04-1
04-1
September 3, 2004
Re: ________ Bank – No Objection Request
Dear Mr. ________:
This responds to your letter of August 11, 2004, as supplemented by your letter of August 30, 2004.
Your letters request that the Department of Financial Institutions (the “Department”) find that the proposed sale of assets and bank charter of ________ Bank (the “Bank”) in a three party transaction conforms to the California interstate branching law found in Chapter 22, commencing with Section 3800, of the Financial Code. Based upon the final form of the transaction as described in your August 30th letter, it is our conclusion that the sale of the Bank does not violate California law. For that reason, the Department does not object to the form of the proposed sale of the Bank.
I trust this has been responsive to your request. If you have any questions or comments, please feel free to contact me.
Very truly yours,
HOWARD GOULD
Commissioner of Financial Institutions
By
KENNETH SAYRE-PETERSON
Senior Counsel
KSP71:pjp
cc: Howard Gould, Commissioner
John Drews, Esq., General Counsel, Department of Financial Institutions
August 30, 2004
Kenneth Sayre-Peterson, Esq.
Senior Counsel
California Department of Financial Institutions
1810 13th Street
Sacramento, CA 95814
Re: ________
Dear Ken:
Reference is made to my letter to Commissioner Howard Gould dated August 11, 2004, wherein I described a possible three-party transaction involving our client, _______ San Francisco, California (“Selling National Bank”), a second California-based national bank (“Purchasing National Bank”), and a Florida-based national bank (the “Florida National Bank”). The plan involves a series of integrated and concurrent transactions with the net result being Florida National Bank will acquire Selling National Bank that has concurrently sold all of its assets and liabilities to Purchasing National Bank.
We also held a meeting in Los Angeles with the Commissioner, Brian Yuen and you (by telephone) from the California Department of Financial Institutions (“DFI”), Alan Rothenberg, financial advisor to Florida National Bank (by telephone), Jeff Wishner, of ________, financial advisor to Selling National Bank (by telephone), Peter T. Paul, Chairman of _______, and me on August 12, 2004, where this transaction, various alternative structures, and our legal analysis were discussed.
Since the date of the August 11th letter and our August 12th meeting, the parties have continued to negotiate and structure the transactions. While there may be some fine tuning before the deal is finalized, I believe the structure of the overall transaction will be as follows:
1. Purchasing National Bank will organize an Interim National Bank for the purpose of consolidating with Selling National Bank under the charter of Selling National Bank (“Consolidation”). In this Consolidation, the outstanding shares of Selling National Bank will be cancelled and converted into the right to receive a cash purchase price, and the outstanding shares of Interim National Bank will be converted into and exchanged for new shares of Selling National Bank.
2. Upon consummation of and concurrent with the Consolidation, and upon receipt of all required approvals, Selling National Bank will relocate its main office from San Francisco to Los Angeles, together with any and all authority Selling National Bank has to conduct a commercial banking business within the State of California.
3. Purchasing National Bank will cause a purchase and assumption of all of the assets, liabilities and business of Selling National Bank, other than its authorization to conduct a commercial banking business in the State of California from its main office, and its corporate charter, which for tax purposes will be treated as a complete liquidation of Selling National Bank, as a wholly-owned subsidiary of Purchasing National Bank (the “Liquidation”). After the Liquidation, Selling National Bank will continue to exist as a corporate entity with officers and directors.
4. Upon consummation, and simultaneously with the Consolidation and the Liquidation, Florida National Bank will purchase from Purchasing National Bank all the issued and outstanding shares of Selling National Bank it acquired in the Consolidation (the “Stock Purchase”).
5. Immediately after the Stock Purchase, Florida National Bank will cause Selling National Bank to merge with and into Florida National Bank, with the result, among others, that the newly re-located Los Angeles main office of Selling National Bank will become a branch office of Florida National Bank, and Florida National Bank will have the right to open de novo branches in California under Section 3824(a)(3) of the California Financial Code.
We respectfully request written confirmation from the DFI that it will not pose any objections to the integrated transactions described above.
Thank you for your kind attention to this matter.
