Letter finds that national bank may adopt corporate governance provisions of Alabama state law and engage in a share exchange to ensure that newly formed parent holding company will own 100 percent of shares of bank. 10/12/99

The Bank would file an application with the Federal Reserve Bank of Atlanta to form the holding company.

1

See Ala. Code § 10-2B-11.02 et seq.

2

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #869

October 12, 1999

November 1999

12 USC 214

Re:

[ ] (“Bank”)

Share Exchanges Pursuant to Alabama State Corporate Law

Dear [ ]:

This is in response to your request for confirmation that the Bank may elect the corporate governance

provisions of Alabama law and complete a share exchange in accordance with those provisions. Based

on the representations that you have made, we conclude that the Bank may effect a proposed share

exchange by following the provisions of Alabama law.

Background

The Bank proposes to elect the corporate governance provisions of Alabama law through amendment

to its articles of association and bylaws, and engage in a share exchange as provided by Alabama law.

The Bank wishes to form a parent holding company and proposes the share exchange to ensure that the

holding company will own 100 percent of the shares of the Bank.

The Bank would use several steps to accomplish the share exchange. The Bank would form a

company to act as the holding company of the Bank. The shareholders of the Bank would vote on the

1

plan of share exchange. If the holders of two-thirds of the shares of the Bank approve the share

exchange, the holding company would then exchange its shares for shares of the Bank using the

procedures described in Alabama law. As a result, each shareholder of the Bank would own shares

2

d form a

company to act as the holding company of the Bank. The shareholders of the Bank would vote on the

1

plan of share exchange. If the holders of two-thirds of the shares of the Bank approve the share

exchange, the holding company would then exchange its shares for shares of the Bank using the

procedures described in Alabama law. As a result, each shareholder of the Bank would own shares

2

- 2 -

See id. at § 10-2B-13.01 et seq.

3

12 C.F.R. § 7.2000(b).

4

Ala. Code § 10-2B-11.02(a).

5

Id. at § 10-2B-11.03(e).

6

Id. at § 10-2B-11.02(a).

7

Id. at § 10-2B-11.05.

8

Id. at § 10-2B-13.02(a)(2).

9

Id at § 10-2B-13.20(a).

10

of the holding company, and the holding company would own 100 percent of the shares of the Bank.

Each shareholder of the Bank would have the opportunity to own the same number and percentage of

shares in the holding company as that shareholder previously held in the Bank. In the alternative,

shareholders could exercise dissenters’ rights and receive cash for their shares.3

Applicable Law

National banks may adopt corporate governance procedures that comply with applicable federal

banking law and safe and sound banking practices. An OCC regulation provides that:

To the extent not inconsistent with applicable Federal banking statutes or regulations, or

bank safety and soundness, a national bank may elect to follow the corporate

governance procedures of the law of the state in which the main office of the bank is

located, the law of the state in which the holding company of the bank is incorporated,

the Delaware General Corporation Law, Del. Code Ann. Tit. 8 (1991, as amended

1994, and as amended thereafter), or the Model Business Corporation Act (1984, as

amended 1994, and as amended thereafter). A national bank shall designate in its

bylaws the body of law selected for its corporate governance procedures.4

Alabama statutory law expressly permits corporations to conduct share exchanges

ated,

the Delaware General Corporation Law, Del. Code Ann. Tit. 8 (1991, as amended

1994, and as amended thereafter), or the Model Business Corporation Act (1984, as

amended 1994, and as amended thereafter). A national bank shall designate in its

bylaws the body of law selected for its corporate governance procedures.4

Alabama statutory law expressly permits corporations to conduct share exchanges. The holders of at

5

least two-thirds of each class of shares entitled to vote must approve the plan of share exchange. The

6

corporation’s board of directors also must approve the transaction. After the shareholders approve

7

the share exchange, the acquiring corporation must deliver articles of share exchange to the secretary of

state.8

Alabama statutory law requires corporations conducting share exchanges to provide dissenters’ rights

to shareholders. Corporations must include notice of dissenters’ rights with the notice for the meeting

9

at which the shareholders will vote on the transaction. Any shareholder who wishes to dissent must

10

give notice to the corporation of intent to dissent and may not vote in favor of the transaction at the

- 3 -

Id. at § 10-2B-13.21(a).

