Federal Banking Law

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FEDERAL BANKING LAWCONSIDERATIONS IN UNFRIENDLY

TAKEOVERS OF DEPOSITORY

INSTITUTIONS

MICHAEL S. HELFER*

RUSSELL J. BRUEMMER**

TABLE OF CONTENTS

Introduction .................................................... 310

I. Overview of the Regulatory Scheme ....................... 311

A. Commercial Banks .................................... 312

B. Thrift Institutions ..................................... 313

II. Unfriendly Takeovers of Commercial Banks ...............313

A. Federal Statutes Governing Acquisitions of

Commercial Banks .................................... 313

1. The Bank Holding Company Act ................. 313

2. The Bank Merger Act ............................. 316

3. The Change in Bank Control Act ................. 317

B. Identifying the Would-Be Acquirors .................. 319

1. Domestic bank holding companies ................. 319

2. Companies other than bank holding companies ... 320

3. Foreign companies ................................ 322

4. Individuals and groups that are not companies .... 323

C. Issues That May Arise in Unfriendly Attempts to Take

Over a Commercial Bank or Bank Holding Company 324

1. CBCA or BHCA .................................. 324

2. Divestitures required to cure antitrust concerns .... 327

3. Financial and managerial standards ............... 329

4. Nonvoting equity agreements ...................... 330

III. Takeovers of Thrift Institutions...........................

332

* Wilmer, Cutler & Pickering, Washington, D.C. Member, District of Columbia Bar. B.A.,1967, Claremont Men's College; J.D., 1970, Harvard University.

** Wilmer, Cutler & Pickering, Washington, D.C. Member, State Bar of Minnesota and

District of Columbia Bar. B.A., 1974, Luther College; J.D., 1977, University of Michigan.

309



310 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309

A. Federal Statutes Governing Acquisitions of Thrift

Institutions ........................................... 335

1. The National Housing Act ........................ 335

2. The Home Owners' Loan Act ..................... 3373. The Change in Savings and Loan Control Act .... 338

B. Identifying the Would-Be Acquirors .................. 339

1. Savings and loan holding companies .............. 339

2. Companies that are not savings and loan holding

com panies ......................................... 340

3. Foreign companies ................................ 341

4. Savings and loan associations ...................... 341

5. Individuals and groups that are not companies .... 342C. Issues That May Arise in Unfriendly Takeover

A ttempts ............................................. 343

1. Unfriendly acquisitions by merger ................. 343

2. Sale of control conversions ........................ 345

3. Cross-industry acquisitions ........................ 347

IV. Critical Analysis of the Regulatory Scheme ................ 350

C onclusion ...................................................... 353

INTRODUCTION

Unfriendly takeover attempts' have become a common part of the

corporate landscape during the last ten years. Until recently, however,

depository institutions2 seemed virtually immune from hostile takeovers.

This immunity stemmed, at least in part, from the acquiror's fear of

being unable to clear the regulatory hurdles necessary to acquire "con-

trol" of a depository institution.

The acquisition of control over federally insured depository institu-tions3 requires the prior approval of one or more federal regulatory

agencies. 4 The approval process was intended to protect the safety and

soundness of insured depository institutions and to assure compliance

1. Unfriendly corporate takeovers, for the purposes of this Article, are tender or exchange

offers or merger proposals that are not endorsed by the target corporation's management.

2. Depository institutions, for the purposes of this Article, include commercial banks, savings

banks, savings and loan associations, and their holding companies.

3. The Federal Deposit Insurance Corporation (FDIC) insures the deposits of national andstate-chartered banks, savings banks, and mutual savings banks, regardless of their membership in

the Federal Reserve System. St 12 U.S.C. §§ 1811-1815 (1982). The Federal Savings and LoanInsurance Corporation (FSLIC) insures the accounts of all federal savings and loan associations and

federal savings banks not insured by the FDIC. The FSLIC also may insure the accounts of state-

chartered building and loan, savings and loan, and homestead associations and cooperative banks.

See 12 U.S.C. §§ 1724

-17 3

0g (1982).

4. Some acquisitions require affirmative approval, while others require notice to the regula-

tory agency and no disapproval before the running of a statutory time period. See izhfa notes 27-59

& 123-49 and accompanying text.




regulatory agencies must review a proposed acquisition.' 0 In any acqui-

sition the acquiring company would prefer to structure its takeover

strategy in a manner that minimizes regulatory delay. This goal is even

more important during a hostile takeover, because delay will give the

target more time to thwart the bidder's efforts to take control. Con-

versely, the target would find it advantageous to force the bidder to pur-

sue a regulatory route that increases the scope of required review or the

time frame within which that review is conducted."

A. CommercialBanks

The Comptroller of the Currency (Comptroller) reviews acquisitions ofnational banks under the Bank Merger Act (BMA)1 2 or the Change in

Bank Control Act (CBCA).13 Under the Bank Holding Company Act

(BHCA), the Board of Governors of the Federal Reserve System (Fed-

eral Reserve Board or Board) reviews acquisitions of bank holding com-

panies and acquisitions of commercial banks by companies that will

become bank holding companies as a result of the proposed transac-

tion. 14 Under the CBCA, 15 the Federal Reserve Board also reviews ac-

quisitions of bank holding companies and of state banks thatare

members of the Federal Reserve System by entities that are not "compa-

nies."'16 The Federal Deposit Insurance Corporation (FDIC) reviews ac-

quisitions of federally insured, state-chartered commercial banks that

are not members of the Federal Reserve system under the CBCA17 or

BMA.18

10. If the target is a state-chartered bank, or a bank holding company with state-chartered

bank subsidiaries, the acquiring company must also comply with the applicable state notice or prior

approval statutes in effect in the target's state of incorporation. See Whitney Nat'l Bank v. Bank ofNew Orleans & Trust Co., 379 U.S. 411, 424-25 (1965) (Federal Reserve Board cannot approve

acquisitions in violation of state law). The state law requirements are beyond the scope of this

Article. Nonetheless, they can be a significant hurdle to a successful acquisition. Where the target

is publicly held, the federal securities laws will also be applicable to depository institution takeovers,

but these laws are not discussed in this Article. They generally are enforced by bank or thrift

regulators for takeovers of commercial banks or savings and loan associations, and by the Securities

and Exchange Commission (SEC) for bank holding companies or savings and loan holding compa-

nies. See 15 U.S.C. §§ 77-78 (1982).

11 . As a matter ofpublic policy, Congress and the federal and state agencies should take steps

to eliminate such opportunities for procedural delays based on form in order to avoid inconsisten-

cies in the treatment of substantially similar transactions. See nihaotes 209-10 and accompanying

text (discussing various methods of eliminating inconsistencies).12. 12 U.S.C. § 1828 (1982) (§ 1828(c)(2) grants authority to review).

13. 12 U.S.C. § 1817 (1982) (§ 1817(j) grants power to review).

14. 12 U.S.C. §§ 1841-1850 (1982) (§ 1842(a) authorizes review).

15. 12 U.S.C. § 1817(j)(1) (1982).

16. A "company" is "any corporation, partnership, business trust, association, or similar or-

ganization . See 12 U.S.C. § 1841(b) (1982).

17. Id

18. 12 U.S.C. § 1828(c) (1982).



1984] TAKEOVERS OF DEPOSITORY INSTITUTIONS

B. Thrift Institutions

The regulatory scheme applicable to acquisitions of savings and loan

associations and other thrift institutions is less complicated than that

applicable to takeovers of commercial banks, primarily because the Fed-

eral Home Loan Bank Board (FHLBB) and the Federal Savings and

Loan Insurance Corporation (FSLIC), the two federal regulators of

thrift institutions, are affiliated.' 9 The Home Owners' Loan Act

(HOLA)2° governs mergers and consolidations of two or more savings

and loan associations.2 1 The FHLBB reviews combinations in which the

surviving institution is federally chartered. 22 The FSLIC reviews merg-

ers and consolidations that result in state-chartered entities,2 3 acquisi-

tions of stock by savings and loan holding companies or other companies

subject to the provisions of the National Housing Act (NHA),24 and,

pursuant to the Change in Savings and Loan Control Act (CSLCA),2 5

purchases of stock of insured thrift institutions by entities that are not

companies.26

II. UNFRIENDLY TAKEOVERS OF COMMERCIAL BANKS

A. FederalStatutes Governing Acquisitions of CommercialBanks

I. The Bank Holding Company Act

Section 3 of the BHCA requires the approval of the Federal Reserve

Board before a "company" 27 becomes a "bank holding company, '"28 or

before an existing bank holding company acquires more than five per-

cent of any class of voting securities in another "bank" 29 or bank hold-

19. The FSLIC is under the direction of the FHLBB, and operates under bylaws, rules, andregulations prescribed by the FHLBB. See 12 U.S.C. § 1725(a) (1982).

20. 12 U.S.C. §§ 1461-1468 (1982).

21. Id § 1464.

22. Ste 12 C.F.R. § 546.2(b) (1983) (merger effective only when approved by FHLBB).

23. Id § 563.22(a) (FSLIC must approve merger or consolidation with another institution).

24. 12 U.S.C, § 1730a(e) (1982).25. 12 U.S.C. § 1730(l)(6), (q) (1982).

26. Id § 173

0(q).

27. For the definition of the term "company," see supra note 16.

28. A "bank holding company" is "any company which has control over any bank or over

any company that is or becomes a bank holding company . BHCA, 12 U.S.C. § 1841(a)(1)

(1982).

29. A "bank" is "any institution. . . which (1) accepts deposits that the depositor has a legal

right to withdraw on demand, and (2) engages in the business of making commercial loans." Id

§ 1841(c). Institutions chartered by the FHLBB or whose accounts are insured by the FSLIC are

specifically exempted from the definition of "bank" as a result of an amendment to the BHCA

added in 1982. Id The exclusion is consistent with the Federal Reserve Board decisions that have

held savings and loan associations are not banks for purposes of the BHCA. See, e.g., First Bancorp.,

68 Fed. Res. Bull. 253, 254 n.5 (1982) (savings and loan associations have only limited commercial

lending activities), rev'd, No. 82-1401 (10th Cir. Feb. 21 , 1984).

The two-part definition of "bank," which requires the receipt of demand deposits and the mak-



THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309

ing company.30 "Control" and "subsidiary" are the critical terms in the

BHCA's prior approval requirements. A company "controls" a bank or

another company if it owns twenty-five percent or more of any class of

the bank's or company's voting securities, controls the election of a ma-jority of the bank's or company's directors, or exercises a "controlling

influence" over the company as determined by the Federal Reserve

Board.31 Similarly, a company will be deemed a "subsidiary" if another

company owns twenty-five percent of its voting shares, controls the elec-

tion of a majority of its directors, or exercises a "controlling influence"

over its management or policies.32 Ordinarily, it is easy to determine

whether one company owns twenty-five percent or more of the voting

stock of another.

33

The more difficult question lies in theFederal Re-

ing of commercial loans, provides the so-called "nonbank bank loophole" in the BHCA. See in/a

notes 71-72 and accompanying text (discussing nonbank bank acquisitions). In January 1984, the

Federal Reserve Board amended Regulation Y. See Bank Holding Companies and Change in Bank

Control; Revision of Regulation Y, 49 Fed. Reg. 794 (1984) (to be codified at 12 C.F.R. § 225.1-6,

.1 1-.14, .21-.25, .31-.32, .41-.43) [hereinafter cited as Revised Regulation YI. The Board specifically

amended its definitions contained in Regulation Y to narrow the nonbank loophole. "Deposits that

a depositor has a right to withdraw on demand" are defined as "any deposit with transactional

capability that, as a matter of practice, is payable on demand and that is withdrawable by check,

draft, negotiable order of withdrawal, or other similar instrument." Id at 818 (adopting 12 C.F.R.

§ 225.2(a)(1)(A)). "Commercial loans" are defined as "any loan other than a loan to an individual

for personal, family, household, or charitable purposes, and includes the purchase of retail install-

ment loans or commercial paper, certificates of deposit, bankers' acceptances, and similar money

market instruments, the extension of broker call loans, the sale of federal funds, and the deposit of

interest-bearing funds." d (adopting 12 C.F.R. § 225.2(a)(1)(B)). The Tenth Circuit's decision in

First Bancorporation, however, casts some doubt on the validity of the Board's definition of de-

mand deposits. See First Bancorp., No. 82-1401 (10th Cir. Feb. 21, 1984) (distinguishing NOW

accounts from demand deposit accounts).

30. See 12 U.S.C. § 1842(a)(3) (1982). The Federal Reserve Board deems the acquisition of an

interest in a bank holding company to be an indirect acquisition of an interest in the banks con-

trolled by the bank holding company. See, e.g., State St. Boston Corp., 67 Fed. Res. Bull. 862, 862

(1981) (acquiror of voting shares of bank holding company indirectly acquires interest in banking

subsidiaries).

The BHCA exempts the following transactions from the prior approval requirements: acquisition

of shares in good faith in a fiduciary capacity (subject to certain exceptions); purchase of shares in

the regular course of securing or collecting a debt previously contracted in good faith (subject to a

two-year divestiture requirement); or acquisition of additional shares in a bank in which the bank

holding company owned or controlled a majority of the voting shares prior to the acquisition. Set

12 U.S.C. § 1842(a) (1982).

31 . Id § 1841(a)(2).

32. Id § 1841(d). The definition of "subsidiary" refers to the "power. . .to exercise a control-

ling influence," id (emphasis added), while the definition of "control" refers to a company that

"exercises a controlling influence." Id. § 1841(a)(2) (emphasis added). It is unlikely that any sub-

stantive difference was intended by, or results from, this difference in formulation. See P. HELLER,

HANDBOOK OF FEDERAL BANK HOLDING COMPANY LAW 28 n.77 (1976) (difference in definitions is

drafting oversight rather than intentional). Nevertheless, it would be desirable as a matter of house-

keeping for Congress to remove any possible confusion by amending the definition of "control" to

include the "power" to exercise a controlling influence over a bank or company.

33. Such determinations can, however, be problematic. For example, there may be two or

more classes of voting stock outstanding and one class may vote with the other on the election of

directors and on major corporate actions such as mergers. The Federal Reserve Board staff views

such voting arrangements as resulting in the treatment of both classes as a single class for purposes

of the BHCA. Thus, there are circumstances in which a company could own 25% of a class of

voting stock of a bank and still not control the bank under the definition of 12 U.S.C.




serve Board's determination of whether a company controls the election

of a majority of the Board of another company or exercises a "control-

ling influence" over it.34

A bank holding company or another company that seeks prior ap-

proval under the BHCA must file an application in compliance with the

procedural requirements of the BHCA35 and the Federal Reserve

Board's Regulation y.36 These requirements can be time-consuming.

Despite the BHCA's stated deadline of ninety-one days within which the

Federal Reserve Board must act, 37 it is not unusual fo r an approval to

take six months or more.38

§ 1841(a)(2)(A) (1982). The company might, of course, control the bank under another part of§ 1841 (a)(2).

34. A company need not be capable of directing every decision made by a bank or another

company in order to have a "controlling influence" over it. See Citizens Inc., 66 Fed. Res. Bull. 907,908 (1982) (existence of controlling influence is question of fact based on past and prospective

relationships, and subtle pressures and influences); see also Patagonia Corp., 63 Fed. Res. Bull. 288,292 (1977) (exercising controlling influence inferred from structure of situation, though actual evi-dence not apparent).

35. 12 U.S.C. § 1842(b) (1982).

36. See Revised Regulation Y,supra note 29, at 822 (adopting 12 C.F.R. § 225.14). The appli-

cation is filed with the applicant's respective Federal Reserve Bank. Id The applicant must pub-

lish a notice of the proposed acquisition and of the public's opportunity to comment on the

acquisition in a newspaper of general circulation in the community in which the main office of the

bank to be acquired is located. 12 C.F.R. § 262.3 (1983). The staff of the Federal Reserve Bank

reviews the application to determine whether it contains the necessary information. Revised Regu-

lation Y, supra note 29 , at 822 (adopting 12 C.F.R. § 225.14(c)).

The application is also forwarded to other agencies for review, although they are not required to

comment on it. Se e 12 U.S.C. § 1842(b) (1982); 12 C.F.R. § 262.3(e) (1983). The Comptroller of the

Currency reviews the application if the acquired bank is a national or District of Columbia bank.

12 U.S.C. § 1842(b) (1982). A state supervisory agency reviews it if the bank is a state bank. Id

The Department of Justice also reviews the application for potential antitrust problems. Id

§ 1842(c). The Federal Reserve Board must hold a formal hearing on an application if the Comp-

troller or the state supervisory authority disapproves the application in writing. Id § 1842(b). The

Board rarely grants requests for formal hearings in other circumstances, although it presumably

will do so if material factual issues are in dispute. See generally Farmers & Merchants Bank v. Board

of Governors, 567 F.2d 1082, 1089 (D.C. Cir. 1977) (application may be approved after informal

proceedings); Northwest Bancorp. v. Board of Governors, 303 F.2d 832, 843-44 (8th Cir. 1962)

(hearing not required unless Comptroller disapproves in writing).

37. If the Board fails to act on an application "within the ninety-one-day period which begins

on the date of submission to the Board of the complete record on that application," the application

is deemed to have been approved. 12 U.S.C. § 1842(b) (1982).

