend to the reports and information required under paragraphs 9, 10, and 12 of the act.

Disapproval of changes in control. The act sets forth various factors to be considered in the evaluation of a proposal. The Board is required to review the competitive impact of the transaction, the financial condition of the acquiring person, and the competence, experience, and integrity of that person and the proposed management of the institution. In assessing the financial condition of the acquiring person, the Board will weigh any debt-servicing requirements in light of the acquiring person’s overall financial strength, the institution’s earnings performance, asset condition, capital adequacy, future prospects, and the likelihood of an acquiring party making unreasonable demands on the resources of the institution.

Except as otherwise provided by regulation of the appropriate federal banking agency, a notice filed pursuant to this subsection shall contain the following information:

A. The identity, personal history, business background and experience of each person by whom or on whose behalf the acquisition is to be made, including his material business activities and affiliations during the past five years, and a description of any material pending legal or administrative proceedings in which he is a party and any criminal indictment or conviction of such person by a State or Federal court.

B. A statement of the assets and liabilities of each person by whom or on whose behalf the acquisition is to be made, as of the end of the fiscal year for each of the five fiscal years immediately preceding the date of the notice, together with related statements of income and source and application of funds for each of the fiscal years then concluded, all prepared in accordance with generally accepted accounting principles consistently applied, and an interim statement of the assets and liabilities for each such person, together with related statements of income and source and application of funds, as of a date not more than ninety days prior to the date of the filing of the notice.

C. The terms and conditions of the proposed acquisition and the manner in which the acquisition is to be made.

D. The identity, source, and amount of the funds or other consideration used or to be used in making the acquisition, and if any part of these funds or other consideration has been or is to be borrowed or otherwise obtained for the purpose of making the acquisition, a description of the transaction, the names of parties, and any arrangements, agreements or understandings with such persons.

E. Any plans or proposals which any acquiring party making the acquisition may have to liquidate the bank, to sell its assets or merge it with any company or to make any other major change in its business or corporate structure or management.

F. The identification of any person, employed, retained, or to be compensated by the acquiring party, or by any person on his behalf, to make solicitations or recommendations to stockholders for the purpose of assisting in the acquisition, and a brief description of the terms of such employment, retainer, or arrangement for compensation.

G. Copies of all invitations or tenders or advertisements making a tender offer to stockholders for purchase of their stock to be used in connection with the proposed acquisition.

H. Any additional relevant information in such form as the appropriate Federal banking agency may require by regulation or by specific request in connection with any particular notice.