Sincerely,
August 11, 2004
VIA ELECTRONIC TRANSMISSION AND PERSONAL DELIVERY
CONFIDENTIAL
Mr. Howard Gould
Commissioner of Financial Institutions
California Department of Financial Institutions
1810 13th Street
Sacramento, California 95814
Re: ________ — Request for Non-Objection
Dear Commissioner Gould:
On behalf of ________ , San Francisco, California (“________”)[1], we are hereby requesting confirmation from the California Department of Financial Institutions (the “DFI”) that it would not raise any objection with the Office of the Comptroller of the Currency (the “OCC”) to a proposed integrated, four party, three-step transaction (the “Integrated Transaction”) by which ________ simultaneously would (i) merge (the “Merger”) with an unaffiliated interim national bank (the “Interim National Bank”) organized and owned by a national bank headquartered in Florida (the “Florida National Bank) with no branches or offices in California, with ________ being the national bank surviving the Merger (the “Surviving National Bank”); (ii) sell substantially all of the assets and business of Surviving National Bank, including its branches (the “Sale”), to an unaffiliated national bank headquartered in California (the “California National Bank”); and (iii) merge Surviving National Bank with and into Florida National Bank (the “Final Merger”). The parties to the Integrated Transaction intend for the Merger, the Sale and the Final Merger to occur simultaneously for all practical purposes. From a technical perspective the sequence of the Merger and the Sale could vary with the Sale closing an instant before the Merger; however from a business perspective, the result of the Integrated Transaction would be the same.
________ seeks confirmation from the DFI that it would not object to the Integrated Transaction regardless of the sequence of the Merger and the Sale. If the sequence of the Merger and the Sale is important to the DFI, the parties will certainly take the DFI’s preference into consideration in the final structure of the Integrated Transaction. We request that you note that our initial discussions with the OCC regarding the feasibility of the Integrated Transaction from a federal perspective have been favorable.
The Parties
There are four parties involved in the Integrated Transaction–________, Florida National Bank, California National Bank, and Interim National Bank. Interim National Bank will be organized by Florida National Bank with its sole office in Los Angeles, California (“Los Angeles Office”), solely for the purpose of effectuating the Integrated Transaction. ________ was chartered in 1987. Under Section 3825 (b) of the California Financial Code (“CFC”), Interim National Bank will be deemed to have the same age as ________.
Background
________ has received an indication of interest from Florida National Bank contemplating an acquisition of ________ subject to certain conditions. Florida National Bank has indicated its intention to immediately dispose of all remaining assets, branches and business of _________, which are incompatible with Florida National Bank’s business plan. To address this issue and to maximize value to its shareholders, ________ has engaged in definitive negotiations with California National Bank to purchase substantially all of ________ assets and business for a premium, including its two branches, that Florida National Bank is not interested in retaining. Florida National Bank is willing to pay a premium for ________ even without its current business thereby maximizing the return to ________ shareholders. ________ believes that the Integrated Transaction will result in a higher return to its shareholders than would the Merger or the Sale alone.
The Integrated Transaction
The Integrated Transaction involves three transactions among the constituent parties-the Merger, the Sale, and the Final Merger. While no definitive agreement has been entered into as of the date of this letter, it is contemplated ________, Florida National Bank, and California National Bank would enter into an agreement2 providing for: (i) the Merger whereby Interim National Bank would merge with and into ________ with ________ as the Surviving National Bank; (ii) the Sale whereby ________ would sell substantially all of its assets and business to California National Bank; and (iii) the Final Merger whereby Surviving National Bank would merge with and into Florida National Bank, with Florida National Bank being the surviving corporation. Following consummation of the Integrated Transaction, Florida National Bank will have acquired ________ as the Surviving National Bank, including Interim National Bank’s Los Angeles Office, and California National Bank will have acquired the assets and liabilities of ________, including its current branch offices.
Analysis
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”) permits national banks to branch interstate unless a state has enacted legislation to prohibit such interstate transactions before June 1, 1997.3 Riegle-Neal also provided that states could take various actions relating to interstate branching.
Riegle-Neal only allows interstate branching through the merger of one bank (or purchase of all of the bank’s assets) with another. States were left with the decision whether or not to allow de novo branching. In 1995, California adopted a series of laws to permit interstate branching by merger and to prohibit de novo branching by out-of-state institutions.
Section 3824(a)(3) of the CFC generally provides that an out-of-state bank may establish or maintain a branch in California only by means of merging with or acquiring substantially all of the business of a California bank .4 We believe that the Integrated Transaction complies with Section 3824(a)(3) whether or not the Merger, Sale and Final Merger occur simultaneously, or, if they occur sequentially, regardless of the sequence of the Merger and the Sale.
The Integrated Transaction
The parties intend for the Merger, the Sale and the Final Merger to occur simultaneously. As such we respectfully submit that the Integrated Transaction is the functional equivalent of Florida National Bank merging with ________ a California bank, and the Florida National Bank immediately reselling substantially all of ________ assets and business to California National Bank. The DFI has not objected to a similar transaction.
