October 2008
TARP CAPITAL PURCHASE PROGRAM UNDER THE
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008
CHICAGO
Citigroup Center
500 West Madison Street
Suite 3700
Chicago, IL 60661-2511
phone: (312) 715-5000
fax: (312) 715-5155
MADISON
33 East Main Street
Suite 900
Madison, WI 53703-3095
phone: (608) 251-5000
fax: (608) 251-9166
On October 14, 2008, the United States Department of the Treasury (“Treasury”)
announced the creation of a voluntary Capital Purchase Program (“CPP” or the
“Program”), under which the Treasury will purchase up to $250 billion of senior
preferred shares of qualifying U.S. controlled banks, savings associations, and
certain bank and savings and loan holding companies. The CPP, which is part of
the previously announced Troubled Assets Relief Program (“TARP”), is intended to
encourage U.S. financial institutions to build capital to increase the flow of
MILWAUKEE
411 East Wisconsin Avenue
Suite 2040
Milwaukee, WI 53202-4497
phone: (414) 277-5000
fax: (414) 271-3552
financing to U.S. businesses and consumers and to support the U.S. economy.
The application for participation in the Program is available on the Treasury’s Web
site; however, the investment agreement and related documentation are not yet
NAPLES
1395 Panther Lane
Suite 300
Naples, FL 34109-7874
phone: (239) 262-5959
fax: (239) 434-4999
PHOENIX
One Renaissance Square
Two North Central Avenue
Phoenix, AZ 85004-2391
phone: (602) 229-5200
fax: (602) 229-5690
TUCSON
One South Church Avenue
Suite 1700
Tucson, AZ 85701-1621
phone: (520) 770-8700
fax: (520) 623-2418
www.quarles.com
© 2008 Quarles & Brady LLP
This document provides
information of a general nature.
None of the information contained
herein is intended as legal advice
or opinion relative to specific
matters, facts, situations or issues.
Additional facts and information or
future developments may affect the
subjects addressed in this document. You should consult with a
lawyer about your particular
circumstances before acting on
any of this information because it
may not be applicable to you or
your situation.
available. The share purchases will occur on standardized terms as described in
the CPP term sheet, which is summarized below.
Eligible Institutions
The CPP is available to “qualified financial institutions,” which include (1) banks
and savings associations that are not controlled by a bank holding company or
savings and loan holding company, (2) bank holding companies and savings and
loan holding companies that engage solely or predominantly in activities that are
permissible for financial holding companies under relevant law, (3) banks or
savings associations controlled by qualifying financial holding companies and (4)
bank holding companies and savings and loan holding companies whose U.S.
depository institution subsidiaries engage in businesses very closely related to
banking activity. To qualify, the applicant must be established and operating in the
United States and may not be controlled by a foreign bank or company. The
Treasury has the authority to determine eligibility after consulting with the
appropriate federal banking agency (“FBA”).
Because the Treasury is purchasing only senior preferred shares and warrants, certain U.S.
institutions, such as banks or bank holding companies that have elected to be taxed under
Subchapter S of the Internal Revenue Code (which are not permitted to issue preferred stock),
currently are not eligible to participate in the CPP. However, the Treasury has informally indicated
its plans to make the CPP available to Subchapter S institutions. In addition, guidance on the
Federal Deposit Insurance Company’s (“FDIC”) Web site indicates that certain institutions with less
than $1 billion in assets that serve low- to moderate-income populations and underserved
communities and that have been impacted by Fannie Mae or Freddie Mac stock depreciation may,
under certain conditions, apply for consideration under the CPP.
Application Procedure and Conditions for Participation
On October 20, 2008, the Treasury released the application for participation in the CPP as well as
guidance for participation. To participate, applicants must submit an application to their appropriate
FBA prior to 5:00 p.m. (EST) on November 14, 2008. If the applicant is a bank holding company,
the application should be submitted to both the applicant’s holding company supervisor and the
supervisor of the largest insured depository institution controlled by the applicant. For those
institutions, the capital purchase will occur at the holding company level. Each FBA will provide
information on its Web site regarding where an application for participation in the CPP should be
directed as well as submission instructions. The FBA Web sites are listed below.
1.
The Federal Deposit Insurance Company: www.fdic.gov
2.
The Federal Reserve: www.federalreserve.gov
3.
The Office of the Comptroller of the Currency: www.occ.treas.gov
4.
The Office of Thrift Supervision: www.ots.treas.gov
To be eligible for the CPP, an applicant must receive approval of the Treasury. According to a
statement by Treasury Secretary Henry Paulson, Jr. on October 20, the CPP is not being
implemented on a first-come, first-served basis; rather, an applicant’s FBA will review the
application and make a recommendation to the Treasury, which will make the final determination
whether or not to make the capital purchase. To receive approval, an applicant must agree to
certain terms and conditions and make certain representations and warranties pursuant to a
detailed investment agreement and related agreements which, at the time of this update, were not
yet available. Applicants may file an application with the appropriate FBA prior to the release of the
2
investment agreement; however, in those cases an amended application must be filed to provide
updated responses.