11

Id. at § 10-2B-13.22(a).

12

Id. at §§ 10-2B-13.23(a) and 10-2B-13.24(a).

13

Id. at § 10-2B-13.28(a).

14

Id. at § 10-2B-13.30(a).

15

Id. at § 10-2B-13.31(a).

16

See 12 U.S.C. § 215a and 12 C.F.R. 12 C.F.R. § 5.33(e)(4). Some circuit courts have permitted interim mergers. See,

17

e.g., NoDak Bancorporation v. Clarke, 998 F.2d 1416 (8 Cir. 1993) (permitting interim merger of national bank that

th

froze out minority shareholders). The Eleventh Circuit, which includes Alabama, has invalidated a freeze-out interim

merger for a national bank, but has not addressed the permissibility of the interim merger device generally. See Lewis

v. Clark, 911 F.2d 1558 (11 Cir. 1990)

e,

17

e.g., NoDak Bancorporation v. Clarke, 998 F.2d 1416 (8 Cir. 1993) (permitting interim merger of national bank that

th

froze out minority shareholders). The Eleventh Circuit, which includes Alabama, has invalidated a freeze-out interim

merger for a national bank, but has not addressed the permissibility of the interim merger device generally. See Lewis

v. Clark, 911 F.2d 1558 (11 Cir. 1990). Lewis involved a freeze-out merger with disparate forms of consideration, i.e.,

th

some shareholders received cash for their shares, while others received holding company shares. We believe Lewis

would not prohibit a share exchange because all shareholders who do not dissent from the transaction would receive

the same consideration, i.e., holding company shares.

See 12 U.S.C. § 215a(b)-(d). A dissenting shareholder must either vote against the merger, or give written notice of

18

dissent prior to or at the shareholder meeting at which the shareholders vote on the merger. The value of the

dissenting shareholder’s shares is determined by an appraisal made by a committee of three persons: one chosen by

the dissenting shareholders, one chosen by the directors of the bank (as it exists after the merger), and one chosen

by the other two members of the committee. If the committee fails to determine a value of the shares, or a dissenting

shareholder is not satisfied with the value determined, the OCC must make an appraisal of the shares. The resulting

bank must pay the costs of any appraisal conducted by the OCC.

shareholders’ meeting. If the shareholders approve the transaction, the corporation must send written

11

notice to all dissenters after the meeting concerning the procedure for demanding payment. Dissenting

12

shareholders must then demand payment, and the corporation must make payment to the

shareholders. Any shareholder who is dissatisfied with the payment offered must provide the

13

corporation with an estimate of fair value

reholders approve the transaction, the corporation must send written

11

notice to all dissenters after the meeting concerning the procedure for demanding payment. Dissenting

12

shareholders must then demand payment, and the corporation must make payment to the

shareholders. Any shareholder who is dissatisfied with the payment offered must provide the

13

corporation with an estimate of fair value. The corporation must then either pay the amount requested

14

by the shareholder, or seek an appraisal from the court. In an appraisal proceeding, the corporation

15

is presumed to pay costs, but the court may assess the costs to the shareholders if the court finds that

the shareholders’ actions were arbitrary, vexatious, or not in good faith.16

Federal banking law does not expressly address the authority of national banks to engage in share

exchanges. There are several mechanisms, however, by which a national bank may form a parent

holding company and, as a result, own 100 percent of the shares of a bank. For example, a national

bank can effect a holding company reorganization by forming a holding company and chartering an

interim bank, which is a subsidiary of that company. The existing bank then merges into the interim

bank. The National Bank Act provides protection for shareholders in an interim merger by providing

17

dissenters’ rights.18

A national bank may become a holding company subsidiary through other methods, e.g., by forming a

holding company which then conducts a tender offer for the shares of the bank. Those methods can be

subsidiary of that company. The existing bank then merges into the interim

bank. The National Bank Act provides protection for shareholders in an interim merger by providing

17

dissenters’ rights.18

A national bank may become a holding company subsidiary through other methods, e.g., by forming a

holding company which then conducts a tender offer for the shares of the bank. Those methods can be

- 4 -

12 C.F.R. § 7.2000(b).

19

12 U.S.C. § 215a.

20

See Footnote 18, supra.

21

Ala. Code § 10-2B-13.01 et seq.