38. There has been considerable dispute as to when the 91-day period begins to run and

whether a new 91-day period begins when the applicant submits new information. For a discussion

of the decisions that have considered this issue, see Republic ofTex. Corp. v. Board of Governors,

649 F.2d 1026, 1034-43 (5th Cir. 1981).

The Federal Reserve Board's recent revision of Regulation Y provides in part:

For the purpose of computing the 91-day period, the record shall be regarded as complete

on the latest of:

(i) The date of receipt by the Board of an application that has been accepted for

processing by the Reserve Bank,

(ii) The last day provided in any notice for receipt of comments and hearing requests

on the application;

(iii) The date of receipt by the Board of the last relevant material regarding the appli-

cation that is needed for the Board's decision, if the material is received from a source

outside of the Federal Reserve System; or




The Federal Reserve Board reviews the application to determine

whether the acquisition violates the BHCA's antitrust, financial, and

managerial standards.39 The Federal Reserve Board must reject an ap-

plication that would create a monopoly, that would further an attemptto monopolize, or that would have other anticompetitive effects. If the

convenience and needs of the communities to be served advanced by the

transaction outweigh the anticompetitive effects of the acquisition, how-

ever, even a transaction that would have this effect can be approved.40

The Board also must consider "the financial and managerial resources

and the future prospects of the company or companies and the banks

concerned," '4 1 in particular the acquiror's resulting capital ratios, the

amount of debt the acquiror willincur, and the

prospectsof the com-

bined organization, in order to ensure that a holding company will serve

as a "source of strength" to its subsidiary banks.42

2. The Bank Merger Act

The provisions of the BMA apply to mergers, consolidations, and ac-

quisitions of assets and assumptions of liabilities43 of insured commercial

banks.44 The procedural requirements of the BMA are similar to those

imposed by the Federal Reserve Board under theBHCA.45 The

sub-stantive standards of the BMA, including its antitrust standards, are

identical to the BHCA standards.46

(iv) The date ofcompletion of any hearing or other proceeding [ordered by the Board].

Revised Regulation Y, supra note 29, at 822-23 (to be codified at 12 C.F.R. § 225.14(1)(2)).

39. 12 U.S.C. § 1842(c) (1982).

40. Id

41. Id The Federal Reserve Board may deny an application on the basis of adverse financial

or managerial factors even in the absence of anticompetitive effects. See Board of Governors v. First

Lincolnwood Corp., 439 U.S. 234, 243-48 (1978). It may not, however, deny an application merely

because the price paid to some shareholders of the bank or bank holding company is less than the

price paid to other shareholders. See Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749,

753 (10th Cir. 1973).

42. See Revised Regulation Y, supra note 38, at 822. The Federal Reserve Board may not use

the managerial resources test to establish a "good moral character requirement" for applicants

under the BHCA. See Security Bancorp. v. Board of Governors, 655 F.2d 164, 168 (9th Cir. 1980),

vacated on other grounds, 454 U.S. 1118 (1981). Moreover, the Federal Reserve Board cannot use

matters "unrelated to the operation of any bank" to deny an application on the basis that manage-

rial resources are unfavorable. Id at 166.

43. These transactions will be referred to as "mergers" in this Article.

44. 12 U.S.C. § 1828(c) (1982).

45. An application to merge an insured bank into a national bank is filed with the Comptrol-

ler. An application to merge an insured bank into a state member bank is filed with the FederalReserve Board, and an application to merge an insured bank into a state nonmember bank or an

uninsured bank or other institution is filed with the FDIC. Id Notice of the proposed merger must

be published for 30 days in a newspaper ofgeneral circulation in the community in which the main

offices of the banks involved are located unless an emergency exists. Id § 1828(c)(3). The agency

reviewing the application must request reports on competitive factors from the Department ofJus-

tice and the other two banking agencies "in the interests of uniform standards." Id. 1828(c)(4).

The reports must be submitted within 30 days of the date on which they are requested. Id

46 . Compare 12 U.S.C. § 1842(c) (1982) (BHCA standards) with 12 U.S.C. § 1828(c)(5) (1982)



19841 TAKEOVERS OF DEPOSITORY INSTITUTIONS

The BMA has been relatively insignificant in most hostile bank take-

overs for several reasons. First, the holding company structure domi-

nates the commercial banking industry, especially for midsize and large

banking organizations. Second, although the BMA often is used bybank holding company subsidiaries to complete friendly acquisitions,

4 7

completion of an unfriendly takeover requires acquisition of the shares

of another bank holding company or bank. Such a transaction is subject

to the BHCA, even if a merger with the acquired entity is planned.

Third, the BMA's procedural requirements provide another reason

for preference of the BHCA procedure for unfriendly takeovers. The

Comptroller requires that a merger application under the BMA include

a copy of an executed merger agreement and a certificate from the tar-get bank's corporate secretary that details the resolutions adopted by the

target's board of directors.48 The Federal Reserve Board's application

to acquire shares pursuant to the BHCA, in contrast, does not require

any documents executed by the target.49 In unfriendly acquisitions, it is

obviously impossible to comply with regulations that require the target

bank's cooperation. 50

3. The Change in Bank Control Act

The CBCA covers virtually every acquisition of "control" that is not

subject to the BHCA or the BMA.51 It requires any "person" proposing

to acquire "control" of an "insured bank" to give sixty days prior writ-

(BMA standards). The reviewing agency must immediately notify the Department ofJustice whena transaction is approved. Id. § 1828(c)(6). Applicants whose transactions are approved must wait30 days before consummating the transaction, except in emergencies. Id § 1828(c)(3)(C). The

waiting period is, in effect, a statute of limitations for antitrust violations, because the transaction

may no t subsequently be "attacked in any judicial proceeding on the ground that it alone and of

itself constituted a violation of any antitrust laws" other than the antimonopoly provisions of the

Sherman Act, 15 U.S.C. § 2 (1982), or of the antitrust laws for actions that occur after the consum-

mation of the transaction. 12 U.S.C. § 1828(c)(7)(C) (1982). The waiting period and bar against

subsequent suit provision is also contained in the BHCA. Id § 1849(b).

47. The BMA can be used to structure an acquisition to fall within the jurisdiction of the

Comptroller or the FDIC, and not the Federal Reserve Board. The parties to an acquisition should

examine the structure of a proposed acquisition because the agencies' application of the statutory

standards differs, although the statutes are similar.

48. See COMPTROLLER OF TH E CURRENCY, GENERAL INSTRUCTIONS AND PROCEDURES FO R

TH E PREPARATION OF AN APPLICATION FOR MERGER, CONSOLIDATION, OR PURCHASE OF ASSETS

AND ASSUMPTION OF LIABILITIES Form CC 7023-01, at 2, 7 (1983).

49. 12 U.S.C. § 1842(a) (1982).

50. The need for these barriers is questionable, because neither an executed agreement nor

the target's resolutions of approval are necessary to determine whether the statutory antitrust,

financial, and managerial standards are met. The legal staff of the FHLBB permits a procedure

that enables an acquiror to use the provisions applicable to mergers of savings and loan associa-tions, which are very similar to those of the BMA, in unfriendly acquisitions. Stt hnifa note 178 and

accompanying text. If the Comptroller made legal findings similar to those of the FHLBB legal

staff, the BMA could be used by banks or holding companies to effect unfriendly takeovers in the

same manner.51. See 12 U.S.C. § 1817(j)(8)(B) (1982) (transactions subject to BHCA or BMA not subject to

CBCA).




ten notice of the proposed acquisition to the "appropriate Federal bank-

ing agency."52 The CBCA defines "control" broadly,53 and regulations

adopted by the regulatory agencies have further expanded the defini-

tion. Each agency presumes that any person who acquires ten percent or

more of any class of voting securities of a bank holding company or a

state-member bank has control if the acquired institution has a class of

securities registered pursuant to the Securities Exchange Act of 1934,54

or if immediately after the acquisition no person will own a greater pro-

portion of the class of voting shares than the acquiring person.55 Any

proposed unfriendly takeover of a bank that is not governed by the

BHCA is almost certain to be subject to the provisions of the CBCA.

A notice filed with the appropriate bank regulatory agency that seeksprior approval fo r an acquisition subject to the CBCA must contain cer-

tain background information about the acquiring person. 56 The sixty-

day statutory period within which the agency must act does not begin to

run until this notice is deemed complete by the agency.

The acquiror may complete the transaction if within sixty days after

filing notice under the CBCA the agency has not issued a notice to dis-

approve the proposed acquisition or extended the time period for its

review.57

Within the review period, the agency may issue a notice stat-ing the agency's intent not to disapprove the proposed transaction,

which allows the acquiror to consummate the takeover, or a notice dis-

approving the proposed acquisition.58

The regulatory agency may disapprove any proposed acquisition

52. Id § 1817()(1). For the purposes of the CBCA the term "person" means "an individual

or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship,

unincorporated organization, or any other form of entity no t specifically listed herein." Id

§ 1817(j)(8)(A). The term "insured bank" includes any "bank holding company" as defined in theBHCA, and the "appropriate Federal banking agency" in the case of a bank holding company is

the Federal Reserve Board. Id § 1817)(1).53. The CBCA defines "control" as "the power, directly or indirectly, to direct the manage-

ment or policies of an insured bank or to vote 25 per centum or more of any class of voting securities

of an insured bank." Id § 1817(j)(8)(B).54. 15 U.S.C. §§ 78a-78kk (1982).

55. See 12 C.F.R. § 15.3 (1983) (Comptroller); Revised Regulation Y, supra note 29, at 830

(adopting 12 C.F.R. § 225.41(b)(2)) (Federal Reserve Board); 12 C.F.R. § 303.15(a) (1983) (FDIC).

The presumption is, at least in theory, rebuttable.

56. The required information includes: the identity, personal history, business background,

and experience of each acquiring person, including any pending legal or administrative proceedings

to which he is a party; financial statements for each acquiring person; the terms and conditions ofthe proposed acquisition; the source and amount of funds to be used in making the acquisition;

plans or proposals to liquidate the bank, merge it with another company, or make major changes inits business, corporate structure, or management; copies of all tender offers; and any additional

information required by the statute or the banking agencies. See 12 U.S.C. § 18170j)(6)(A)-(H)

(1982).57. The agency may extend the review period for up to 30 days only if it concludes that the

acquiror has not submitted all material information or ha s provided substantially inaccurate infor-

mation. Id § 1817(j)(1).

58. Id




under the CBCA if the proposed acquisition would violate the CBCA's

antitrust standards. In addition, approval of an acquisition may be de-

nied if the financial condition of any acquiror would jeopardize the in-

terests of the acquired bank or its depositors, or if the competence,experience, or integrity of an acquiror or proposed management person-

nel are such that it would not be in the interests of the depositors or the

public to allow that concern to control the bank. Finally, approval will

be withheld if an acquiring person fails or refuses to furnish information

required by the agency. 59

B. Identiying the Would-Be Acquirors

1. Domestic bank holding companies

The BHCA prohibits bank holding companies from acquiring more

than five percent of the outstanding voting shares of a bank or another

bank holding company without the prior approval of the Federal Re-

serve Board. Bank holding companies are in compliance with the

BHCA's provisions on nonbank activities by definition; they can acquire

control over other commercial banks, therefore, with minimal disrup-

tion to their other business activities. 6° Section 3(d) of the BHCA,6 1 the

Douglas Amendment, is a particularly important substantive require-

ment in considering unfriendly takeover proposals: it effectively prevents

the Federal Reserve Board from approving an application that would

result in acquiring control of a bank outside the state in which the ex-

isting bank holding company's operations are principally conducted.62

59. See id § 1817(j)(7). The CBCA establishes a different formula than the BHCA or BMA

for analyzing the applicant's financial and managerial resources. Under the BMA and the BHCA,

theappropriate agency is directed to "take into consideration the financial and managerial re-sources and future prospects" of the participants in the transaction. See 12 U.S.C. §§ 1828(c)(5),

1842(c) (1982). The Federal Reserve Board, on the basis of this language, requires a bank holding

company to serve as a "source of strength" to the banks it acquires. See, e.g., Citizens Bancorp, 61Fed. Res. Bull. 806 (1975); Northern States Fin. Corp., 58 Fed. Res. Bull. 827 (1972). The Supreme

Court has held that the agency may deny an application "solely on the grounds of financial ormanagerial unsoundness, regardless of whether that unsoundness would be caused or exacerbated

by the proposed transaction." Board of Governors v. First Lincolnwood Corp., 43 9 U.S. 234, 252

(1978). The CBCA, in contrast, permits the appropriate banking agency to deny an acquisition

only if the "financial condition of any acquiring person is such as might jeopardize the financial

stability of the bank or prejudice the interests of the depositors of the bank," or if the "competence,experience, or integrity of any acquiring person or of any proposed management personnel indi-

cates that it would no t be in the interest of the depositors of the bank, or in the interest of the public

to permit such person to control the bank." See 12 U.S.C. § 1817(j)(7)(C)-(D) (1982). If the agency

disapproves the proposed acquisition, the acquiror may request an agency hearing, and upon disap-

proval after the hearing, may appeal the decision in a federal court of appeals. Id § 1817(j)(4)-(5).60. See 12 U.S.C. § 1842(a) (1982); see nfra notes 68-72 and accompanying text.61. 12 U.S.C. § 1842(d) (1982).

62. Id The Douglas Amendment does not prohibit an acquisition that does not require Fed-eral Reserve Board approval, such as acquiring less than five percent of another bank's stock. It

applies, however, to acquisitions that require § 3 approval, including any acquisition of control

over a bank or bank holding company. See Letter from Theodore E. Allison, Secretary of Federal




Exceptions to the bar imposed by the Douglas Amendment are of

great practical importance. First, bank holding companies that had

multistate operations in 1956 are protected.63 Second, states may explic-

itly authorize out-of-state bank holding companies to acquire in-state

banks. 64 Some states have done this on a limited or reciprocal basis, and

many others are considering such provisions. 65 Third, the Garn-St

Germain Act provides a procedure for the approval of "extraordinary

acquisitions"-acquisitions of failing institutions in other states under

elaborate procedures set out in the statute.66

The Douglas Amendment ordinarily prevents out-of-state bank hold-

ing companies from becoming acquirors in unfriendly takeovers. A po-

tential target, however, should not be unduly comforted by thisimpediment; the Amendment also makes it more difficult to find a"white knight," and can lessen the number of bidders for a bank,

thereby possibly reducing the price the target's stockholders would

otherwise obtain in an unfriendly takeover situation.67

2. Companiesother than bank holding companies

Companies that are not bank holding companies face a different stat-

utory impediment, but one that is equally effective in deterring most

Reserve Board, to William C. Beaman, Clerk of the United States District Court for the District of

Wyoming, at 3 n.2 (Nov. 17, 1978).63. 12 U.S.C. § 1842(d) (1982).

64. Id The acquisition by the out-of-state bank holding company must be "specifically au-

thorized by the statute laws of the state in which such bank is located, by language to that effectand not merely by implication." Id

65. Al of July 1, 1983, at least one state allowed acquisitions of banks by out-of-state bank

holding companies without limitation. ALASKA STAT. § 06.05.235(e) (1978 & Supp. 1982). Two

states allowed nationwide interstate banking on a reciprocal basis. N.Y. BANKING LAW § 142-b

(McKinney 1982); Act ofMay 18, 1983, ch . 302, § 2, 1983 Me. Legis. Serv. 910, 911 (to be codifiedat Me. Laws § 10-1013.2). Three New England states allow reciprocal interstate banking on aregional basis. Act of June 8, 1983, Pub. Act No. 83-411, § 2, 1983 Conn. Legis. Serv. 947, 950

(West) (to be codified at CONN. GEN. STAT. § 36-416); MASS. GEN. LAWS ANN. ch. 167A, § 2 (West1977 &Supp. 1983); Act of May 17, 1983, ch. 201, § 1(c), 1983 R.I. Pub. Laws 1861 (to be codified

at R.I. GEN. LAWS § 19-30-2) (reciprocal with New England states until 1984, then reciprocal na-

tionwide). At least one state permits an out-of-state bank holding company to acquire a bank orbank holding company if the acquired institution is in danger of failing. Act of Apr. 25, 1983, ch .157, § 9, 1983 Wash. Legis. Serv. 1258, 1266 (West) (to be codified at WASH. REV. CODE

§ 30.04.230). Three states allow out-of-state bank holding companies to ow n or control "limited

purpose" banks, but restrict in some manner the bank's provision of full services. See DEL. CODE

ANN. tit. 5, § 803 (West Supp. 1982); Act of May 10, 1983, § 1, 1983 Md. Laws 143 (to be codifiedat MD. FIN. INST. CODE ANN. § 5-901); S.D. CODIFIED LAWS ANN. § 51-16-40 (1980). See generall,Interstate Banking BarriersBujfted by BA-Seafrst, 2 BANKING EXPAN. REP. (Law & Business, Inc.),

May 16, 1983, at 7 (discussing various state law provisions that affect interstate banking).