In June, 2000, ________ acquired certain assets and liabilities of ________ from the FDIC as Receiver (the “IDB Transaction”). In connection with the IDB Transaction, ________ within days of this purchase, it resold substantially all of the assets and business it acquired from the FDIC, including the branches in Ridgecrest and Mammoth Lakes, California to ________. Simultaneously, ________ was granted permission by the New York Superintendent of Banks to establish a new branch in Beverly Hills, California, without objection from the DFI.5 We respectfully submit that there is no practical difference between the Integrated Transaction and the IDB Transaction and the DFI should pose no objection to it.
Under Section 3824 (a)(3) an out-of-state bank,6 Florida National Bank, will be merging with ________, a California bank,7 in accordance with federal law, and the law of the domicile of the out-of-state bank, the laws of the United States.8 There is no provision of Chapter 22 of Division 1 or Division 1.5 (commencing with Section 4800) of the CFC that cannot and will not be met in connection with the Integrated Transaction. Accordingly, viewed as a single transaction, we respectfully submit that there is no legal basis for the DFI to object to the Integrated Transaction. Rather the Integrated Transaction is functionally equivalent to at least one other transaction that has occurred in California.
We also submit that the policy of the State of California is to view planned transactions, such as that contemplated by the Integrated Transaction, as a single transaction. Section 4828.3 clearly provides that transactions constituting reorganizations whereby a California bank acquires all of the outstanding shares of another depository corporation in accordance with a plan that provides for the sale of the entire banking business to a California bank followed by a final merger transaction should be viewed as a single transaction. We respectfully submit that the Integrated Transaction is the type of transaction contemplated by Section 4828.3, and consistent with this public policy, should be viewed as a single plan by the DFI.
Sequential Transactions
Even if the Integrated Transaction is deconstructed into a series of sequential transactions, we respectfully submit that there is no legal basis for the DFI to object, regardless of whether the Merger or the Sale occurs first.
The Sale Followed by the Merger and the Final Merger
Under this alternative, ________ would sell substantially all of its assets and business to California National Bank in the Sale immediately followed on the same day by the Merger. The Sale raises no issue because both banks are California based national banks.
The Merger involves two national banks—Interim National Bank and _______. There is no question regarding compliance with federal law governing the Merger. For purposes of this discussion, we believe the relevant issue is whether ________ following the Sale, should be
considered a “California bank” for purposes of Section 3824(a)(1) of the CFC.
Section 102 of the CFC defines “bank” as any incorporated banking institution that has been incorporated to engage in a commercial banking business or trust business.9 There is no requirement that the bank engage in the business of accepting deposits or conducting a commercial banking business in order for it to be a bank. Following the Sale, ________ will still be a duly chartered national banking institution that has been incorporated to engage in a commercial banking business. Therefore, for purposes of the CFC, ________ would be a bank immediately after the Sale.
Section 126.5 of the CFC defines “California” to mean when used with respect to a national bank, a national bank that maintains its main office in the state.10 Following the Sale, ________ will still maintain its main office in California where its current headquarters office is located.11 Therefore, immediately after the Sale, ________ would continue to be a Califomia bank. Further, ________ will still exist as a corporate entity with assets consisting of its bank charter and the cash consideration from the Sale. ________ will also still have a Board of Directors, shareholders and officers. Accordingly, ________ could enter into contracts or agreements, own property, or exercise any other powers granted to a national bank, including, subject to OCC approval and non-compete provisions, starting a new commercial banking business. Similarly, as a national bank, ________ would still need the approval of the OCC to merge or consolidate with another entity.
Most recently, the OCC has affirmed the continuing existence of a national bank with no substantive assets other than its charter, as ________ would be immediately after the Sale, by proposing to regulate those national banks that have divested themselves of their assets, and then seek to subsequently purchase or otherwise acquire assets which represent a deviation from the national bank’s original business plan.12 A copy of OCC Bulletin 2004-5 is attached hereto as Exhibit A for your reference. At a minimum we believe this reinforces our analysis that immediately after the Sale, ________ would continue to be a California bank.13
Immediately following the Sale, it is proposed that Interim National Bank, a California bank, would merge with and into ________, a California bank, resulting in Surviving National Bank in compliance with federal law.14 No California law should b implicated in the Merger.