22

The scheme of dissenters’ rights in Alabama law is also substantially similar to that found in Iowa law. Compare

23

Ala. Code at § 10-2B-13.01 et seq. with Iowa Code § 490.1301, et seq. The OCC has found that the dissenters’ rights

available under Iowa law afford comparable protections to corresponding provisions in the National Bank Act. See

Interpretive Letter No. 786, reprinted in [1997 Transfer Binder] Fed. Banking Law Rep. (CCH) ¶ 81-213 (June 9, 1997)

and Conditional Approval No. 99-10 (Apr. 1, 1999) at 5.

time consuming, relatively expensive, and present a risk that the holding company will acquire less than

100 percent of the bank’s shares.

Discussion

A national bank may adopt Alabama state corporate governance procedures and conduct a share

exchange, to the extent that those procedures are not inconsistent with applicable federal banking

statutes and regulations. OCC regulation expressly permits a national bank to elect the corporate

governance procedures of the law of the state in which the main office of the bank is located.

19

Because the main office of the Bank is located in Alabama, the Bank may elect Alabama corporate

governance procedures.

Alabama state law allowing share exchanges is not inconsistent with applicable federal banking statutes

or regulations. The transaction would not directly or indirectly violate federal banking law, which is

silent concerning share exchanges

main office of the bank is located.

19

Because the main office of the Bank is located in Alabama, the Bank may elect Alabama corporate

governance procedures.

Alabama state law allowing share exchanges is not inconsistent with applicable federal banking statutes

or regulations. The transaction would not directly or indirectly violate federal banking law, which is

silent concerning share exchanges. Alabama law permitting share exchanges is consistent with those

provisions in federal banking law that permit national banks to accomplish the same result through

different steps where the bank provides adequate dissenters’ rights as described below. To ensure

consistency with federal banking law addressing interim mergers, national banks that effect a share

20

exchange must provide reasonable appraisal rights to those shareholders who choose not to receive

shares by dissenting from the transaction. A national bank conducting a share exchange should provide

dissenters’ rights that are substantially similar, although not necessarily identical to those in section

215a.

21

Alabama law governing share exchanges provides shareholders with dissenters’ rights that are

substantially similar to those in section 215a for interim mergers. Both Alabama law and section 215a

22

provide shareholders the right to dissent and receive fair value for the shares. In both cases, if the

parties are unable to settle on the fair value of the shares, an independent third party (a state court

under Alabama law or the Comptroller under the National Bank Act) ultimately determines the fair

value of the shares. Under each system of dissenters’ rights, a dissatisfied shareholder may dissent

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shareholders the right to dissent and receive fair value for the shares. In both cases, if the

parties are unable to settle on the fair value of the shares, an independent third party (a state court

under Alabama law or the Comptroller under the National Bank Act) ultimately determines the fair

value of the shares. Under each system of dissenters’ rights, a dissatisfied shareholder may dissent

23

- 5 -

Ala. Code § 10-2B-13.31.

24

12 U.S.C. § 215a(d).

25

from the transaction and receive the fair value of the shares, as determined by the independent third

party.

Alabama law in one respect is not consistent with the dissenters’ rights available in federal banking law.

Alabama law provides that the corporation must pay the cost of any judicial appraisal, unless the court

finds that the dissenting shareholders acted arbitrarily, vexatiously, or not in good faith in demanding

payment. Federal banking law, in contrast, requires the resulting bank to pay for any Comptroller

24

appraisal, without exception. Section 7.2000(b) limits the ability of national banks to adopt

25

alternative corporate governance to only those statutes that are not inconsistent with federal banking

law so that national bank shareholders will not suffer a disadvantage resulting from the bank’s selection

of that alternative law. To meet that limitation in section 7.2000(b), a national bank proposing to adopt

Alabama law and conduct a share exchange must agree to pay the cost of any judicial appraisal that

may result. The Bank must also agree to pay for arbitration of the matter if the appropriate court

refuses jurisdiction of an appraisal action.

Conclusion

For the above reasons, and subject to the above conditions, we conclude that the Bank may effect a

share exchange pursuant to Alabama law. If you have any questions concerning this letter, please

contact Frederick G. Petrick, Jr., Senior Attorney, Securities and Corporate Practices Division, at

202-874-5210.

Sincerely,

/s/

Julie L. Williams

Chief Counsel