66. See 12 U.S.C. § 1823(0 (1982).67. A well-structured, friendly transaction entered into before the unfriendly tender offer

may, however, enhance the deterrent use of an agreement with an out-of-state bank holding com-pany. For a discussion of acquisitions of nonvoting equity interests by out-of-state bank holding

companies in friendly transactions, see in/a notes 109-14 and accompanying text. Because suchnonvoting equity agreements generally require the cooperation of the target, they do not lend

themselves to use by unfriendly acquirors.




unfriendly takeover attempts. The BHCA generally prohibits bank

holding companies from owning companies other than banks or compa-

nies that engage in activities closely related to banking.68 The restric-

tions on nonbanking activities are intended to separate the business ofbanking from most other commercial activities. 69 A company that be-

comes a bank holding company by acquiring control over a bank or an

existing bank holding company is subject to this prohibition.70 Because

of these restrictions, a company engaged in such nonbanking activities

may not acquire or retain control over a bank without divesting itself of

the unrelated business activities. The number of nonbank holding com-

panies able or willing to acquire commerical banks, therefore, is signifi-

cantly limited.Recently there has been a flurry of activity with respect to the acquisi-

tion or retention of "nonbank banks"7' by various types of financial in-

68. 12 U.S.C. § 1843(a) (1982). Among the exceptions to the general rule is an exemption for

any activity that the Federal Reserve Board determines to be "so closely related to banking or

managing or controlling banks as to be a proper incident thereto." Id § 1843(c)(8). The Federal

Reserve Board's regulations implementing this provision are contained in Revised Regulation Y,

supra note 29, at 826 (adopting 12 C.F.R. § 225.25).

69. The Federal Reserve Board has recently stated that separation of banking from nonbank-

ing activities was intended to eliminate potential conflicts of interest and concentration of resourcesinherent in the commingling of banking and commerce, to maintain banks as impartial providers of

credit, to avoid the anticompetitive effects that arise from close ties between the control and use of

credit, and to protect the banking system and the economy from the instability that could resultfrom bank participation in commerce. Se BankAmerica Corp., 69 Fed. Res. Bull. 105, 108, af'd sub

nom. Securities Indus. Ass'n v. Board of Governors, 716 F.2d 92 (2d Cir. 1983), cert. granted, 52

U.S L.W. 3544 (U.S. Jan. 23, 1984) (No. 83-614).

70. Section 4(a)(2) of the BHCA, 12 U.S.C. § 1843(a)(2) (1982), requires a company to divest

its impermissible nonbanking activities within two years from the date on which it becomes a bank

holding company. Id The Federal Reserve Board may extend that period for up to three one-year

periods, if the extension would not be detrimental to the public interest. Id

71, "Nonbank banks" are commercial banks that either do not accept deposits withdrawable

on demand, or do not make commercial loans. Cf 12 U.S.C. § 1841(c) (1982) (definition of

"bank"); supra note 29 and accompanying text. An acquiror ofa "nonbank bank" is not subject to

the BHCA's procedural requirements or its substantive provisions on nonbank activities because

these financial institutions are not "banks" for purposes of the BHCA.

In the past, the Federal Reserve Board has permitted commercial corporations to acquire a bank

on the condition that it divest the bank's commercial loan portfolio. More recently, the Federal

Reserve Board has opposed such acquisitions unconditionally. For example, in connection with its

opposition to the acquisition of a nonbank bank by a mutual fund underwriter and advisor, the

Federal Reserve Board asserted that a bank is engaged in making a commercial loan if it purchases

commercial paper, bankers acceptances, or certificates of deposit, extends broker call loans, sells

federal funds, deposits interest bearing funds, or engages in similar lending vehicles. See Letter fromWilliam W. Wiles, Secretary of Federal Reserve Board to William M. Isaac, Chairman of FDIC

(Dec. 10 , 1982) (commenting on Notice of Change in Bank Control filed by Dreyfus Corporation,

New York, N.Y., with respect to Lincoln State Bank, East Orange, N.J.). But see, e.g., Letter from

Margaret L. Egginton, Deputy to the Chairman of FDIC, to William W. Wiles, Secretary of Fed-eral Reserve Board (Dec. 29, 1982) (challenging Federal Reserve Board's definition of commercial

loan). The Federal Reserve Board's recent revision of Regulation Y also adopts definitions of "de-

mand deposit" and "commercial loan" that are designed to limit the use of nonbank banks to avoid

the requirements of the BHCA. See Revised Regulation Y, supra note 29 , at 818-19 (to be codifiedat 12 C.F.R. § 225.2(a)). Both the FIDA, supra note 8, and various "moratorium" bills introduced

in the 98th Congress, see, e.g., S. 1682, § 101, 98th Cong., 1st Sess., 129 CONG. REc. S 10,890-92




stitutions and other companies. None of these "nonbank" transactions,

however, appears to have been the result of an unfriendly takeover at-

tempt. From a business point of view, it is difficult to conceive of cir-

cumstances in which an industrial or commercial company wouldattempt the unfriendly acquisition of a commercial bank with the goal

of turning it into a nonbank bank. Among other problems, the acquiror

presumably would have to arrange for the target to divest itself of its

demand deposits or its commercial loan portfolio prior to , or simultane-

ously with, the acquisition, which would be very difficult without the

target's cooperation.72

3. Foreign companies

Foreign companies also can acquire control over U.S. commercial

banks or bank holding companies. As a practical matter, however, it

may take a foreign company longer to complete the Federal Reserve

Board's review and approval process. Nevertheless, the number of ac-

quisitions by such companies is growing, and further expressions of in-

terest, especially in certain attractive, high-growth banking markets, are

being reported.73

When a foreign company forms or acquires a bank holding company,

its activities within the United States are subject to the same rules as

domestic bank holding companies. Thus, a foreign company is subject to

geographic limits on its banking activities and substantive restrictions

on its nonbanking activities conducted within the United States. 74 A

foreign company that qualifies as a "foreign bank holding company"75

(daily ed . July 26, 1983), would redefine "bank" to eliminate use of the nonbank bank to avoid the

BHCA's requirements on nonbankingactivities.

72. The Federal Reserve Board, if it wished to accomodate an unfriendly takeover of a com-

mercial bank by a company that intended to convert it to a nonbank bank, could take a "no-

action" position if the divestiture were simultaneous with the unfriendly acquisition, as the Board

requires when there are divestitures for antitrust reasons. Even a simultaneous divestiture, how-

ever, is difficult. Thus, nonbank holding companies will not be desirable white knights for target

banks because of the divestiture requirement, unless the target is willing to restructure significantly

its banking activities in response to an unfriendly tender offer from another source.

73. See Interest Waxes in ForeignOwnership ofUS. Banks, 2 BANKING EXPAN. REP. (Law &Busi-

ness, Inc.), Nov. 7, 1983, at 2-6; J. Murphy, Acquisitions of Banks and Bank Holding Companies by

Individuals, Foreigners, and Nondepository Institutions 27 (Sept. 7, 1983) (unpublished seminar

material).

74. Foreign banks with branches or agency offices in the United States also are subject to

geographic restrictions on their banking activities and limitations on their nonbanking activities

conducted within the United States. See International Banking Act of 1978, 12 U.S.C. §§ 3103(a),

3106(c) (1982); 12 C.F.R. § 211.23(h) (1983). See generally Skigen & Fitzsimmons, The Impact of the

InternationalBanking Act of1978 on ForeignBanks and TheirDomesticandForeignAffiliates, 35 Bus. LAw.

55 (1979) (discussing Act's practical implications).

75. A "foreign bank holding company" is "a bank holding company organized under the laws

of a foreign country, more than half of whose consolidated assets are located or consolidated reve-

nues derived, outside the United States." 12 C.F.R. § 211.23(d) n.2 (1983). Permissible activities

for a foreign bank holding company are outlined at id § 211.23(o.




may engage in activities of any kind outside the United States, and may

engage in or maintain within the United States activities incidental to

its foreign operations or its international commerce.76

4. Individuals andgroups that arenot companies

Many commercial banks, even relatively large ones, are vulnerable to

unfriendly takeover attempts by individuals or groups of individuals. 77

An acquisition by an individual or by a group of individuals without

sufficient formal links to constitute a company for purposes of the

BHCA is subject only to the CBCA.78 The determination of whether

the acquiror is a company may affect the success of an unfriendly take-

over attempt fo r two reasons. First, compliance with the requirements of

CBCA presents fewer burdens to an acquiror and offers fewer opportu-

nities for the target to challenge the acquisition. Second, the BHCA

prohibits a company that is not a bank holding company from acquir-

ing a controlling interest in a bank or bank holding company without

divesting itself of ownership of its nonbanking activities. 79 An acquisi-

tion subject only to the CBCA thus allows an opportunity to purchase a

significant block of the target's stock before launching an unfriendly

tender offer.80

CBCA procedural requirements provide targets with few defenses

against unfriendly takeover proposals. The CBCA does not require the

acquiror to publish notice of the application, nor does it require notice

to the target bank.8 t The CBCA also does not explicitly grant the target

76. The Federal Reserve Board generally has not rigidly applied the prohibitions on non-

banking activities contained in the BHCA with respect to applications in which the applicant is

owned by a foreign government. See Banca Commerciale Italiana, 68 Fed. Res. Bull. 423 (1982)

(approval of foreign government-owned bank's acquisition of existing U.S. bank consistent with

public interest). The Board has expressed concern, however, in cases in which the foreign govern-ment applicant is engaged in a wide range of banking and other commercial activities, that there

will be a higher probability ofconflict between banking and nonbanking operations contrary to the

stated purposes of the BHCA. Id at 425. In addition, the Board has expressed particular concern

about the prospect that a foreign government-owned entity might be "established for the principal

purpose of evading the interstate banking prohibitions. . . of the act .... " Id.

77. &egenerall Riggs Nat'l Bank v. Allbritton, 516 F. Supp. 164 (D.D.C. 1981) (individual

attempting unfriendly tender offer for control of bank with $2.8 billion in assets).

78. An acquisition by a "company" may be subject to the CBCA, the BHCA, or both, de-pending on the structure of the transaction. For a discussion of the relationship of the CBCA and

the BHCA, see infra notes 27-42 & 51-59 and accompanying text.

79. See supra notes 68-69 and accompanying text.

80. For a discussion of securities law issues regarding acquisitions of a target corporation's

stock prior to a tender offer, see Tobin & Maiwurm, BeachheadAcquizions: Creating Waves in the

Marketplace and Uncertainty in the Regulatog Framework, 38 Bus. LAW. 419 (1983).

81. Notice to the target may be necessary under securities or other laws. See, e.g., Williams

Act § 13, 15 U.S.C. § 78m(d) (1982) (notice to issuer ofcertain securities required within 10 days of

acquisition); Hart-Scott-Rodino Antitrust Improvements Act §7A, 15 U.S.C. § 18a(a) (1982) (tar-

get required to file notification with Federal Trade Commission for certain acquisitions of stock).

Acquisitions of banks subject to the BHCA or the BMA are exempt from the Hart-Scott-Rodino




standing to participate in the agency's review proceedings8 2 or standing

to appeal a determination by the agency not to disapprove an

acquisition.

C Issues That May Arise i Unfriendy~Attempts to Take Over a Commercial

Bank orBank Holding Company

. CBCA or BHCA

A critical factor in a hostile takeover is whether a group of individuals

acting together to acquire control of a bank or bank holding company

will be a "company" for purposes of the BHCA.83 Several advantages

accrue to an acquiror thatstructures itself to fall outside the definition

of "company." A group that is not a company is not subject to the

BHCA and, after passing OBCA review, could acquire all the stock of a

bank or bank holding company. In addition, gaining approval of an

application under the CBCA is easier and faster than under the BHCA.

For that reason, when faced with a hostile tender offer, the target will

find it advantageous to assert that the acquiring group is a company

and thus subject to the BHCA.

The Federal Reserve Board recently stated, consistent with earlier de-

terminations of the Board and the courts, that individuals bound to-

gether in a "formalized structure for the purpose of acquiring or

managing a bank holding company" are a company for purposes of the

BHCA. 84 As a company, a group may have to comply with both the

Act's notification provisions, see id § 18a(c)(7), but acquisitions subject to clearance only under the

CBCA are not. Id § 18a(c).

The bank regulatory agencies differ as to whether a target may gain access under the Freedom of

Information Act (FOIA), 5 U.S.C. § 552 (1982), to filings made by a would-be acquiror once the

target learns that notice has been filed. The Comptroller of the Currency denies access to change inbank control notices until consummation of the acquisition, and then provides only summary no-

tice. Its policy rests on the confidentiality of the notice required by the CBCA, 12 U.S.C.

§ 18170)(6) (1982), and the exemption from disclosure of confidential information under FOIA.

See 5 U.S.C. § 552(b)(8) (1982). The FDIC, at its discretion, makes available to the public informa-

tion concerning changes in the control ofan insured bank. 12 C.F.R. § 309.4(c)(2) (1983) (informa-

tion publicly available to extent notice contains name of target, names of sellers and purchasers of

stock, number of shares involved, and number of shares outstanding). The CBCA notice is not

made available by the FHLBB. 12 C.F.R. § 563.18(2)(O (1983) (no disclosure without consent of

acquiror or until consummation of acquisition).

82. The Federal Reserve Board has developed an informal procedure that allows target banks

or other interested persons to submit information for consideration in the Federal Reserve Board's

review. Sometimesit conducts "nonhearing hearings." No court, however, has decided to what

extent, if any, a target is entitled to participate. See, e.g., Hodgson &Douglas, The Change In Bank

ControlAct. A Screening Statute Transformed, I BANKING EXPAN. REP. Sept. 6, 1982, at 1, 10.

83. "Company" is defined more narrowly in the BHCA than "person" is defined by the

CBCA. See supra note 16 and accompanying text.

84. See Letter from James McAfee, Associate Secretary of Federal Reserve Board, to John D.

Hawke, Jr. (Sept. 13, 1982) (regarding CBCA notice filed by shareholders group). The Federal

Reserve Board determined that a group of individuals and partnerships that had entered into a

written agreement regarding a planned acquisition of stock was a "company." Id The agreement

gave control of the group's stock to three representatives elected by the group and to the group



TAKEOVERS OF DEPOSITORY INSTITUTIONS

CBCA and the BHCA under certain circumstances. Any individual,

group, or company that is not already a bank holding company gener-

ally can acquire up to ten percent of the outstanding voting shares of a

bank or bank holding company without triggering either the BHCA orthe CBCA.8 5 If the group is a company, the BHCA requires it to obtain

the Federal Reserve Board's approval for any acquisition of twenty-five

percent or more of the outstanding shares of voting stock of a bank or

bank holding company.86 A company that acquired more than ten per-

cent of a bank holding company's voting stock and later decided to ex-

ceed twenty-five percent would have to comply first with the CBCA

procedures, and then with the BHCA procedures.

A company might have to submit a BHCA application even if it seeksless than twenty-five percent of the stock of a bank or bank holding

company. In addition to defining control with a stock ownership thresh-

old,8 7 the BHCA defines control to include a "controlling influence over

the management or policies of the bank or company."8 8 The Federal

Reserve Board has established by regulation rebuttable presumptions of

control in certain situations despite ownership of as little as five percent

of a bank's or company's voting shares.89 Moreover, the Federal Re-

itself. Id at 2. Any sale of shares subject to the agreement required group authorization, and the

group could bind all of the shares to a sale with a third party. Id

Factors that may cause a group to be deemed a "company" include the existence of a formal

organizational structure that governs the operation of the group's holding of the shares in the bank

or bank holding company, and the potential for or the practical likelihood of perpetual existence.

See P. HELLER, supta note 32, at 1-4. The Federal Reserve Board considers "whether there are any

agreements relating to sale, transferability, or voting of the shares of the proposed target by the

components of the alleged company and whether or not some type of formalized structure exists

among the components of the alleged company with respect to control of the proposed target."

Hawke, Adler & Kaplan, Banks' Immunity to Hostile Takeovers Has Dissolved, Legal Times of Wash.,

Aug. 10, 1981, at 44, col. 1; see also WISCUB, Inc., 65 Fed. Res. Bull. 773, 776-77 (1979) (formal

structure needed for shareholders collectively to constitute company); SYBCorp., 63 Fed. Res. Bull.587, 588 (1977) (shareholder group may become company through agreement or structure). The

BHCA was designed to prevent the formation of entities that may be used as a means of acquiring

and maintaining in perpetuity management and control of banks' shares or assets. SENATE COMM.

ON BANKING AND CURRENCY, S. REP. No. 1095, 84th Cong., 2d Sess. 7 (1955), reprinted n 1956

U.S. CODE CONG. & AD. NEws 2482, 2488. An important indicator of permanency is whether

dispersion or dissolution of the group's control over shares of the issuer's stock will result after the

death of a member of the group. See id

85. The bank regulatory agencies expanded the statutory definition of control by establishing

a rebuttable presumption of control if a person acquires the power to vote 10% or more of any class

of a publicly held company's voting securities. See 12 C.F.R. § 15.3 (1983) (Comptroller); Revised

Regulation Y,supra note 29, at 830 (adopting 12 C.F.R. § 225.7(a) (1983) (Federal Reserve Board));

12 C.F.R. § 303.15(a) (1983) (FDIC). Experience suggests that rebutting the presumption is not

easy in the case of a publicly traded company, at least in the absence of an undertaking not to vote

the stock or sell it in a block to anyone else without regulatory approval. Thus, the acquisition of

more than 10% of the voting stock in a publicly held company prior to launching a tender offer

usually will require compliance with at least the CBCA.

86. See 12 U.S.C. § 1841(a)(2)(A) (1982).

87. Id

88. Id § 1841(a)(2)(C).

89. See Revised Regulation Y, supra note 29, at 828 (adopting 12 C.F.R. § 225.31(d)). A com-

pany that owns, controls, or has the power to vote more than five percent of any class of voting

1984]




serve Board, after following the BHCA's notice and hearing procedures,

may also find that a controlling influence has been established in other

circumstances.90 Under the BHCA, therefore, control may be found

before the twenty-five percent threshold has been reached.