Immediately after the Merger, the Final Merger would occur whereby Surviving National Bank, a California bank, would merge with and into Florida National Bank. We believe the Final Merger would also comply with Section 3824(a)(1) since it is a merger of an out-of-state bank, Florida National Bank, as the surviving corporation, with a California bank.
It is also possible that immediately after the Sale, instead of the Merger and the Final Merger, _______ could merge directly with Florida National Bank. We believe that from the standpoint of Section 3824, the result should be the same as that described above.
In the only precedential determination by the DFI that we were able to locate analyzing Section 3824 in a transaction between two nationally chartered institutions, the DFI objected to an interstate merger pursuant to which one national bank with its headquarters in Florida proposed to acquire a federal thrift with its headquarters in Florida.15 In that case, the Florida thrift had branches in California that the Florida national bank was going to acquire. The DFI stated that because the federal thrift maintained its main office outside of California, the proposed transaction was prohibited by Section 3824(a)(3) of the CFC. In contrast, ________ is, and Interim National Bank will be, a national bank headquartered in California.
For the reasons set forth above we respectfully submit that the sequence of the Sale followed by the Merger, and the Final Merger falls squarely within the permissible transactions for interstate merger transactions contained in Section 3824 of the CFC.
The Merger Followed by the Sale and the Final Merger
Under this alternative the sequence of the Merger and the Sale would be reversed whereby ________ will merge with Interim National Bank in a forward triangular merger with Interim National Bank being the Surviving National Bank prior to the sale of ________ assets to California National Bank in the Sale.
The Merger transaction involves the merger of two California banks, which are national banks. The subsequent Sale whereby Surviving National Bank immediately after the Merger and on the same day resells substantially all of the ________ assets and business it acquired in the Merger also involves a transaction of two California banks that are national banks. Each of these transactions should be accomplished in accordance with applicable federal law without implicating California’s interstate branching law. This alternative is also the functional equivalent of the IDB Transaction.
The Final Merger involving the merger of Surviving National Bank with and into Florida National Bank would involve the merger of an out-of-state bank, Florida National Bank, as the surviving corporation, with a California bank, Surviving National Bank, in compliance with federal law and the CFC.
For these reasons we respectfully submit that the Merger Followed by the Sale and the Final Merger would not violate Section 3824(a) (3) or any other provision of law. Accordingly, there would be no legal basis for objecting to this sequence.
Merger of ________ and Florida National Bank Followed by Sale
A third variation of the Integrated Transaction could involve the merger of ________ directly with and into Florida National Bank, with Florida National Bank being the surviving corporation simultaneously with or immediately followed by the Sale. Under this variation there is no question but that the requirements of Section 3824 (a)(1) will be met and that ________ will meet the test for being considered a “California bank” as it will maintain its main office (and all of its branches) in California and will be licensed to conduct a national commercial banking business.
We respectfully submit that this third variation of a sequence of transactions comprising the Integrated Transaction would comply with the CFC and not provide any legal basis for objection by the DFI.
Branching Authority
Under Section 3824 (a)(3), if an out-of-state bank acquires branches by means of a merger of purchase transaction with a California bank, it may subsequently open de novo branches. Pursuant to the Integrated Transaction Florida National Bank will acquire derivatively a California branch in one of two ways. First, Interim National Bank will organize with its main office in Los Angeles. Pursuant to applicable provisions of the National Bank Act, this office would be transferred by operation of law to Florida National Bank in the Final Merger. Alternatively, in the Sale Followed by Merger and Final Merger or the Merger of ________ and Florida National Bank Followed by Sale scenarios, ________ National Bank could retain its main office in San Francisco, and then apply to the OCC to re-locate that office from San Francisco to Los Angeles. In any of these alternatives it is respectfully submitted that this branching authority derives as a matter of law from the Integrated Transaction regardless of the sequence it may take if the Integrated Transaction is otherwise consummated in accordance with Section 3824 (a)(3)
Conclusion
We respectfully seek confirmation from the DFI that it would not raise any objections with the OCC to the Integrated Transaction. We believe the best view of the proposal is as a single transaction that is consistent with prior transactions to which the DFI has not objected. Even if the Integrated Transaction is viewed as an integrated sequence of individual transactions, we believe under any of the possible scenarios described herein, no objection should be posed by the DFI.
Should you have any additional questions regarding the Integrated Transaction, do not
hesitate to call the undersigned at (310) 312-4205.
Sincerely yours,
cc: Ken Sayre-Peterson, Esq.
