Letter finds that national bank may adopt corporate governance provisions of Washington 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 San Francisco to form the holding company.

1

See Wash. Rev. Code § 23B.11.020 et seq. (1990).

2

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #870

October 12, 1999

November 1999

12 USC 214

Re:

Share Exchanges Pursuant to Washington State Corporate Law

Dear [ ]:

This is in response to your request for confirmation that a national bank may elect the corporate

governance provisions of Washington law, and complete a share exchange in accordance with those

provisions. Based on the representations that you have made, we conclude that a bank may effect a

proposed share exchange by following the provisions of Washington law.

Background

A national bank with its main office located in Washington state proposes to elect the corporate

governance provisions of Washington law through amendment to its articles of association and bylaws,

and engage in a share exchange as provided by Washington 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 plan of

1

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 Washington law. As a result, each shareholder of the bank would own shares of the holding

2

o act as the holding company of the bank. The shareholders of the bank would vote on the plan of

1

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 Washington law. As a result, each shareholder of the bank would own shares of the holding

2

- 2 -

See id. at § 23B.13.010 et seq.

3

12 C.F.R. § 7.2000(b).

4

Wash. Rev. Code § 23B.11.020(a). State banks in Washington may also form parent holding companies through

5

share exchanges. Id. at § 30.04.560.

Id. at § 23B.11.030(5) (1990).

6

Id. at § 23B.11.020(1).

7

Id. at § 23B.11.050.

8

Id. at § 23B.13.020(1)(b).

9

Id at § 23B.13.200(1).

10

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)

t 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

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

5

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

6

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

7

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

secretary of state.8

Washington 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

9

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

10

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

- 3 -

Id. at § 23B.13.210(1).

11

Id. at § 23B.13.220(1).

12

Id. at § 23B.13.230(1).

13

Id. at § 23B.13.280(1).

14

Id. at § 23B.13.300(1).

15

Id. at § 23B.13.310(1).

16

See 12 U.S.C. § 215a and 12 C.F.R. 12 C.F.R. § 5.33(e)(4). Although the holding company reorganization is a

17

common transaction, the Ninth Circuit Court of Appeals, which includes Washington, has not addressed the

permissibility of that transaction for national banks. See Nasser v. Federal Home Loan Bank Bd., 723 F.2d 1437 (9th

Cir. 1984) (challenge to interim merger involving thrifts dismissed on jurisdictional grounds). Some circuit courts

have permitted interim mergers. See, e.g., NoDak Bancorporation v

n transaction, the Ninth Circuit Court of Appeals, which includes Washington, has not addressed the

permissibility of that transaction for national banks. See Nasser v. Federal Home Loan Bank Bd., 723 F.2d 1437 (9th

Cir. 1984) (challenge to interim merger involving thrifts dismissed on jurisdictional grounds). Some circuit courts

have permitted interim mergers. See, e.g., NoDak Bancorporation v. Clarke, 998 F.2d 1416 (8 Cir. 1993) (permitting

th

interim merger of national bank that froze out minority shareholders). Another circuit 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).

th

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.

transaction at the shareholders’ meeting. If the shareholders approve the transaction, the corporation

11

must send written notice to all dissenters after the meeting concerning the procedure for demanding

payment. Dissenting shareholders must then demand payment, and the corporation must make

12

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

13

provide the corporation with an estimate of fair value

reholders approve the transaction, the corporation

11

must send written notice to all dissenters after the meeting concerning the procedure for demanding

payment. Dissenting shareholders must then demand payment, and the corporation must make

12

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

13

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

14

amount requested by the shareholder, or seek an appraisal from the court. In an appraisal

15

proceeding, the corporation 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

bsidiary 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

Wash. Rev. Code § 23B.13.010 et seq.

22

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

23

Compare Wash. Rev. Code at § 23B.13.010 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 Washington 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 Washington state, the bank may elect Washington

corporate governance procedures.

Washington 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

the bank is located.

19

Because the main office of the bank is located in Washington state, the bank may elect Washington

corporate governance procedures.

Washington 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. Washington 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

20

share 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

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

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

22

section 215a 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 Washington 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

23

section 215a 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 Washington 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

23

- 5 -

Wash. Rev. Code § 23B.13.310.

24

12 U.S.C. § 215a(d).

25

shareholder may dissent from the transaction and receive the fair value of the shares, as determined by

the independent third party.

Washington state law in one respect is not consistent with the dissenters’ rights available in federal

banking law. Washington 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

24

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

25

adopt 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 Washington state 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 Washington 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

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 Washington 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