The Federal Reserve Board has held, however, that a company seek-

ing to acquire less than twenty-five percent of a publicly traded bank

holding company can avoid "control" fo r purposes of the BHCA if it

agrees to conditions designed to preclude control.91 The Federal Re-

serve Board's decision to process an application, from a "company"

under the CBCA that, absent the conditions, would control the bank

and therefore be subject to the BHCA raises interesting policy questions.

First, the procedure leads to an anomaly. The Federal Reserve Board isreviewing changes in bank control although the conditions imposed, by

definition, prevent any shift in control. In theory, the conditions should

mean that no CBCA notice is required, not that the Federal Reserve

Board's review and nondisapproval is necessary. Further, the Federal

Reserve Board probably will find enforcement of the conditions difficult

and burdensome.92 The conditions may last for a long time, and the

securities presumably controls the bank or bank holding company if one or moreof the company's

directors, trustees, partners, officers, or employees with policymaking functions serves in a similar

capacity in the bank or bank holding company and no other person controls as much as five per-

cent of any class of voting securities of that bank or other company. Id at 829 (adopting 12 C.F.R.

§ 225.31(d)(2)(iii)). Similarly, a company that controls more than five percent of any class of vot-

ing securities presumably controls the bank or bank holding company if affiliated persons control

additional voting securities that, together with the company's securities, aggregate 257 or more of

any class of voting securities of the bank or bank holding company. Id (adopting 12 C.F.R.

§ 225.31(d)(2)(ii)). The presumption of control may even arise in cases in which the company

controls less than five percent of the shares. A company obtaining policymaking authority pursuant

to an agreement or understanding with the bank or bank holding company presumably controls the

bank or bank holding company. Id (adopting 12 C.F.R .§ 225.31 (d)(2)(i)). Moreover, a company

that restricts therights of a holder of voting securities under an agreement or understanding pre-

sumably controls the shares involved. Id (adopting 12 C.F.R. § 225.31(d)(I)(ii)). Any one of three

factors negates the latter presumption: if the agreement or understanding is a mutual agreement

among shareholders granting a right-of-first-refusal; if it is incident to a bona fide loan transaction;

or if it relates to restrictions on transferability that continue only for a period of time reasonably

necessary to obtain approval from the appropriate banking agency. Id

90. See 12 U.S.C. § 1841(a)(2)(C) (1982). The notice and hearing procedures are set out in

Revised Regulation Y, supra note 29, at 828 (adopting 12 C.F.R. § 225.31).

91. See, e.g., Letter from James McAfee, Associate Secretary of Federal Reserve Board, to

John D. Hawke, Jr., Esq. (Sept. 13, 1982). In this letter, the Board required the group of sharehold-

ers to pledge that neither it nor its members would: (I) become a member of the board of directors

of the bank holding company; (2) nominate a director or group of directors in opposition to nomi-

nees of the management or board of directors of the bank holding company; (3) try to obtain

representation in the bank holding company by appointing an officer, agent or employee to the

company; (4) influence or attempt to influence business policies of the bank holding company such

as dividend policies, loan and credit decisions, pricing of services, personnel decisions, location of

offices, branching, or hours of operation; (5) engage in proxy solicitation activities; or (6) invest as a

group in any other banking or nonbanking investments. Id at 3; see also Letter from William W.

Wiles, Secretary of Federal Reserve Board, to John L. Douglas, Esq. 5 (Apr. 5, 1982) (similar agree-

ments not to seek directors' positions or influence policies).

92. In one of the "noncontrol" CBCA decisions, two Federal Reserve Board members dis-

sented on grounds that included the difficulty of enforcing the conditions that were imposed to




target can be expected to demand Federal Reserve Board action when-

ever it perceives a violation of the conditions, especially when the CBCA

proceeding is the first step toward an unfriendly takeover.

2. Divestitures required to cure antitrust concerns

Antitrust issues are an important hurdle for many acquisitions subject

to the BHCA, and conceivably could present problems in transactions

subject to the CBCA as well.9 3 For a proposed acquisition of a direct

competitor, the Federal Reserve Board analyzes whether the takeover

will have a substantial adverse effect on existing competition in the af-

fected banking markets. 94 If the acquisition unreasonably reduces ex-

enable the company to proceed under the CBCA rather than the BHCA. See Letter from James

McAfee, Associate Secretary of Federal Reserve Board, to John D. Hawke, Esq., supra note 91, at 4.93. The antitrust analysis required by the BHCA can be conducted only after the relevant

geographic and product markets within which the acquisition will have an effect on competition

have been defined. Commercial banking is the relevant "line of commerce," or product market,

within which to analyze the effect on competition of the acquisition of one bank by another. See,

e.g., United States v. Connecticut Nat'l Bank, 41 8 U.S. 656, 663-66 (1974) (savings banks distin-

guishable from commercial banks for antitrust analysis); United States v. Philadelphia Nat'l Bank,

374 U.S. 321, 356-57 (1963) (commercial banking constitutes distinct line of commerce). The

evolution of nonbank financial services offered by savings and loan associations, commercial and

consumer lending companies, insurance companies, securities firms, and other entities may, how-ever, require that these other competitors be included in the relevant product market. See e.g.,

Note, The Line ofCommerce Fo r Commercial Bank Mergers.:A Product-OrientedRedefiton, 96 HARv. L.

REv. 907, 917-26 (1983) (recognizing need to redefine commercial banking market to include

nonbank financial services). The Supreme Court has defined the relevant geographic market for

competitive analysis as the local area within which "bank customers that are neither very large norvery small find it practical to do their banking business." PhiladelphiaNat' Bank, 374 U.S. at 361.

If the relevant product market is broadened, it also may be necessary to reevaluate the appropriate

geographic market within which the competition defined by the new product market is affected.The Federal Reserve Board must find that a transaction actually violates antitrust laws in order

to deny the application. See, e.g., County Nat'l Bankcorp. v. Board of Governors, 654 F.2d 1253,1254 (8th Cir. 1981) (multibank holding company and its subsidiary acquired unaffiliated bank

holding company); Republic of Tex. Corp. v. Board of Governors, 649 F.2d 1026, 1043 (5th Cir.

1981) (bank holding company acquisition of bank); Mercantile Texas Corp. v. Board of Governors,

638 F.2d 1255, 1263 (5th Cir. 1981) (proposed merger of bank holding companies).

94. The Federal Resecve Board has traditionally applied criteria similar to the standards in

the 1968 Department of Justice Merger Guidelines. U.S. DEPARTMENT OF JUSTICE, MERGER

GUIDELINES (1968). In June 1982, however, the Department of Justice issued new guidelines thatreflect its current policy on acquisitions and mergers. See U.S. DEPARTMENT OF JUSTICE, MERGER

GUIDELINES (1982). Although the Federal Reserve Board has not adopted the 1982 guidelines for-mally, it is apparent that the Board is analyzing proposed acquisitions under both the 1968 and the

1982 guidelines. The Federal Reserve Board has given no clear indication with regard to what itwill do in the event of a conflict between the two guidelines.

The Federal Reserve Board also considers the transaction's effect on potential competition inmarkets where only one of the parties is present. See United States v. Marine Bancorp., Inc., 418U.S. 602, 623-42 (1974) (geographic market extension merger analyzed under potential competition

doctrine). Recent court cases call into question the continued existence of the potential competi-

tion doctrine. See, e.g., Republic of Tex. Corp. v. Board of Governors, 649 F.2d 1026, 1044-48 (5thCir. 1981); Mercantile Tex. Corp. v. Board of Governors, 638 F.2d 1255, 1263-72 (5th Cir. 1981).

The Federal Reserve Board has issued proposed guidelines for determining when to apply "intense

scrutiny" to a proposed acquisition raising potential competition concerns. See Policy Statement ofthe Board of Governors of the Federal Reserve System for Assessing Competitive Factors under the

Bank Merger Act, 47 Fed. Reg. 9017 (1982). Although the Board has not formally adopted thepolicy statement, it has applied the statement's guidelines to analyze recent bank holding company




isting competition, the Board determines whether divestiture of certain

offices or assets or other measures alleviate the transaction's anticompe-

titive effects.

The divestiture policy of the Federal Reserve Board presents difficul-

ties for an acquiror in an unfriendly situation. The Board has decided

that applicants must make any divestiture necessary to alleviate an-

ticompetitive concerns before or concurrently with completing the ac-

quisition.95 Potential purchasers of divested assets, however, may be

reluctant to enter into a purchase agreement with a hostile acquiror

when the only available financial information on the target is from pub-

lic materials. Furthermore, agreement with a third-party purchaser of

the to-be-divested assets is less likely without reasonably strong assur-ance that the acquisition will succeed. The Federal Reserve Board,

however, has not considered these arguments sufficiently persuasive to

relax its divestiture rule in hostile takeovers.96

One solution to the Federal Reserve Board's simultaneous divestiture

rule would be for the unfriendly acquiror to enter into a contract to sell

off its own offices or assets in the banking markets in which violations of

the antitrust laws would otherwise occur. As a business matter, how-

ever, acquirors,even in friendly transactions, have been reluctant to selltheir own offices or assets because of the possible adverse effect on em-

ployee morale and established banking relationships. Another solution,

one that minimizes the problems caused by the Board's simultaneous

divestiture rule, is for the acquiror and a third party to enter into a

contract, contingent as to price and other significant terms, that would

allow the third-party purchaser of the divested bank to assume control

immediately when the unfriendly takeover is consummated, but would

delay establishing the purchase price until the divested assets were re-

viewed by the acquiror and the third-party purchaser. Yet another solu-

tion is to transfer the bank to be divested to a trustee until the third-

party purchaser-which might even be the trustee or a co-trustee-

complies with regulatory requirements. The Federal Reserve Board im-

plicitly gave some support to the trustee approach in a 1982 decision.9 7

acquisitions. See, e.g., Old Kent Fin. Corp., 69 Fed. Res. Bull. 102, 103 n.9 (1983); PNC Fin. Corp.,

69 Fed. Res. Bull. 51, 52 n.3 (1982).

95. See InterFirst Corp., 68 Fed. Res. Bull. 243, 244 (1982) (planned divestiture must be

-before or concurrent with acquisition); Barnett Banks of Fla., Inc., 68 Fed. Res. Bull. 190, 190

(1982) (divestiture should be completed before consummation).

96. See, e.g., Central Bancorp., Inc., 68 Fed. Res. Bull. 789, 792 (1982). The Federal Reserve

Board acknowledged arguments on the issue in Central,but it expressly declined to decide the issue

because its decision to deny Central's application mooted the issue. Id

97. See Sun Banks of Fla., Inc., 68 Fed. Res. Bull. 374, 376 & n.13 (1982) (Board accepted

commitment to transfer to-be-divested bank to independent trustee if unable to consummate divest-

iture simultaneously with merger; co-trustee was bank holding company that had contracted to

acquire to-be-divested bank).




Even these solutions, however, may delay the acquisition of the target

bank. The ultimate purchaser of the divested bank must itself obtain

clearance under the BHCA, CBCA, or BMA. That additional review

provides the reluctant target with yet another opportunity to challenge

the acquisition. Moreover, even an interim owner, including a trustee,

might have to pass regulatory clearance, at least under the CBCA notice

procedure, before it could acquire the shares of the bank to be divested.

The concurrent divestiture issue, therefore, is ripe fo r Federal Reserve

Board review in a rulemaking proceeding.

The Comptroller's policy regarding procompetitive divestitures is less

rigid than that of the Federal Reserve Board. The Comptroller consid-

ers the timing of required divestitures on a case-by-case basis. It mayeven allow an applicant to make a required divestiture after the con-

summation of the transaction in an unfriendly takeover.

3. Financialandmanagerial tandards

The financial standards used by the Federal Reserve Board in review-ing BHCA applications9 8 can also have a significant effect in contested

takeover situations. In certain takeover situations, the financial stan-

dards applied by the Federal Reserve Board during BHCA review canbe decisive. For example, in the recent battle for control of Union Com-

merce Corporation, Union Commerce employed the time-honored tech-

nique of seeking a "white knight" when confronted with a hostile tender

offer by Huntington Bancshares, Inc. Union Commerce cooperated

with its white knight, Central Bancorporation, which launched a com-

peting tender offer for control.9 9 The Federal Reserve Board denied

Central's application to acquire Union Commerce, however, because

the Board determined that the acquisition would substantially weakenCentral's financial condition and flexibility.' °° Huntington's applica-

tion, which the Federal Reserve Bank approved, t0 1 went forward and, as

a result, its tender offer was successful.

In friendly situations, the Board's initial determination that a propo-

sal's adverse financial results requires denial may not be fatal. For ex-ample, applicants can restructure the financial aspects of proposed

transactions previously denied by the Federal Reserve Board, thereby

alleviating the Board's concerns. 02 In a contested takeover, however,


99 . Se e Central Bancorp., Inc., 68 Fed. Res. Bull. 789 (1982).100. See td at 790. The Board was concerned that Central would incur a substantial increase

in debt in making the acquisition. Id

101. See Huntington Bancshares, Inc., 68 Fed. Res. Bull. 434, 437 (1982) (approving applica-

tions under BHCA and BMA).102. Compare, eg., United Midwest Bancshares, Inc., 68 Fed. Res. Bull. 713, 715 (1982) (forma-

tion of bank holding company denied in part on financial grounds) with United Midwest Banc-

1984]




parties may not have sufficient time to restructure a proposal.

The BHCA also requires that the Federal Reserve Board consider the

managerial resources of the proposed applicant.10 3 The BHCA, the

BMA, and the CBCA differ, however, in their financial and managerial

standards. Under the CBCA, the regulatory agency can disapprove the

application only if the financial condition of the acquiror will "jeopard-

ize" the financial stability of the target institution or if the managerial

competence of the acquiror is such that it would not be in the public

interest to permit the acquisition to go forward. 0 4 The BHCA and the

BMA direct the regulators simply to consider the financial and manage-

rial competence of the applicant. 10 5 The Federal Reserve Board has de-

veloped its "source of strength rule"'0 6

under the BHCA, which requiresthe applicant to show affirmatively that it will serve as a source of

strength to the subsidiary bank. An unwilling target could oppose an

acquisition on the grounds that the applicant will not serve as a source

of managerial strength to the target bank. 0 7 Historically, however, as-

sertions of managerial insufficiency have not defeated unfriendly tender

offers. 108

Although the difference in language between the CBCA, on the one

hand, and the BHCA and the BMA, on the other, has not yet beendecisive, there seems to be little justification for it. An acquisition sub-

ject to the CBCA may be no less permanent or significant to the subsidi-

ary bank, its stockholders, depositors, and customers than one subject to

the BHCA. The same concerns that fostered the requirement of special

regulatory procedures before allowing changes in bank control militate

in favor of adoption of a uniform standard.

. Nonvoting equity agreements

A final issue concerning unfriendly takeovers of commercial banks is a

shares, Inc., 68 Fed. Res. Bull. 774, 775 (1982) (approving formation of bank holding company afterfinancial factors restructured).

103. See 12 U.S.C. § 1842(c) (1982).

104. 12 U.S.C. § 1817(j)(7)(C)-(D) (1982).

105. See 12 U.S.C. § 1842(c) (1982) (BHCA); 12 U.S.C. § 1828(c)(5) (1982) (BMA).106. See, e.g., Citizens Bancorp, 61 Fed. Res. Bull. 806 (1975); Downs Bancshares, Inc., 61 Fed.

Res. Bull. 673 (1975); Northern States Fin. Corp., 58 Fed. Res. Bull. 827 (1972). The Supreme

Court upheld the source of strength rule in Board of Governors v. First Lincolnwood Corp., 439U.S. 234, 251 (1978).

Congressendorsed the rule indirectly by incorporating its language

inthe

report of the Senate Committee on Banking, Housing and Urban Affairs that accompanied the

proposed Financial Institutions Supervisory Act Amendments of 1977, S. 1, 95th Cong., 1st Sess.

(1977). See S. REP. No. 323, 95th Cong., 1st Sess. 11 (1977).107. Cf. akota Bankshares, Inc., 64 Fed. Res. Bull. 310, 310 n.2 (1978) (shareholder protesting

acquisition alleged applicant's past management practices would injure minority shareholders).

108. See, e.g., Benson Bancshares, Inc., 63 Fed. Res. Bull. 1009, 1011 & n.4 (1977) (allegation of

stock manipulation not sufficient to deny application for adverse managerial resources). But cf.

First State Holding Co., 67 Fed. Res. Bull. 802, 802-03 (1981) (application denied when applicant

repeatedly violated consumer credit laws and regulations).




variant of the target's traditional search fo r a white knight. A party that

might be dubbed a "white knight-in-waiting" agrees to purchase a sub-

stantial nonvoting equity interest in the target without acquiring the

proscribed percentage of voting shares. These agreements are fre-quently with entities presently ineligible to acquire actual control of the

target, notably out-of-state bank holding companies. 109

Nonvoting equity agreements have several effects on a target bank or

bank holding company. Nonvoting equity agreements facilitate the

eventual acquisition of the target bank by the investing bank should the

barriers to interstate banking fall." 0 Often viewed as a preliminary step

to acquisition, they signal the market and potential hostile acquirors

that the target has been claimed. In addition, the purchase of a smallpercentage of common stock and additional amounts of preferred stock

injects capital into the target institution. Finally, even with the Federal

Reserve Board's guidelines, interstate equity agreements further insulate

the target bank from attack. Having entered into an equity agreement,

the target can marshal against an acquiror a block of five percent of the

outstanding voting shares in hands presumably friendly to incumbent

management. If the hostile acquisition succeeds, the acquiror would un-

doubtedly prefer to free its newly acquired bank from the terms of the

interstate equity agreement. This would require the redemption of the

equity capital invested by the out-of-state bank holding company"'

and, perhaps, payment of a premium fo r the termination of the invest-

ment agreement.