__________
CC 2004-5
OCC BULLETIN
Comptroller of the Currency
Administrator of National Banks
Subject: Fundamental Change in Asset Composition Description: Notice of Proposed
of a Bank Rulemaking
TO: Chief Executive Officers of All National Banks, Department and Division Heads, All
Examining Personnel and Other Interested Parties
The Comptroller of the Currency (OCC) has issued a notice of proposed rulemaking (NPRM) that would require a national bank to obtain the approval of the OCC before the following two types of fundamental changes in the composition of the bank’s assets occurs: (1) selling or otherwise disposing of all, or substantially all, of its assets to become a “stripped” or dormant bank charter, or, (2) after having “stripped” the charter of assets, subsequently purchasing or otherwise acquiring assets. The notice was published in the Federal Register on January 7, 2004. The comment period will end on March 8, 2004.
Specifically, the proposal would add a new section 5.53 to part 5 of OCC regulations that would require a national bank to file an application and obtain the OCC’s prior written approval before changing the composition of all, or substantially all, of its assets through (1) sales or other disposition or, (2) after having sold or disposed of all or substantially all of its assets, through purchases or other acquisitions. This new approval requirement, however, would not apply to a change in composition of a bank’s assets that the bank undertakes in response to direction from the OCC (e.g., in an enforcement action pursuant to 12 USC 1818) or pursuant to a statute or regulation that requires OCC review or approval (e.g., a voluntary liquidation pursuant to 12 USC 181 and 12 CFR 5.48). A bank that has disposed of all or substantially all of its assets before the effective date of this regulation would have to comply with the prior approval requirement if it purchases or otherwise acquires or takes on new assets after the regulation takes effect.
When reviewing an application under this new requirement, the OCC would consider the purpose of the transaction, its impact on the safety and soundness of the bank, and any effect on the bank’s customers, and may deny the request for approval if the transaction would have a negative effect in any such respect. In addition, the OCC’s review of an application in connection with any subsequent growth in assets of a stripped charter would include, among other things, the factors governing the organization of a de novo bank under 12 CFR 5.20.
For further information, contact Heidi M. Thomas, special counsel, Legislative and Regulatory Activities Division at (202) 874-5090 or Jan Kalmus, NBE/senior licensing analyst, Licensing Policy and Systems at (202) 874-5060.
_______________________________________
Julie L. Williams
First Senior Deputy Comptroller and Chief Counsel
Attachment: 69 FR 892 [http://www.occ.treas.gov/fr/fedregister/69fr892.pdfl
Date: January 13, 2004 Page 1 of 1
[1]The views set forth herein are made on behalf of ________ only, and no other party to the Integrated Transaction. Further, parties to the Integrated Transaction have not had an opportunity to meet and confer on the precise form of the Integrated Transaction. Therefore, the transaction could differ in certain respects from what is being described in this letter.
2 It is possible that the parties may enter into separate agreements for each constituent transaction rather than a single integrated agreement.
3 Section 102 of Riegle-Neal, Public Law No. 103-328, 1811.
4 Cal. Fin. Code §3824.
5 While the IDB Transaction was made in the context of a closed bank, this has no significance under Cal. Fin. Code § 3824 (a)(3). There are no special rules under this provision for transactions involving failed banks. In contrast, under Cal. Fin. Code § 3826 (a) a closed bank is of relevance in establishing an exception to the minimum age requirement set for in Cal. Fin. Code § 3825.
6 See, Cal. Fin. Code § 139.5 (a).
7 See, Cal. Fin. Code § 126.5 and discussion, infra.
8 See, Cal. Fin. Code § 139.9 and § 4805.12.
9 Cal. Fin. Code § 102.
10 Cal. Fin. Code § 126.5.
11 ________ and California National Bank will agree to designate a portion of the former ________ main office as ________ continuing main office immediately following the Sale.
12 OCC Bulleting 2004-5; 69 Fed. Reg. 892 (January 7, 2004).
13 ________ acknowledges that this result would not be possible under the CFC since a selling California state bank would have to surrender to the Commissioner for cancellation the certificates of authorization or licenses issued to it by the Commissioner pursuant to CFC § 4861. No such requirement exists under the National Bank Act or otherwise for national banks. Further, we note that the DFI did not raise an objection on this basis to the IDB Transaction where the California bank had failed and was out of business.
14 Subject to further tax analysis it is possible that ________ may merge with and into Interim National Bank. For purposes of this discussion, this form of transaction should have no consequence.
15 Letter from Conrad W. Hewitt, September 13, 1996.