According to guidance issued by the Treasury, an applicant does not need to complete all of the
required authorizations by the time it submits the application, nor does it need to take action to in
fact issue the preferred shares prior to the November 14, 2008 deadline. If an applicant is unable to
achieve compliance with all of the terms and conditions (including representations and warranties)
contained in the investment agreement and related documents by November 14, it must explain, in
an attachment to its application, the conditions that cannot be met and the reasons they cannot be
met. In addition, if an applicant receives preliminary approval from the Treasury, it will have 30 days
in which to submit final documentation and fulfill any outstanding requirements (e.g., obtaining a
shareholder vote to authorize the issuance of preferred shares).
In addition, an applicant must disclose to the Treasury any mergers, acquisitions or other capital
raisings that are pending or under negotiation and the expected consummation dates for such
transactions.
According to the Treasury’s guidance, an applicant may request that specific portions of its
application be kept confidential. Such requests may be granted if the applicant demonstrates the
specific harm that would result from public release of application information and follows specific
procedures. The appropriate FBA will determine if the request is to be granted.
The Treasury’s guidance has indicated applications that are denied or withdrawn will not be
disclosed; however, the Treasury will publicly announce completed transactions within 48 hours.
Additional conditions applicable to participants are contained in the CPP term sheet. In addition,
participants in the CPP must comply with certain executive compensation standards established by
the Treasury.
Summary of the CPP Term Sheet
Investment Amounts
The minimum subscription amount available to a CPP participant is 1% of its risk-weighted assets.
The maximum subscription amount is the lesser of 3% of its risk-weighted assets or $25 billion. All
measurements of risk-weighted assets will be based on the information contained in the latest
quarterly supervisory report filed by the applicant with its FBA, updated to reflect material changes
since its filing.
3
Senior Preferred Shares
The senior preferred shares purchased by the Treasury will qualify as Tier 1 capital. The shares will
rank senior to the participant’s common stock and pari passu (i.e., at an equal level) with most
existing preferred shares of the participant. The senior preferred shares will be non-voting except
for class voting rights on issues that may affect the shares adversely. According to the Treasury’s
guidance, all capital purchases will occur at the highest-tier holding company in cases in which the
banking organization has a bank holding company or a savings and loan holding company.
According to the term sheet, the senior preferred shares will pay a dividend rate of 5% per year for
the first five years and 9% per year every year thereafter. Senior preferred shares purchased from a
holding company must cumulate over the life of the investment. However, senior preferred shares
issued by banks that are not subsidiaries of holding companies have non-cumulative dividends.
As long as any senior preferred shares are outstanding, an issuer is generally prohibited (and must
obtain consent from the Treasury) with respect to its ability to pay dividends on, or repurchase or
redeem, other classes of its stock unless all dividends with respect to the senior preferred shares
are fully paid. In addition, the consent of the Treasury is required for dividend increases with respect
to other classes of the issuer’s stock until the earlier of (1) three years from the date of the initial
investment or (2) the Treasury no longer holds any senior preferred shares of the issuer. Likewise,
the Treasury must approve most share repurchases by the issuer during the first three years of the
investment, so long as the Treasury continues to hold senior preferred shares of the issuer.
In addition, during the first three years following an investment, the senior preferred shares may be
redeemed by a participant only from the proceeds of a qualifying stock issuance by the participant.
After three years, the senior preferred shares may be redeemed at par.
Warrants
In addition to senior preferred shares, the Treasury must receive warrants to purchase common
stock of participating institutions as part of the CCP. In general, the warrants must be convertible
into an amount of common stock of the participant equal to 15% of the Treasury’s senior preferred
investment in the participant; however, the number of shares of common stock underlying the
warrants may be reduced in the event the participant engages in certain qualified equity offerings
on or prior to December 31, 2009.
4
The initial exercise price of the warrants will be the market price of the participant’s common stock
on the date of the investment in the senior preferred shares, calculated based on the 20-trading day
trailing average. The exercise price is subject to reduction in certain cases (e.g., if the participant
does not have sufficient number of shares authorized to reserve for issuance and/or approval from
the institution’s stockholders is necessary for such issuance, the exercise price of the warrants may
be reduced). The Treasury may not exercise or transfer more than 50% of the warrants prior to the
earlier of (1) the date on which the participant has received aggregate gross proceeds from
qualified equity offerings of at least 100% of the issue price of the senior preferred shares or (2)
December 31, 2009.
Executive Compensation
All financial institutions participating in the CPP will be subject to the executive compensation and
corporate governance requirements of the Emergency Economic Stabilization Act (the “Act”),
including (1) ensuring that incentive compensation for senior executives does not encourage
unnecessary and excessive risks that threaten the value of the financial institution, (2) required
clawback of any bonus or incentive compensation paid to a senior executive based on statements
of earnings, gains or other criteria that are later proven to be materially inaccurate, (3) prohibition on
the financial institution from making any golden parachute payment to a senior executive based on
the Internal Revenue Code provision and (4) agreement not to deduct for tax purposes executive
compensation in excess of $500,000 for each senior executive. These restrictions remain in place
until the Treasury no longer holds any equity or debt securities of the financial institution. The
Treasury has issued interim final rules for these executive compensation standards.
*
*
*
For more details, or if you have any questions, please contact Jim Friedman at 414-277-5735 /
[email protected], Jeffrey LaValle at 414-277-5557 / [email protected], Spencer Larche at 414277-5571 / [email protected], or your local Quarles & Brady LLP attorney.
5