In July 1982 the Federal Reserve Board issued guidelines for deter-

mining cases in which nonvoting equity investments confer control of

the bank or bank holding company on the investor. 12 These guidelines

109. Out-of-state bank holding companies generally cannot acquire control of a bank or abank holding company. See supra notes 61-66 and accompanying text. Although nonvoting equity

agreements most commonly involve out-of-state bank holding companies, foreign banks and domes-tic and foreign nonbank holding companies may also use this procedure. See, e.g., United Midwest

Bancshares, 68 Fed. Res. Bull. 713, 715 (1982).

110. For example, First National Boston Corporation of Massachusetts and Casco-Northern

Corporation of Maine entered into a nonvoting equity agreement in 1982. First National Bostonpurchased from Casco-Northern nonvoting, redeemable preferred stock with warrants to purchase

common stock at book value. After Massachusetts and Maine enacted legislation allowing recipro-

cal interstate banking in 1983, the two bank holding companies announced their intention tomerge. Se FirstNatzonal Boston Signs to Buy Casco-Northen, Wall St . J., Mar. 11 , 1983, at 2, col. 3.

111.This amount

may beup

to 25%of the bank's total equity, or even higher amounts if theissuing bank holding company has been in financial difficulty.

112. See Board of Governors of the Federal Reserve Board, Policy Statement on Nonvoting

Equity Investments by Bank Holding Companies, 47 Fed. Reg. 30,965 (1982) (codified at 12 C.F.R.

§ 225.143 (1983)). The Federal Reserve Board policy statement is not limited to investments by

out-of-state bank holding companies, and its provisions may be applied equally to agreements with

foreign banks and domestic and foreign nonbank holding companies. Id. For a general discussion

of these guidelines, see Heifer & Bruemmer, The FederalReserve Board'sPoliy Statement on BHC on-Voting Equity Investments, I BANKING EXPAN. REP. Aug. 2, 1982, at 1; Heifer &Bruemmer, Interstate

Nonvoting Equity Agreements and "Control" Under the Bank Holding Company Act, 39 Bus. LAw. 383

1984]




may facilitate agreements between banks and bank holding companies

located in different states because they permit a bank holding company

to purchase up to twenty-five percent of the nonvoting equity of a bank

or another bank holding company and contingent rights to acquire upto twenty-five percent of its voting stock before the acquiror is deemed

to be in control.113 Overly restrictive investment agreements may lead

to a determination that the out-of-state bank holding company controls

the target bank,114 and the Federal Reserve Board's policy statement is

sufficiently flexible to accommodate such arguments. Even in the ab-

sence of such a determination, however, would-be acquirors will proba-

bly prefer more inviting opportunities and targets in the markets they

wish to enter.

III. TAKEOVERS OF THRIFT INSTITUTIONS

The statutory framework for acquiring control of a savings and loan

association is similar to that for acquiring control of a commercial bank.

There are, however, differences that can make the acquisition of a sav-

ings and loan association less complicated and less disruptive of the ac-

quiror's other business activities.

In spite of these differences,unfriendly takeover attempts have not

been as prevalent in the savings and loan industry largely because the

majority of savings institutions are mutual associations, which the de-

positors, as members of the association, "own." An individual or corpo-

ration cannot acquire control of a mutual savings and loan association

unless the association converts to the stock form of ownership in accord-

ance with FHLBB regulations. 1 5 Prior to 1982, the FSLIC regulations

on acquiring the stock of a converted association further limited the

(1984); Hawke, Fed Shows Frustration in Latest Investment Guidelines, Legal Times of Wash., Aug. 9,

1982, at 34, col. 1.113. See 12 C.F.R. § 225.143(d)(4) (1983).

114. See, e.g., Letter from Michael Bradfield, General Counsel of Federal Reserve Board, to

Peter P. Bartholow, Executive Vice President-Finance, Mercantile Texas Corporation (Mar. 24,

1983) (proposed nonvoting equity agreement inconsistent with BHCA and Board guidelines), Let-

ter from William W. Wiles, Secretary of Federal Reserve Board, to Richard S. Simmons, Esq. (July

8, 1982) (agreements between two bank holding companies inconsistent with control provisions of

BHCA).

115. See 12 C.F.R. § 563b.1-.10 (1983). The FHLBB adopted regulations in April 1982 that

permit, on a test-case basis, the conversion of an association from the mutual to the stock form of

ownership in connection with the establishment of a holding company, the acquisition of the con-

verting association by an existing holding company, or the merger of the converting associationwith an existing stock association. See FHLBB Conversions from Mutual to Stock Form, 47 Fed.

Reg. 19,672, 19,682 (1982) (codified as amended at 12 C.F.R. § 563b.9-.10). The FHLBB removed

the test-case restriction in 1983 as part of a general restructuring of the conversion regulations. See

48 Fed. Reg. 15,591, 15,604 (1983) (to be codified at 12 C.F.R. §§ 563b.9-.10).

The statutory and regulatory framework also limits the possibility that a contested proxy fight for

control of a mutual savings and loan association will be used to try to merge the two institutions.

Members of a mutual association may communicate with other members on matters of interest to

the association. No savings and loan holding company, or any director, officer, employee, or con-




number of potential targets.' 1 6

The absence of unfriendly takeover activity in prior years in the sav-

ings and loan industry also may have reflected the historically limited

scope of savings and loans' financial activities. The industry's depressedfinancial condition over the past few years, coupled with the difficulty of

ascertaining from public information the value of an association's loan

portfolio, also limited unfriendly takeover attempts.

These factors, however, seem to be diminishing. The value of many

stock savings and loan associations may be higher than the current mar-

ket price of their stock because of the expanded powers Congress re-

cently granted to savings and loan associations" t 7 and because of falling

interest rates. Moreover, many savings and loan associations have con-verted from the mutual to the stock form of ownership, recognizing the

potential for an increase in their net worth through infusions of equity

capital. Substantial modifications in FHLBB regulations, including a

reduction in the required waiting period for acquiring more than ten

percent of a converted association's stock from three years to one year,

have eased the conversion process.1 8

trolling person of the holding company, can hold, solicit, or exercise voting rights in a mutualsavings and loan association. See 12 C.F.R. § 584.9(a) (1983).

116. Under prior FHLBB regulations, no person could, directly or indirectly, acquire or offer

to acquire more than 10% of any class of voting securities for a period of three years after the

conversion, except with the prior written approval of the FSLIC. Set 12 C.F.R. § 563b.9(d) (1982)

(amended 47 Fed. Reg. 19,672, 19,682 (1982)).

117. The Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No.

96-221, 94 Stat. 13 2 (codified in scattered sections of 12 U.S.C.) (Deregulation Act), took effect

January 1, 1981. The Act removed many of the restrictions on services that federally chartered

thrift institutions could offer. It authorized federal savings and loan associations to make commer-

cial real estate loans and secured and unsecured consumer loans and to invest up to 20% of their

assets in commercial paper and corporate debt securities. 12 U.S.C. § 1464(c)(2) (1982). Further, it

authorized thrift institutions to provide credit card services, id § 1464(b)(4), to offertrust and otherservices previously available only from commercial banks and trust companies, id § 1464(n), and to

operate remote service units. Id § 1464(b)(1).

The Garn-St Germain Act, supra note 7, expanded the authorized activities of thrift institutions.

The Act authorizes thrift institutions to invest in government securities, to make commercial, agri-

cultural, and corporate loans (up to 10% of assets as of January 1, 1984), and to accept demand

deposits from commercial, corporate, and agricultural customers that have a lending relationship

with the institution. 12 U.S.C. § 1464(c) (1982). Although these enhanced powers were intended

"to provide such institutions the flexibility necessary to maintain their role of providing credit for

housing," id § 1464(a), they will enable thrift institutions to compete for business far beyond their

traditional activities. See Vartanian & McFarlane, FHLBB Helps Bring About Major Change n

Thrifts, Legal Times of Wash., Nov. 1, 1982, at 16, 23, col. 1 (federally chartered savings and loan

associations can invest up to 75% of assets in "commercial-type" investments).

118. The FHLBB and Congress have expanded the ability of both federally and state-

chartered savings and loan associations to convert from the mutual to the stock form of ownership.

See 47 Fed. Reg. 19,672-79 (1982) (codified at 12 C.F.R. § 563b.1-.10 (1983)); 48 Fed. Reg. 15,591

(1983) (to be codified in scattered sections of 12 C.F.R. §§ 552, 563b). The 1982 amendments

allowed officers, directors, and persons other than depositors to acquire larger shares of the conver-

sion stock and compressed the solicitation and offering period. Under those amendments, no per-

son could acquire more than five percent of the converted association's outstanding shares in the

conversion offering unless the plan of conversion raised this number to 10%. See 47 Fed. Reg.

19,676, 19,679 (1982). Converting associations could also adopt charter provisions that prohibited




In addition, new legislation may significantly increase the number of

thrift targets. FIDA and other legislation that would permit bank hold-

ing companies to acquire federally insured thrift institutions is pending

in the 98th Congress.' 19 The Federal Reserve Board has traditionally

allowed bank holding companies to acquire thrift institutions only when

the thrift is financially troubled or, in certain states, for what amounts to

historical reasons.' 20 Healthy thrift institutions would face the prospect

of unfriendly takeovers from bank holding companies if the bill is en-

acted. The holding companies could view the thrifts as a means to ex-

pand their deposit-taking operations to other states indirectly, even

though the Douglas Amendment prohibits such an expansion through

the acquisition of a bank.'2

'Thus, the agencies that regulate thrifts may soon confront the same

issues that have arisen in unfriendly acquisitions of commercial banks.

Precedent from the commercial banking agencies should be useful in

deciding these issues because of the similarity in the statutes that govern

acquisitions of thrifts and acquisitions of commercial banks.' 22 Never-

theless, special issues that reflect differences in the statutes governing

thrift acquisitions may also arise. This section discusses some of those

similarities and differences.

the acquisition by any person of more than 10% of the association's stock for up to three years and

could renew the provisions on a year-to-year basis after the expiration of the original three-yearperiod. Id at 19,679. Associations that converted before the rules were adopted remained subject to

the three-year limitation on holding more than 10% contained in 12 C.F.R. § 563b.9(d) (1983)

(amended 1982), until at least May 5, 1983. See 47 Fed. Reg. 24,252, 24,253 (1982) (to be codified

at 12 C.F.R. § 563b).The FHLBB further modified the conversion regulations in 1983. These modifications retain the

10% limit for one year for "standard conversions," but allow a converting association to adopt

further antitakeover charter provisions only if permitted by the law of the state in which the princi-

pal office of the converted insured association is located. Id. at 15,594, 15,602 (to be codified at 12C.F.R. § 563b.3(i)(7)). Moreover, a federally chartered association can include an optional an-

titakeover provision only if it terminates within one year of the completion of the conversion. Id at

15,594, 15,601 (to be codified at 12 C.F.R. § 552.4). The new regulations also provided for the "sale

of control" in connection with conversions subject to special procedural rules. Id at 15,594-97,15,606-11 (to be codified at 12 C.F.R. §§ 552, 563b), but a notice proposing the recission of thoseregulations was published in January 1984. Set 49 Fed. Reg. 415 (1984); infra notes 184-93 and

accompanying text. On February 29 , 1984, the FHLBB adopted a further revision of its conversion

regulations, reextending the 10% restriction to three years. See 49 Fed. Reg. 7356 (1984).

Congress also has eased the conversion process for some mutual associations. Amendments to the

HOLA enacted in 1982 provide that the FHLBB may authorize the conversion of a financially

troubled mutual savings and loan association into a federal stock association, notwithstanding anyother provision of state or federal law. See 12 U.S.C. § 14 6 4 (p) (1982).

119. See supra note 8.

120. See infra notes 194-206 and accompanying text.121. See 12 U.S.C. § 1842(d) (1982). The FIDA and its progeny,supra note 8, also would permit

thrift holding companies to acquire banks. A thrift holding company that acquired a bank would

become a bank holding company as well, and therefore would be subject to the BHCA. Id.

122. Cf Kaneb Servs., Inc. v. FSLIC, 650 F.2d 78, 80 & n.5, 82 & n.12 (5th Cir. 1981) (apply-

ing cases construing BHCA to construe National Housing Act).




A. FederalStatutes GoverningAcquisitionsof Thrift Institutions

1. The NationalHousingAct

The National Housing Act of 1934 (NHA)123 governs acquisitions of

thrift institutions by savings and loan holding companies and other"companies." The NHA prohibits a savings and loan holding company

from acquiring or retaining control of an "insured institution" or an-

other savings and loan holding company without the prior written ap-

proval of the FSLIC, or from acquiring "another insured or uninsured

institution" or a savings and loan holding company through merger,

consolidation, or purchase of assets. 124 Limitations on acquisitions by

companies other than savings and loan holding companies are similar-the company must secure prior written approval of the FSLIC before

acquiring direct or indirect control of an insured institution.1 25

The scope of these sections is established by the definitions of the stat-

ute's key terms.1 26 The concept of "control" is of particular significance

to the NHA's requirements and definitions. The NHA defines control

under both an objective test and a subjective "controlling influence" test

similar to that contained in the BHCA.127

123, 12 U.S.C. §§ 1701-1

750g (1982).

124. See id § 1730a(e)(1)(A).

125. Section 408(e)(1)(B) of the NHA excepts from this requirement acquisitions by a devise

under the terms of a will and acquisitions in connection with a corporate reorganization. Id

§ 1730a(e)(l)(B).

126. An "insured institution" is any savings and loan, building and loan, homestead associa-

tion, or cooperative bank whose accounts are insured by the FSLIC. Id § 1730a(a)(l)(A). A "com-

pany" is "any corporation, partnership, trust, joint-stock company, or similar organization," with

narrow exceptions. Id § t730a(a)(1)(C). A "savings and loan holding company" is a company that

controls an insured association or other holding company. Id § 1730(a)(1)(D). Companies that

own or control voting shares of an insured institution or of a savings and loan holding company

acquired in connection with underwriting securities are excepted from the definition of savings and

loan holding company by the NHA, if those shares are held only for the period of time reasonably

necessary to sell them. Id § 1730a(a)(3). Also excepted is any trust "other than a pension, profit-

sharing, shareholders', voting or business trust," if the trust was formed before June 26, 1967, or is a

testamentary trust created on or after that date, and by its terms the trust must terminate within 25

years or not later than 21 years and 10 months after the death of individuals living on the effective

date of the trust. Id

A "multiple savings and loan holding company" is "any savings and loan holding company that

controls two or more insured associations." Id. § 1730a(a)(1)(E). A "subsidiary" of a person is a

company controlled by the person or a subsidiary of the person. Id § 1730a(a)(1)(H).

127. For purposes of the NHA, a person has control over:

(A) an insured institution if the person. . . owns, controls, or holds with power to vote,

or holds proxies representing, more than 25 per centum of the voting shares of such in-

sured institution, or controls in any manner the election of a majority ofsuch institutions;

(B) any other company if the person. . . owns, controls, or holds with power to vote, or

holds proxies representing, more than 25 per centum of the voting shares or rights of such

other company, or controls in any manner the election or appointment of a majority of

the directors or trustees of such other company, or is a general partner in or has contrib-

uted more than 25 per centum of the capital of such company.

Id § 1730a(a)(2)(A). The FSLIC will find "control" if it determines, after reasonable notice and an

opportunity for hearing, that a person "directly or indirectly exercises a controlling influence over




The FSLIC's procedural requirements are similar to those established

by the Federal Reserve Board under the BHCA.128 The antitrust stan-

dards of the NHA also are virtually identical to those of the BHCA. 129

In evaluating an acquisition of control, the FHLBB, like the Federal

Reserve Board, also considers the financial and managerial resources of

the acquiring company, the future prospects of the company and the

insured institution, and the convenience and needs of the communities

to be served by the resulting entity. 130

Restrictions on the nonthrift-related business activities of a savings

and loan holding company depend on whether the holding company is

a unitary or a multiple holding company. If it is unitary, the asset char-

acteristics of the association it controls also affect the restrictions.'3

'

the management and policies of an [insured] institution." Id § 1730a(a)(2)(D); accord 12 C.F.R.

§ 583.26 (1983).

128. Compare 12 C.F.R. §§ 543.2(c)-(f), 58 4

.4

(g) (1983) (FSLIC procedures) with supra notes 34-36 and accompanying text (BHCA procedures). An application is filed with the FHLBB's Office ofExaminations and Supervision and the Supervisory Agent of the district in which the insured insti-

tutions involved have their home offices. 12 C.F.R. § 584.4(o (1983). The FSLIC also requires anapplicant to file public notice in the community in which the home office of any institution to be

acquired is located, and in the community in which the home office of the largest subsidiary insuredinstitution of the acquiring holding company is located. Id. § 584.4(g). The Supervisory Agent

gives notice of the application to the state official who supervises savings and loan associations andto any other persons the Supervisory Agent "believes might have an interest in the application." I

§ 543.2(d)(3). The FSLIC need not notify the Department ofJustice. The rules provide for public

comments or protests, responses to protests, and oral argument on the merits of the application incertain cases. Id § 543.2(e)-(f.

The NHA requires the FSLIC to make a decision on the application within 90 days after itsfiling. See 12 U.S.C. § 1730a(e)(2) (1982). The 90-day period begins to run when all the required

information is received by the FSLIC, including amendments to the application and supporting

data, material submitted by protesting parties or other commentators, staff reports and recommen-

dations, and any comment submitted by the Department of justice. See Fort Worth Nat'l Corp. v.FSLIC, 69 F.2d 47 , 58 (5th Cir. 1972); Fidelity Fin. Corp. v. FSLIC, 359 F. Supp. 324, 327 (N.D.Cal. 1973). Failure to act within the 90-day period, however, does not result in an automatic ap-

proval, nor does it affect FSLIC's jurisdiction.S.ee

ort Worth Nat'l Corp. v. FSLIC, 469 F.2d 47,57-58 (5th Cir. 1972). The failure of the Federal Reserve Board to act on an application filed under

the BHCA, in contrast, is deemed to be an approval of the application. See 12 U.S.C. § 1842(b)

(1982).129. The NHA provides that the FSLIC shall not approve any proposed acquisition that may

reduce competition or create a monopoly, unless the public benefit from the acquisition clearlyoutweighs the anticompetitive effects. 12 U.S.C. § 1730a(e)(2) (1982); see 12 C.F.R. § 584.4(c)

(1983) (FHLBB antitrust standards).

130. 12 U.S.C. § 1730a(e)(2) (1982). The statutory command to consider the financial and

managerial resources and future prospects of the parties grants the FSLIC authority coextensivewith that of the Federal Reserve Board under the BHCA, and permits the FSLIC to imposefinancial conditions on an approval. See Kaneb Servs., Inc. v. FSLIC, 650 F.2d 78, 80 & n.5, 82 &

n.12 (5th Cir. 1981)(imposing

dividend andnet

worthrestrictions

on associationbeing

acquired bycompany) (citing Board of Governors v. First Lincolnwood Corp., 439 U.S. 234, 249-53 (1978)).The FSLIC has also required acquiring companies to guarantee the ne t worth of the acquired

savings and loan association. See Leibold, Mergers ofFSLIC InsuredSavings and Loan Associations, 37

Bus. LAW. 868, 875 (1982).

In 1983, the FHLBB delegated to its principal supervisory agents the authority to approve acqui-

sitions that fall within certain market-share parameters and do not raise significant policy issues.

See FHLBB Delegation of Authority Regarding Holding Company Acquisition and Debt, 48 Fed.

Reg. 170 (1983) (to be codified at 12 C.F.R. § 584).131. See 12 U.S.C. § 1730a(c)(1) (1982).




Multiple savings and loan holding companies are quite restricted in

business activities unrelated to the thrift industry.1 32 A unitary savings

and loan holding company whose subsidiary association fails to qualify

as a domestic building and loan association under the Internal RevenueCode 133 must meet the same restrictions.134 The unrelated business ac-tivities of unitary savings and loan holding companies that qualify as

domestic building and loan associations, however, are not restricted.135

The proposed FIDA136 would change these provisions significantly. The

bill would treat unitary savings and loan holding companies the same as

multiple savings and loan holding companies for purposes of their future

nonthrift activities.137

.2 The Home Owners' Loan Act

Savings and loan associations may merge under the Home Owners'

Loan Act (HOLA). t38 The HOLA grants to the FHLBB rulemaking

and regulatory power over reorganizations, consolidations, liquidations,

dissolutions, and mergers of associations with other FSLIC-insured insti-

tutions. 139 Pursuant to this authority, the FHLBB has issued regula-

132. The NHA limits multiple savings and loan holding companies and their subsidiaries to

the following business activities:

(A) furnishing or performing management services for a subsidiary insured institution, (B)

conducting an insurance agency or an escrow business, (C) holding or managing or liqui-

dating assets owned by or acquired from a subsidiary insured institution, (D) holding or

managing properties used or occupied by a subsidiary insured institution, (E) acting as

trustee under deed of trust, or (F) furnishing or performing such other services or engaging

in such other activities as the [FSLIC] may approve or may prescribe by regulation as

being a proper incident to the operations of insured institutions and not detrimental to

the interests of savings account holders therein.

Id § 1730a(c)(2). The services and activities that the FSLIC has determined are "a proper incident

to the operations of insured institutions" are set out in 12 C.F.R. § 584.2-1(a) (1983).133. See LR.C. § 7701(a)(19) (1976).134. 12 U.S.C. § 1730a(n) (1982). A "domestic building and loan association" must meet the

supervisory, business purpose, and assets tests of I.R.C. § 7701(a)(19) (1976). The association must

be an "insured institution" or subject to supervision and examination by a state or federal regula-

tory authority; it must be engaged principally in "acquiring the savings of the public and investing

in loans"; and it must have at least 60% of its assets invested in cash, government obligations,

deposit insurance company securities, passbook loans, residential or church real property loans,urban renewal loans, institutional loans, foreclosed property, educational loans, or property used by

the association in the conduct of its business. I.; see Treas. Reg. § 301.7701-13A (1979) (Internal

Revenue Service regulations).

135 Such prominent commercial corporations as Sears, Roebuck &Co., National Steel Corpo-

ration, and The Parker Pen Company are unitary savings and loan holding companies. See

FHLBB, MEMBERS OF THE FEDERAL HOME LOAN BANK SYSTEM 1982, at 82, 84, 86 (1983).

136. Supra note 8.137. Id See also Depository Institution Equity Act of 1983, S. 1682, 98th Cong., 1st Sess., 129

CONG. REC. S 10,890-92 (daily ed . July 26, 1983) (requiring similar treatment for unitary and mul-

tiple savings and loan holding companies). Senator Garn's recent bill, however, would put no re-

strictions on the nonthrift activities of the owner of a "qualified thrift lender," essentially a thriftwith 60% or more of its assets in mortgage or mortgage-related loans or 25% or less in commercial

loans. See S. 2181, 98th Cong., 1st Sess., 129 CONG. REc. 16,952 (1983).

138. 12 U.S.C. §§ 1461-1468 (1982).

139. Id § 1464(d)(11).




tions that govern mergers resulting in federally chartered savings and

loan associations or federally insured, state-chartered associations.1 40

3. The Change in Savings and Loan ControlAct

Congress passed the Change in Savings and Loan Control Act of 1978

(CSLCA),' 4 ' as it did the CBCA, to close a gap in the application of

laws that control acquisitions of thrift institutions. The CSLCA applies

when neither the NHA nor the merger provisions of HOLA apply to an

acquisition of an insured association.42

The provisions of the CSLCA are similar to those of the CBCA. They

requirea

person

43 seeking to acquire "control"' 44 of an "insured insti-

tution" or savings and loan holding company to give sixty days prior

written notice to the FSLIC. 45 If the notice is deemed informationally

complete and the FSLIC has not issued a notice disapproving the pro-

140. See 12 C.F.R. § 546.1-.4 (1983) (federally chartered associations); id § 563.22 (1983) (fed-

erally insured, state-chartered associations). Two-thirds of each participant's board of directors

must approve a merger plan prior to submitting a merger application. The application must in-

clude copies of the executed merger agreement and certified copies of the minutes from the boards

of directors' meetings approving the plan, and a shareholders vote may be required. Id § 546.2(c),

(e).After the staff reviews the application to ensure that it is complete, notice of the proposed merger

must be published, and the application is subject to public review and comment for a period of

between 25 and 32 days. Id §§ 543.2(d), (e), 546.2(d)(1). The time period for consideration may

be extended further if a protest is filed against the proposed merger. An opportunity for oral argu-

ment may be provided in certain circumstances. See id §§ 543.2(e)-(), 546.2(d)(1).

The FHLBB approves merging an insured association into a federally chartered savings and loan

association, and the FSLIC approves other mergers of insured associations. In certain cases, the

Principal Supervisory Agency may approve a merger pursuant to authority delegated by the

FHLBB or the FSLIC. See id §§ 546.2(i), 563.22(e). Only the FHLBB or the FSLIC may deny a

merger application. Id

141. 12 U.S.C. § 1730 (1982).

142. The NHA applies only when the acquisition is being made by a savings and loan holdingcompany or other company. See id. 1730a(l)(A). The HOLA applies when one insured associa-

tion is acquiring another insured association through merger. See 12 U.S.C. § 1464(d)(1 1) (1982). If

a transaction is subject to either of these provisions, the CSLCA is expressly inapplicable. See 12

U.S.C. § 1730(q)(17) (1982); 12 C.F.R. § 563.18-2(d) (1983).

143. A "person" is "an individual or a corporation, partnership, trust, association, joint ven-

ture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity

not specifically listed herein." 12 U.S.C. § 1730(q)(8)(A) (1982). This definition is identical to that

of the CBCA. See 12 U.S.C. § 18170)(8) (1982).

144. "Control" is "the power, directly or indirectly, to direct the management or policies of an

insured institution or to vote 25 per centum or more of any class of voting securities of an insured

institution." 12 U.S.C. § 1730(q)(8)(B) (1982). The FHLBB applies a rebuttable presumption of

control if a person acquires 10% or more ofany class of an insured institution's voting securitiesand

the institution has assets of at least $250 million and 1200 or more shareholders, or if the person is

the largest shareholder of the institution after the acquisition. 12 C.F.R. § 563.18-2 (1983). Five

attempts were made to rebut the presumption of control during 1982. The FSLIC determined that

the presumption had been rebutted in three of the five cases. See 16 FHLBB ANN. REP. 12 (1983).

145. See 12 U.S.C. § 1730(q)(1) (1982). The CSLCA requires that the notice filed with the

FSLIC contain the same information as a notice filed under CBCA. Compare id § 1730(q)(6)

(CSLCA notice requirements) with 12 U.S.C. § 18176)(6) (1982) (CBCA notice requirements).

The agency interpretation of when the requirements are met will vary with the circumstances of a

particular transaction.




posed acquisition or extending the review period fo r another thirty days,

the proposed transaction may be consummated at the end of the review

period.146 The FSLIC may issue written notice of its intent not to disap-

prove the acquisition before the expiration of the review period, at

which point the acquiror may consummate the proposed transaction.147

The grounds fo r disapproving a notice filed under the CSLCA are

similar to those of the CBCA.148 A person whose proposed acquisition is

disapproved may request a hearing by the FSLIC on the acquisition,

and may appeal an unfavorable decision after the hearing.' 49 CSLCA

standards differ from NHA standards applicable to a savings and loanholding company, just as CBCA standards differ from BHCA standards

applicable to a bank holding company.

B. Identiing he Would-Be Acquirors

1. Savings and loan holding companies

A savings and loan holding company that seeks to acquire additional

savings and loan associations faces hurdles similar to those that bank

holding companies face when they acquire banks. Acquisitions of addi-

tional savings and loan associations by savings and loan holding compa-

nies are subject to the antitrust, financial, and managerial standards ofthe NHA. t50 Moreover, a unitary savings and loan holding company

that becomes a multiple savings and loan holding company by acquir-

ing another association must meet the restrictions on nonthrift-related

activities. 1 5 '

Unitary savings and loan holding companies with significant non-

thrift business activities may be reluctant to acquire additional associa-

tions for the same reason that nonbank holding companies are reluctant

to acquire banks. 52 The FSLIC, however, allows a unitary savings andloan holding company to maintain its status by merging an acquired

savings and loan association into its existing thrift subsidiary immedi-

146. 12 U.S.C. § 1730(q)(1) (1982). The FSLIC may extend the review period beyond the

additional 30 days "only if the [FSLIC] determines that any acquiring party has not furnished all

the information required [by the CSLCA] or that in [the FSLIC's] judgment any material informa-

tion submitted is substantially inaccurate." Id

147. 12 C.F.R. § 563.18-2(g) (1983).

148. The FSLIC may disapprove the acquisition if it would violate the CSLCA's antitrust

standards; if the financial condition of the acquiror would jeopardize the interests of the acquiredassociation; if the competence of the acquiror's management is questionable; or if any acquiror fails

or refuses to supply required information. 12 U.S.C. § 1730(o)(7) (1982).

149. Id § 1730(q)(4)-(5).150. See supra notes 128-30 and accompanying text (discussing NHA's antitrust, managerial,

and financial requirements).

151. See supra notes 132-35 and accompanying text (discussing restrictions on nonthrift activi-

ties of multiple savings and loan holding companies).152. Se e supra notes 68-70 and accompanying text (discussing restrictions on nonbanking activi-

ties of bank holding companies).

1984] 339




ately. 5 3 This two-step procedure provides an avenue fo r a holding com-

pany to acquire additional stock savings and loan associations without

divesting itself of its other business activities.

Although domestic building and loan associations l5 4 face no statutory

impediment to making out-of-state acquisitions, the FSLIC generally

has not approved interstate acquisitions unless they are necessary to pre-

vent the failure of the target association. 155 Once a savings and loan

association or holding company makes a supervisory interstate acquisi-

tion, however, it can make additional friendly or unfriendly acquisitions

within that state.' 56

Recent amendments to the HOLA prohibit a federally chartered as-

sociation from establishing, retaining, or operating branches in morethan one state unless it qualifies as a domestic building and loan associa-

tion or meets an asset composition test. 157 Moreover, no association may

operate or retain an out-of-state branch unless the total assets of the

association's branches in that state meet these requirements. 158 This

limitation does not apply to a branch acquired in a Garn-St Germain

Act extraordinary acquisition approved by the FSLIC, to a branch au-

thorized prior to the enactment of the amendments, to a branch located

in a statethat permits the establishment of a branch by a state-

chartered association in the state in which the acquiror's home office is

located, or to a branch that was operated lawfully as a branch under

state law prior to the association's conversion to a federal charter. 159

2. Companies that are not savings and loan holding companies

Companies that are not already savings and loan holding companies

face relatively few restrictions in acquiring control over a single savings

and loan association. A unitary savings and loan holding company'snonthrift business activities are not restricted unless its subsidiary associ-

ation fails to qualify as a domestic building and loan association. Thus,

a company other than a savings and loan holding company that seeks to

153. See, e.g., Kaneb Servs., Inc. v. FSLIC, 650 F.2d 78, 80 (5th Cir. 1981) (reviewing facts of

savings and loan acquisition and FSLIC approval).

154. For a definition of domestic building and loan association, see supra note 134.

155. See 12 C.F.R. § 556.5(a)(3) (1983). The FHLBB prefers in-state purchasers or those in the

samestandard

metropolitan statistical area as the acquired association. Id Nevertheless, the

FSLIC had approved more than 20 interstate transactions by April 1982. See 15 FHLBB ANN.

REP. 16-17 (1982).

156. See 12 C.F.R. § 556.5(a)(3)(iii) (1983). For example, City Federal Savings and Loan Asso-

ciation, whose home office is in New Jersey, based its recent unfriendly tender offer for acquisition

of a Florida savings and loan association on this provision. See infra notes 179-83 and accompanying

text.157. See 12 U.S.C. § 1464(r)(1) (1982); supra note 134 and accompanying text.

158. 12 U.S.C. § 1464(r)(1) (1982).

159. See id § 1464(r)(2).




acquire a single savings and loan association need not divest itself of its

nonthrift business activities if it maintains or establishes the "thrift"

characteristics of its subsidiary association.

Moreover, the NHA's standard fo r reviewing the application of acompany that intends to acquire a single savings and loan association is

not as rigid as that used in reviewing an acquisition by an existing sav-

ings and loan holding company. 160 The NHA directs the FSLIC to ap-

prove an acquisition of a single savings and loan association by a

company that is not already a savings and loan holding company unless

the acquiror's financial and managerial resources are inadequate and

the future prospects of the acquiror and the savings and loan association

present a risk to the association or the insurance program of theFSLIC. 161 The FIDA 162 would not change the substantive standard

under which an application is reviewed, although it would limit the ac-

tivities of certain savings and loan holding companies.1 63

3. Foreign companies

Foreign companies also can become savings and loan holding compa-

nies by acquiring savings and loan associations. 164 A foreign company

that acquires control of an association is subject to the same restrictionsas other savings and loan holding companies.' 6 5 Only three foreign

companies were registered with the FHLBB as savings and loan holding

companies as of March 1983,166 but that number may increase quickly

as savings and loan associations become more attractive investments.6 7

4. Savings and loan associations

Acquisitions of savings and loan associations by savings and loan

160. Vartanian, The Role ofthe Savingsand Loan Holding Company in the CurrentRegulatloy Clinate,

in THRIFr ACQUISITIONS AND SUPERVISORY PROBLEMS: THE FDIC AND FHLBB SPEAK 75, 77

(1982).

161. 12 U.S.C. § 1730a(e)(1)(B) (1982). The FSLIC need not conduct the antitrust review

required when existing savings and loan holding companies acquire additional subsidiary associa-

tions. The FSLIC also has less flexibility to analyze financial and managerial resources than it does

when it analyzes an acquisition by an existing savings and loan holding company. The standards

also are considerably less stringent than those applied to an acquisition subject to the BHCA. Even

this more limited standard, however, permits the FSLIC to impose financial conditions on compa-

nies that acquire insured savings and loan associations. See Kaneb Servs., Inc. v. FSLIC, 650 F.2d

78, 82 (5th Cir. 1981) (congressional intent gives FSLIC authority to impose conditions upon ap-

proval of savings and loan holding companyacquisition). In spite of what appears to be relatively

straightforward statutory language, the FHLBB has effectively adopted a moratorium on acquisi-

tions of thrift institutions by securities firms. See FHLBB Statement by Edwin J. Gray, Chairman

(Sept. 22, 1983).

162. Supra note 8.

163. Id

164. Acquisitions by foreign companies are governed by 12 U.S.C. § 1730a(e) (1982).

165. Id

166. See FHLBB, MEMBERS OF THE FEDERAL HOME LOAN BANK SYSTEM 1982, at 86 (1983).


1984]




holding companies are frequently accomplished by mergers rather than

stock purchases. Because mutual savings and loan associations have no

stock to be acquired, they cannot be formed or acquired by holding

companies, except in connection with a conversion from the mutual tothe stock form of ownership. 168 In addition, the holding company form

of control is less prevalent in the savings and loan industry than in the

commercial banking industry. 169 Finally, HOLA precludes federally

chartered savings and loan associations from themselves becoming sav-

ings and loan holding companies by acquiring the stock of another asso-

ciation. 70 Therefore, the merger provisions of the HOLA are the only

mechanism by which a federally chartered savings and loan association

can acquire the assets of another association.t

7 '

5 Individualsandgroups that are not companies

An individual's acquisition of a savings and loan association or hold-

ing company is subject only to the CSLCA. If an individual makes an

acquisition in conjunction with an affiliated company or with a group of

other individuals, the application of the CSLCA or the NHA, a consid-

eration similar to that raised by the CBCA and the BHCA, must be

considered. Application of the "controlling influence" test in the NHA'sdefinition of control will dictate whether to proceed under the CSLCA

or under the NHA.172

The FHLBB's determination of the existence of a company is based

on considerations similar to those used in the commercial banking area.

As under the BHCA, an individual acting for himself rather than for a

business organization is not a company fo r purposes of the NHA. 73

Shareholders who adopt formal agreements that govern their ownership

or voting rights, however, are considered to be a company by the

FHLBB.1 74

168. See supra note 115 and accompanying text.

169. See FHLBB, MEMBERS OF THE FEDERAL HOME LOAN BANK SYSTEM 1982 (1983) (even

many stock savings and loan associations are not controlled by holding companies).

170. See 12 U.S.C. § 1464(c) (1982) (federally chartered savings and loan association may no t

acquire shares of another federally insured association). State-chartered savings and loan associa-

tions may be authorized by state law to invest in another savings and loan association. The

FHLBB has allowed an acquiring association in those situations to obtain the target's shares pursu-

ant to Section 408(e) of the NHA and to file an application subsequently to merge the two associa-

tions. See, e.g., Virginia First Say. and Loan, FHLBB No. 80-608 (Sept. 30, 1980) (FHLBB

resolution).

171. See infia notes 176-83 and accompanying text (discussing an FHLBB staff interpretation

that assists savings and loan associations in making unfriendly acquisitions).

172. Cf supra notes 83-92 and accompanying text (discussing whether BHCA or CBCA applies

to acquisition of shares in bank or bank holding company).

173. See, e.g., FHLBB General Counsel Opinion (Dec. 23, 1965).

174. See, e.g., FHLBB General Counsel Opinion (June 22, 1976); FHLBB General Counsel

Opinion (Nov. 6, 1975); FHLBB General Counsel Opinion (Aug. 8, 1974); FHLBB General Coun-

sel Opinion (Nov. 23, 1970). The definition of "company" includes:




C Issues That May Arise in Unfriendly Takeover Attempts

Many of the issues that have been discussed in the context of un-

friendly takeovers of commercial banks have not yet arisen in actions

before the FHLBB or the FSLIC. If they should arise, however, they

would raise considerations with respect to unfriendly or contested take-

overs similar to those in the commercial banking area. The decisions of

the bank regulatory agencies, therefore, provide some precedent for

resolving the issues.1 75

Laws governing savings and loans associations and the characteristics

of that industry present three other issues, however, that would-be ac-

quirors of savings and loan associations must consider.

I Unfriendly acquisitionsby merger

Savings and loan associations unaffiliated with holding companies

can make acquisitions only under the merger provisions of the

HOLA.176 The FHLBB's merger procedures, however, are not suitable

for regulating unfriendly acquisitions. The regulations require, fo r ex-ample, that an application for prior approval of a merger be accompa-

nied by an executed merger agreement and certified copies of minutes

from a meeting of the target's board of directors endorsing the

merger. 77 This requirement would be impossible to fulfill in an un-

friendly situation until the acquiror obtains control of the target.

In friendly merger transactions, on the other hand, the FSLIC and

FHLBB have routinely allowed savings and loan associations to hold the

shares of other associations fo r very short periods of time prior to con-summation of the transaction after they have entered into friendly

merger agreements. 78 A savings and loan association's inability to hold

the types of entities which, because of their capacity to bring together diverse stockhold-

ings and exercise their voting power under single control for substantial periods, would be

most likely to be able to raise the necessary capital to finance the acquisition of savings

and loan associations and to engage in holding company operations.HR. REP. No. 997, 90th Cong., 2d Sess. 7, reprintedin 1968 U.S. CODE CONG. & AD. NEWS 1601,

1607, Like the CBCA, the CSLCA is relatively uncomplicated procedurally. See supra notes 145-46and accompanying text. The CSLCA, also like the CBCA, does not explicitly provide standing for

the target to oppose a notice of application filed under it or to appeal any FSLIC decision. Anacquisition made under the CSLCA therefore generally will be easier than one under the NHA orthe HOLA.



177. See 12 C.F.R. § 546.2(c) (1983).178. In these transactions, the regulatory agency requires the acquiring association to file a

merger application in connection with its tender offer or other purchase contract, and to place inescrow, but not to purchase, any shares that are tendered or are subject to an option contract, until

the merger application is approved. See Letter from Michael Klein, Esq., Wilmer, Cutler & Picker-

ing, to James J. Finn, Secretary of FHLBB 9 (Jan. 31, 1983). If the merger application is not

approved, any shares in escrow are returned to the offering shareholder. The acquiring associationis allowed to purchase the shares only after the merger application is approved, in connection with

1984]




the shares of another association apparently makes control for a longer

period inconsistent with the provisions of the HOLA.

In City Federal Savings and Loan Association's recent acquisition of

Home Federal Savings and Loan Association the FHLBB's legal staffmay have provided a detour around this difficulty. City Federal, a fed-

erally chartered savings and loan association not affiliated with a hold-

ing company, approached Home Federal with a merger proposal.

When that proposal was not accepted by Home Federal's board ofdirec-

tors, which instead endorsed a competing proposal, City Federal an-

nounced an unfriendly tender offer and submitted to the FHLBB the

filings required by the federal securities laws.

City Federal further requested an opinion from the FHLBB that itsacquisition of Home Federal shares prior to its filing an application for

approval of a merger of the tw o associations did not violate the HOLA's

limitation on permissible investments or the FHLBB's policy restrictions

on interstate acquisitions. The FHLBB's General Counsel responded

that acquiring and holding at least two-thirds of Home Federal's shares"solely for the purpose of facilitating a merger" was permissible, pro-

vided that City Federal would divest itself of the Home Federal shares ifit was unable to complete a merger agreement and gain approval of its

application by the FHLBB.17 9 Under this interpretation, a federal sav-

ings and loan association may not have to file an application for the

FHLBB's prior approval before purchasing the shares if its intent is im-mediately to propose a merger that will be approved with the very

shares it purchased. 180

a "simultaneous" closing of the merger agreement. The shares are thus "held" by the acquiror-

arguably in technical violation of the statute-for an insignificant period of time before the tw oassociations are merged.

179. Letter from Thomas P. Vartanian, General Counsel of FHLBB, to Robert C. Sheehan,

Esq., Counsel to City Federal Savings and Loan Association (Jan. 19, 1983).180. The exchange of letters between the FHLBB and City Federal was ambiguous as to

whether City Federal was required to file an application for approval before purchasing two-thirds

of the outstanding voting shares and thus obtaining "control" over Home Federal. In litigationfiled in response to the FHLBB staff action, the FHLBB's and FSLIC's legal staff took the position

that no prior approval was required if a merger application was filed within 90 days of the acquisi-tion. See FHLBB and FSLIC Memorandum in Support of Motion to Dismiss and in Opposition toPlaintiff's Motion For Temporary Restraining Order at 15-18, C&C Interstate Fin. Corp. v. City

Fed. Sav.&Loan Ass'n, No. 83-0225 (D.D.C. filed Jan. 28, 1983). The FHLBB Opposition Memo-

randum also acknowledged explicitly that the opinions expressed in the letter and in documents

filed with the court were not orders of the FHLBB or the FSLIC, and that the agencies were not

bound by the opinions. See id at 5.The Federal Reserve Board's policy with respect to the acquisition of shares in anticipation of a

merger is much stricter. The Board requires an application for its prior approval under the BHCA

of acquisitions of "a bank or bank holding company, if the acquisition results in the company'scontrol ofmore than 5 percent of the outstanding shares of any class of voting securities of the bank

or bank holding company," Revised Regulation Y,supra note 29 , at 821 (to be codified at 12 C.F.R.§ 225.11 (c)), and an application for approval of a "merger or consolidation of bank holding compa-

nies." Id (to be codified at 12 C.F.R. § 225.11 (e)). Although the Federal Reserve Board exempts

from application for approval mergers or consolidations of subsidiary banks or bank holding com-




Whether the FHLBB staffs opinion will be followed by the FHLBB

or FSLIC is unknown at this point. The issue was not decided in the

City Federal proposal because the competing bidder withdrew its offer

and Home Federal's board agreed to accept a revised offer from City

Federal. There is a strong argument that acquisition of control for a

period that may extend six months or longer while the FHLBB or the

FSLIC reviews the application contravenes the language and statutory

purposes of the HOLA and NHA. At a minimum, it is the only instance

in which an acquiror can deliberately acquire control of a depository

institution for more than an insignificant period of time without someform of prior review of its acquisition by a regulatory agency.18 1

The staff decision gives a significant advantage to a savings and loanassociation in a takeover contest with a company that cannot use the

merger provisions in HOLA. Further, it raises questions regarding the

risks to minority shareholders if shares subsequently must be divested by

the acquiror. 182 On the other hand, it may merely reflect a willingness

on the part of the FHLBB's staff to relax the FHLBB's otherwise rigid

regulations with respect to merger proposals. Either way, a revision of

the regulations under established rulemaking provisions would be

preferable.

183

2 Sale of control conversions

In a "standard conversion," whereby an association converts from the

mutual to the stock form of ownership, no person can acquire more than

ten percent of the stock of the association fo r at least one year after the

panics with other banks, the exemption does not include mergers of nonsubsidiary banks and non-

operating subsidiary banks formed by a company for the purpose of acquiring the nonsubsidiarybank. Id (to be codified at 12 C.F.R. § 225.12(d)). Moreover, the Board requires a BHCA applica-

tion for an acquisition of shares followed by a merger if the acquisition and the merger "do not

occur simultaneously." 48 Fed. Reg. 23,525-26 (1983) (background and summary of Proposed Re-

vision of Regulation Y).181. Acquisitions under this procedure stand in contrast to those in which a person is permit-

ted to acquire shares by devise or inheritance, 12 U.S.C. § 1730a(e)(l)(B) (1982), by foreclosing on

debt contracted for previously in good faith, 12 U.S.C. § 1842(a) (1982), or in a good faith fiduciary

capacity. Id. The transfer of the shares was subject to the control of a third party other than the

acquiror in each of those instances. There was some informal staff review prior to City Federal's

proposed acquisition, because the staff was familiar with City Federal and was aware of its planned

acquisition through its request for a staff opinion. The review, however, was not of the kind that is

ordinarily required before control of a depository institution changes hands.182. For example, divestiture may result in a significant decline in the market value of shares

held by a minority shareholder.

183. The scope of the staff's opinion is unclear in several situations that may be logical exten-

sions of its reasoning. For example, the opinion does not address whether this mechanism can beused to acquire shares of a savings and loan holding company "solely for the purpose of facilitating

a merger" with a subsidiary association of the holding company. Further, it does not address

whether current savings and loan holding companies and state-chartered associations, which are

not restricted by the investment limitations of the HOLA, can acquire shares of a savings and loanassociation to facilitate a merger without first obtaining prior approval under the NHA.

1984]




effective date of the conversion.' 8 4 An acquiror, therefore, cannot make

an unfriendly acquisition pursuant to a standard conversion of an asso-

ciation.' 85 Although management and other insiders usually will have

the only significant block of stock at the end of the first year after con-version, they generally will have no more than twenty-five percent of the

association's stock. The remaining stock in a converted association typi-

cally is sufficiently disbursed that an unfriendly takeover offer is still

possible.

The 1983 revision of the FHLBB's conversion regulations appeared to

create an opportunity fo r acquisitions that resemble unfriendly take-

overs in certain mutual-to-stock conversions. The regulations adopted

procedures for the "sale of control" as part of the conversion process. 186

Although the FHLBB has now proposed to rescind those regulations,

their format provided an example of a means of making an unfriendly

offer for a thrift institution in some circumstances.

In a sale of control conversion, the association and the acquiror would

enter into a binding agreement in which the association agreed to sell all

or a significant portion of the converting association's stock to the ac-

quiring person fo r a price equal to the market value of the stock, plus a

control premium designed to reflect the pro forma fair market value ofthe control represented by the block. A sale of control conversion must

be approved by two-thirds of the association's board of directors and a

184. No person can acquire more than five percent of the shares in the conversion, unless the

plan of conversion specifically allows acquisition of up to 10% for each person. Ste 12 C.F.R.

§ 563b.3(c)(6)(i), (c)(7), (d)(5) (1983). A group of persons, other than management and insiders,

cannot act in concert to circumvent this requirement. Management and other insiders acting in

concert, however, can acquire up to 25%, and in certain circumstances up to 35%, of the converting

association's stock. Id § 563b.3(c) (8).

185. The conversion regulations adopted by the FHLBB in March 1983 also may limit the

ability of some associations to adopt antitakeover charter provisions that extend beyond the first

anniversary of the conversion. Prior to 1982, converting associations could adopt charter provisions

that prohibited any person from acquiring more than 10% of the converted association's stock for

up to three years after the cornversion, and require a supermajority vote of the shareholders to

amend the charter provision. See 12 C.F.R. § 563b.3-.9 (1980) (superseded 1982). The FHLBB

adopted regulations in 1982 that would have permitted converting associations to adopt the charter

provisions for up to three years, and on a year-by-year basis after the three years, subject to amend-

ment by a majority vote of the association's shareholders. See 47 Fed. Reg. 19,676 (1982) (amend-

ing 12 C.F.R. § 563b.3). In March 1983, the FHLBB adopted the current regulation that permits a

converting association to adopt a one-year restriction on any person acquiring more than 10% of

any class of the converted association's equity securities, and any other defensive charter provisions

permitted by the laws of the state in which the main office of the association is located. See 48 Fed.

Reg. 15,602 (1983) (to be codified at 12 C.F.R. § 563b.3(i)(7)). The converted association must file

an opinion of independent counsel with its charter amendment that the amendment is permitted

by state law. Id The one-year restriction was reextended to three years in February 1984. See 49

Fed. Reg. 7356 (1984); supra note 118.

186. FHLBB regulations governing "sale-of-control" conversions were published at 48 Fed.

Reg. 15,594-97 (1983) (to be codified at 12 C.F.R. § 563b. 11-.19). In January 1984, however, the

FHLBB announced its proposed rescission of the sale-of-control conversion regulations. See 49 Fed.

Reg. 415 (1984).




majority of the members of the association.'8 7

When the association's board of directors had approved a sale of con-

trol conversion, other bidders could offer competing bids to the associa-

tion's members. The right to make competing offers was protected by

the requirement that the association distribute immediately and widely

a press release setting forth the principal terms of the proposed sale of

control conversion.'8 8 Persons who wished to make competing offers

thus would be on notice that control of the association is available. 8 9

The right to make competing offers was also protected because the con-

verting association had an obligation to distribute materials concerning

the competing offer to its members when an offer had been filed with

and approved by the FSLIC. 19° Further, the meeting of the associa-tion's members to vote on the originally proposed sale-of-control conver-

sion was automatically postponed for seventy days. 191

These provisions were designed to protect the association and enhance

the control premium in a sale-of-control conversion. 92 For would-be

acquirors, they provided an opportunity, similar in form to an un-

friendly takeover, to acquire the association without obtaining the ap-

proval of the target's board of directors.'9 3

3. Cross-indusig , acquisitions

The possibility that a commercial bank or bank holding company

would attempt an unfriendly takeover of a savings and loan association

or savings and loan holding company, or vice versa, has always been

remote. The regulatory steps that must be traversed have made such

attempts impractical. The Garn-St Germain Act 194 has done nothing to

change those steps, although it has enhanced the prospects of cross-in-

dustry acquisitions in supervisory situations.

95

187. See 12 CTF.R. §§ 563b.4(a)(3), 563b.6(e) (1983).

188, 48 Fed. Reg. 15,596 (1983) (to be codified at 12 C.F.R. § 563b.14(c)).189. A person making a competing offer must file a sale-of-control conversion application with

the FSLIC within 20 days of the date on which management's proxy statement is sent or given tothe association's members. 48 Fed. Reg. 15,597 (1983) (to be codified at 12 C.F.R. § 563b.lb(c)(1)).

190. 48 Fed. Reg. 15,597 (1983) (to be codified at 12 C.F.R. § 563b.1).

191. 48 Fed. Reg. 15,597 (1983) (to be codified at 12 C.F.R. § 563b.16(d)).

192. 48 Fed. Reg. 15,595 (1983). The principal purpose of the regulations was to enhance the

possibilities of raising capital in the conversion process. Id

193. FHLBB regulations also ensured that the acquiror does not acquire additional sharesother than at the presumably higher sale-of-control price. The plan for a sale-of-control conversionmust provide that no acquiring person can receive, or be entitled to, subscription rights in connec-

tion with the conversion. 48 Fed. Reg. 15,596 (1983) (to be codified at 12 C.F.R. § 563b.12). More-

over, no acquiring person can purchase any shares involved in the conversion except the shares

issued in connection with the sale-of-control agreement. Id

194. 12 U.S.C. § 1823(0 (1982).

195. FIDA, supra note 8, however, would completely change this result. The bill would allow

bank holding companies to acquire savings and loan associations, and vice versa, thus making un-

friendly takeover attempts more likely. See supra notes 8-9 and accompanying text.

1984]




Prior to the passage of the Garn-St Germain Act, cross-industry ac-

quisitions were governed solely by the provisions of the BHCA and the

NHA. The NHA offered no real impediment to the acquisition of a

single savings and loan association by a bank holding company becausethere were no restrictions on the unrelated business activities of unitary

savings and loan holding companies. The FHLBB, however, had gener-

ally opposed the acquisition of savings and loan associations by bank

holding companies except in supervisory situations.196

In addition, under the provisions of section 4(c)(8) of the BHCA, the

Federal Reserve Board consistently denied acquisitions of even one sav-

ings and loan association under the BHCA by a bank holding company,

except in states in which banks and savings and loan associations havehistorically been affiliated. 197 In fact, the Board has specifically in-

cluded the operation of a savings and loan association on its list of non-

bank activities that are not permitted fo r bank holding companies. 9 8 In

denying such acquisitions, the Federal Reserve Board found that the

operation of a savings and loan association, although "closely related" to

banking, was not a "proper incident" thereto. 199

In 1982 the Federal Reserve Board approved for the first time acquisi-

tions of financially troubled savings and loan associations by bank hold-

196. STAFF OF TH E BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, BANK HOLD-

ING COMPANY ACQUISITION OF THRIFT INSTITUTIONS 4 (1981).

197. The Federal Reserve Board has allowed savings and loan associations to acquire commer-

cial banks, and thus become bank holding companies, in Rhode Island. Se e Old Colony Co-op.Bank, 58 Fed. Res. Bull. 417 (1972); Newport Say. and Loan Assoc., 58 Fed. Res. Bull. 313 (1972).

Although banks were acquired by savings and loan associations in those cases, the applicationsraised the same issues as would a bank's acquisition of a thrift institution. See Old Colony Co-op.Bank, 66 Fed. Res. Bull. 665 (1980) (operation of building and loan association closely related toRhode Island banking). The Federal Reserve Board also has approved the acquisition of guaranty

savings banks by bank holding companies in New Hampshire. See First Fin. Group of N.H., Inc.,

66 Fed. Res. Bull. 594 (1980); Profile Bankshares Inc., 61 Fed. Res. Bull. 901 (1975). In both the

Rhode Island and the New Hampshire situations, the Board found that the historical affiliation ofbanks and thrifts made the acquisitions permissible nonbank activities in those states.

198. See 12 C.F.R. § 225.126 (1983).199. See, e.g., D.H. Baldwin Co., 63 Fed. Res. Bull. 327 (1977); American Fletcher Corp., 60

Fed. Res. Bull. 868, 870 (1974).In 1981, in dismissing an application filed by National Detroit Corporation, a bank holding

company, to acquire Landmark Savings and Loan Association, the Federal Reserve Board re-quested public comments on the potential effect of the acquisition of thrift institutions by banks

and bank holding companies. National Detroit Corp., 67 Fed. Res. Bull. 440 (1981). The com-ments were used to prepare a study the Board prepared for Congress, in September 1981. SeeLetter from Paul A. Volcker, Chairman, Board of Governors of the Federal Reserve System, to

Senator Jake Garn, Chairman, Senate Committee on Banking, Housing and Urban Affairs (Sept.21, 1981) (enclosing BANK HOLDING COMPANY AcQUISITION OF THRIFT INSTITUTIONs,: A STUDY

BY THE STAFF OF THE BOARD OF GOVERNORS OF TH E FEDERAL RESERVE SYSTEM (1981)). Stud-

ies were also prepared by the Comptroller of the Currency, the FHLBB, and the FDIC in responseto a similar request from Congress. See, e.g., Cross-Industry Acquisitions Between Thrift Institu-

tions and Commercial Banks: A Paper by the Staff of the Office of the Comptroller of the Currency(January 1982), reprinted in Comptroller ofCurrency Report to Senate Banking Committee on Cross-lndustrvAcquiritions, 13 WASH. FIN. REP. T-1 (Mar. 29, 1982). These studies generally supported cross-

industry acquisitions, although they preferred express authorization by Congress.




ing companies in states other than those with historical ties between the

two kinds of institutions.200 In order to secure the approvals, the acquir-

ing bank holding companies agreed to several conditions designed to

ensure that the acquired associations retained their identities as thrift

institutions.21 The conditions were also intended to prevent the acquir-

ing bank holding companies from deriving any competitive advantage

from affiliation with a savings and loan association. 20 2

The quasi-supervisory nature of these acquisitions diminishes their

value as models for unfriendly acquisitions. The active participation of

the regulatory agencies, and the Federal Reserve Board's efforts to fit

these decisions within the framework of its earlier denials of such acqui-

sitions, limit the value of these decisions as precedent without an expan-

sion of the Board's interpretation of the "proper incident" language in

the BHCA.

The Garn-St Germain Act may have further limited the opportunities

for unfriendly, cross-industry acquisitions. The Act amended the Fed-

eral Deposit Insurance Act 20 3 and the NHA to provide authority for"extraordinary acquisitions," including cross-industry and out-of-state

200. &e Citicorp, 68 Fed. Res. Bull. 656 (1982) (acquisition of Fidelity Federal Savings and

Loan Association by out-of-state bank holding company); Interstate Fin. Corp., 68 Fed. Res. Bull.

316 (1982) (acquisition of Scioto Savings Association by in-state bank holding company).

201. For example, Citicorp agreed: that Fidelity would be operated as a federal savings and

loan association with the primary purpose of providing residential housing credit; that Fidelity

would not "establish or operate a remote service unit" outside California; that Fidelity would not"establish or operate branches at locations not permissible for national or state banks located in

California"; that Fidelity would be operated as a "separate, independent profit-oriented corporate

entity" distinct from other Citicorp subsidiaries; that certain transactions between Citicorp andFidelity would be subject to the prior approval of the Federal Reserve Bank of New York; that

Fidelity's name would not be changed to include the word "bank or any other term that might

confuse the public" as to its status as a nonbank thrift institution; and that Fidelity's charter wouldnot be converted to that of a state savings and loan association, a state-chartered thrift institution,

or a state or national commercial bank without the prior approval of the Federal Reserve Board.

See Citicorp, 68 Fed. Res. Bull. 656, 659 (1982). The acquiring bank holding companies in both

cases also agreed not to engage in activities through the acquired association that were not other-

wise permitted activities of bank holding companies. In 1982 the Federal Reserve Board also dis-missed a bank holding company's application to acquire a savings and loan association when the

bank holding company refused to accept a similar limitation on its activities. See Central Pac.

Corp., 68 Fed. Res. Bull. 382 (1982) (application to acquire Kern Savings and Loan Association).In 1983 Citicorp was granted approval to expand the activities of its subsidiary saving and loan

associations consistent with the increased powers granted to thrifts by the Garn-St Germain Act. See

Citicorp, 69 Fed. Res. Bull. 554 (1983).

Since 1982 at least three other applications by bank holding companies to acquire financially

troubled savings and loan associations have been approved by the Federal Reserve Board. See Cit-

icorp, 70 Fed. Res. Bull. 157 (1984) (acquisition of Biscayne Federal Savings and Loan Association);Citicorp, 70 Fed. Res. Bull. 149 (1984) (acquisition of First Federal Savings and Loan Association);Old Stone Corp., 69 Fed. Res. Bull. 812 (1983) (acquisition of Perpetual Savings and Loan

Association).

202. See Carrington, Citicorp Wis FedApproval to Buy 2 S&Ls, Wall St. J., Jan. 23, 1984, at 7,col. 3 (Citicorp's recent acquisitions will blur distinction between thrift and banking industries).

203. See 12 U.S.C. § 1823(0 (1982).




acquisitions, to prevent failures of insured depository institutions. 20 4 Ex-traordinary acquisitions are subject to elaborate procedural require-

ments and supervisory findings; consequently, they are unlikely to

provide a basis for unfriendly acquisitions. 20 5 Moreover, the FederalReserve Board and other regulatory agencies may interpret the provi-sions of the Garn-St Germain Act as an expression of Congress' unwill-ingness to allow cross-industry acquisitions, except in supervisory

acquisitions of failing institutions.20 6

IV. CRITICAL ANALYSIS OF THE REGULATORY SCHEME

Federal laws provide target institutions and potential acquirors withboth opportunities and barriers in a takeover contest. Nevertheless, the

federal regulatory structure that governs the acquisition of depositoryinstitutions-notably, commercial banks, thrifts, and their holding com-panies-is complex, confusing, and sometimes inconsistent, and shouldbe revised. If Congress does not change the present regulatory structure,

the structure will continue to impose unnecessary costs on depository

institutions and will deter economically justified unfriendly takeoversfo r reasons unrelated to the acquisition proposal.

The inconsistent treatment of commercial banks and thrifts is particu-

larly difficult to understand as a matter of policy. There is no valid rea-

son for federal regulation of changes in control of depository institutions

to treat thrifts and commercial banks differently, especially in light ofthe increasing similarity of their product powers. Further, it is not clearwhy the classification of an acquiror as a company, an individual, or anoncompany group results in different treatment. Finally, there are few

rational policy reasons fo r applying different procedural standards, in-

cluding different opportunities fo r public participation, when control ofthe target depository institution is being acquired by an informal group

204. 12 U.S.C. § 1730a(m) (1982).205. For example, the FDIC can use this authority only when an insured bank with more than

$500 million in total assets is closed. 12 U.S.C. § 1823(f(2)(A) (1982). The FSLIC can use itsextraordinary authority only when it has determined that "severe financial conditions exist whichthreaten the stability of a significant number of insured institutions or of insured institutions pos-sessing significant financial resources." 12 U.S.C. § 1730a(m)(l)(A)(i) (1982). Both the FDIC and

FSLIC must consult with the state official who has jurisdiction over the institution before invokingthe extraordinary procedure. See id § 1730a(m)(l)(B)(i) (FSLIC); 12 U.S.C. § 1823(0(2)(B)(i)(1982) (FDIC). The acquisition is then subject to a formal bidding procedure in which a bidder ofthe same type as the acquired institution is preferred. See id. § 1823(0(5) (FDIC); 12 U.S.C.§ 1730a(m)(2) (1982) (FSLIC). The first opportunity for the FDIC to use this procedure was inconnection with the failure of the United American Bank of Knoxville. For an interesting insightinto the complexity of complying with the Act's procedures and preferences, see TraascreptofFDICMeeting on FailedBank, AM. BANKER, Mar. 14, 1983, at 4, col. 1.

206. See, e.g., BHC Acquisitions of S&Ls to Be DecidedSolly Under BHCAct, Fed's General Counsel

Says, 39 WASH. FIN. REP. 771 (Oct. 25, 1982) (interview with Federal Reserve Board general

counsel).




of individuals, rather than, for example, a formal, organized limited

partnership.

Federal regulatory review of changes in control assures that deposi-tory institutions are controlled by persons or entities whose ownership is

consistent with the antitrust laws. Further, it assures that these owners

are financially and managerially qualified to run institutions that are

the basis of the nation's economic system. That the regulatory statutes

are consistent at this general level serves the federal interest in requiring

regulatory review of changes in control of depository institutions, and

emphasizes the benefits and desirability of consistency.

A sensible way to examine the problem is to ask what type of federal

review should be imposed for changes in control of depository institu-

tions-without distinguishing between thrifts and banks for these pur-

poses. Congress should then eliminate unsupportable differences in the

regulatory statutes.

After consistency is recognized as a goal, the definition of "control"

must be examined. There should be one standard definition of "con-

trol." Although the statutes generally are compatible on this point, the

BHCA contains a provision that does not expressly include as part of the

definition the "power" to exercise a "controlling influence.' '20 7

A consis-tent standard of control that includes situations in which a latent power

to control exists is nearly essential. Alternatively, Congress could substi-

tute a presumption of control from stock ownership at a level lower than

the twenty-five percent now generally used. Regulations adopted under

the CBCA and the CSLCA have set a ten percent standard for publicly-

owned companies.2-0 8 That standard is probably more realistic, but even

then, without a "controlling influence" test some changes in "control"

could still slip through without federal review.

The statutes are also generally consistent on the substantive standards

by which changes in control are judged. Where there are differences,

the standards should be made identical, regardless of the identity or

form of the acquiror or the target.

Consistent statutory standards in tw o particular areas with respect toantitrust review are especially desirable and obtainable. First, Congress

should expand the antitrust immunity created by the BMA and BHCA

after thirty days to the other statutes.20 9 Allowing immunity only for

transactions subject to the BMA and the BHCA and not for other trans-

actions is unjustified.210 Second, uniformity is needed in divestiture re-

207, Se, 12 U.S.C. § 1841(a)(2) (1982);supranote 32.

208. See supra note 55 and accompanying text (CBCA) & note 144 and accompanying text

(CSLCA).

209. Se wpra note 46 and accompanying text.

210. The statutes should also be consistent concerning whether convenience and needs of the

1984]




view, particularly in contested takeover cases. The current practice of

the Federal Reserve Board, which rigidly requires divestiture simultane-

ous with the closing of the contested transaction, imposes an artificial

and unnecessary barrier to contested takeovers. A better approach

would be to review contested transactions on a case-by-case basis, be-

cause there are other means of ameliorating short-term anticompetitive

effects before divestiture.

A public policy issue with regard to financial and managerial stan-

dards and community needs is whether to require the acquiror of a de-

pository institution to bring additional "strength" to the institution.

Although the Federal Reserve Board has adopted that requirement for

bank holding companies,2 11 the CBCA standard is simply that the ac-

quisition must not jeopardize depositors and stockholders. If depository

institutions really are special because of their role in the nation's econ-

omy, then perhaps the higher standard of the BHCA is justified. In any

event, there is no compelling justification for different financial and

management standards depending on the structure of the transaction.

The main procedural problem in the BHCA is the length and com-

plexity of the review required. The opportunity for disruption and de-

lay is obvious because there are no effective time limits. The CBCA, on

the other hand, does not formally provide for public participation in the

review process, which could lead to decisions made without relevant in-

formation. An intermediate approach would address this problem:

filing a notice together with detailed information relevant to the appli-

cable statutory standards; public notice through newspapers and the

Federal Register; and a thirty-day comment period for all transactions,

not only those controlled by the BHCA. A fixed review period could be

provided, after which the transaction could go forward unless theagency disapproved the proposed acquisition, as in the CBCA and

CSLCA.212

A decision to enact uniform definitions, substantive standards, and

procedural requirements for changes in control of depository institutions

gives rise to a logical question: is it desirable to have a single agency

responsible for regulating changes in control of depository institutions?

community orother nonantitrust factors are sufficiently compelling to override an antitrust viola-tion. This suggested change is not as significant as others, however, because the issue rarely arises.

But see Indiana Bancorp., 69 Fed. Res. Bull. 913, 913 (1983) (public benefits outweighed anticom-

petitive effects).

211. See supra note 42 and accompanying text.

212. An interesting possibility would be to prohibit anyone but the applicant from appealing

the regulator's decision. The proposed FIDA, supra note 8, § 10 , contains such a provision in a

complete revision of § 4(c)(8) of the Bank Holding Company Act, which governs nonbanking sub-

sidiaries of bank holding companies. Moreover, the federal regulator's decisions to approve a

change in control are infrequently challenged and virtually impossible to overturn.




The decisions and interpretations of a single agency are likely to be

more consistent than those of several agencies, but the issue of consistent

regulation encompasses many issues other than acquisitions of control.

For that reason, the changes suggested in this Article should go forward

notwithstanding any other moves to merge the regulatory agencies.

CONCLUSION

Acquisition of control over commercial banks and savings and loan

institutions is subject to numerous federal statutory as well as regulatory

requirements. These requirements vary considerably depending on the

character of the acquiror, the nature of the target, and the form of ac-

quisition. An analysis of the objectives of federal laws that apply totakeovers of financial institutions indicates that regulatory variations are

unwarranted. Congress is now considering legislation which would cre-

ate largely uniform product powers for federally insured depository in-

stitutions. A decision could well be made not to have uniform product

powers for thrifts and banks and not to have a single regulator for depos-

itory institutions, but nevertheless that it would be desirable to have a

uniform se t of standards governing changes in control of depository in-

stitutions. Congress and the regulatory agencies should move towardsthe goal of uniformity on this score, if no other.

1984]

Federal Banking Law

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