[Federal Register Volume 76, Number 228 (Monday, November 28, 2011)]
[Rules and Regulations]
[Pages 72823-72836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30487]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
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Federal Register / Vol. 76, No. 228 / Monday, November 28, 2011 /
Rules and Regulations
[[Page 72823]]
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1278
RIN 2590-AA37
Voluntary Mergers of Federal Home Loan Banks
AGENCY: Federal Housing Finance Agency.
ACTION: Final rule.
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SUMMARY: Section 1209 of the Housing and Economic Recovery Act of 2008
(HERA) amended section 26 of the Federal Home Loan Bank Act (Bank Act)
to permit any Federal Home Loan Bank (Bank) to merge with another Bank
with the approval of its board of directors, its members, and the
Director of the Federal Housing Finance Agency (FHFA). This final rule
establishes the conditions and procedures for the consideration and
approval of voluntary Bank mergers.
DATES: The final rule is effective on December 28, 2011.
FOR FURTHER INFORMATION CONTACT: John P. Foley, Senior Financial
Analyst, Policy and Program Development, [email protected], (202)
408-2828 (this is not a toll-free number), Federal Housing Finance
Agency, 1625 Eye Street NW., Washington, DC 20006; Eric M. Raudenbush,
Assistant General Counsel, [email protected], (202) 414-6421
(this is not a toll-free number); Federal Housing Finance Agency,
Fourth Floor, 1700 G Street NW., Washington, DC 20552. The telephone
number for the Telecommunications Device for the Hearing Impaired is
(800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
A. The Federal Home Loan Bank System
The 12 regional Banks are instrumentalities of the United States
organized under the Bank Act.\1\ The Banks are cooperatives; only
members of a Bank may purchase the capital stock of a Bank, and only
members or certain eligible housing associates (such as state housing
finance agencies) may obtain access to secured loans, known as
advances, or other products provided by a Bank.\2\ Each Bank is managed
by its own board of directors and serves the public interest by
enhancing the availability of residential mortgage and community
lending credit through its member institutions.\3\ Any eligible
institution (generally a federally insured depository institution or
state-regulated insurance company) may become a member of a Bank if it
satisfies certain criteria and purchases a specified amount of the
Bank's capital stock.\4\
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\1\ See 12 U.S.C. 1423, 1432(a).
\2\ See 12 U.S.C. 1426(a)(4), 1430(a), 1430b.
\3\ See 12 U.S.C. 1427.
\4\ See 12 U.S.C. 1424; 12 CFR part 1263.
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B. HERA Provisions Addressing Voluntary Mergers
Section 1209 of HERA added new paragraphs (b)(1) and (b)(2) to
section 26 of the Bank Act to address voluntary mergers of Banks.
Section 26(b)(1) authorizes any Bank to merge voluntarily with another
Bank with the approval of the Director of FHFA (Director) and the
boards of directors of the Banks involved in the merger. Section
26(b)(2) requires FHFA to promulgate regulations establishing the
conditions and procedures for the consideration and approval of
voluntary mergers, including approval by Bank members.\5\ The HERA
amendments do not provide any further details about the terms on which
Banks may merge or on which FHFA may approve such mergers.
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\5\ See 12 U.S.C. 1446(b)(1), (2).
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As required by section 26(b)(2), the final rule establishes the
conditions and procedures for the consideration and approval of
voluntary mergers of Banks. The rule does not relate to liquidations,
reorganizations, conservatorships, or receiverships undertaken by the
Director pursuant to the authority set forth at section 26(a) of the
Bank Act and section 1367 of the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992 (Safety and Soundness Act).\6\
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\6\ See 12 U.S.C. 1446(a), 4617.
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C. The Proposed Rule
On November 26, 2010, FHFA published in the Federal Register a
proposed rule to implement section 26(b) of the Bank Act by adding to
FHFA's regulations a new part 1278 to govern voluntary mergers of
Banks.\7\ The 60-day comment period closed on January 25, 2011.
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\7\ See 75 FR 72751 (Nov. 26, 2010).
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The proposed rule would have established procedures for Banks to
follow in order to consummate a merger, including: Execution of a
written merger agreement that has been authorized by each merging
Bank's board of directors; joint submission of a merger application to
FHFA by the merging Banks; preliminary approval of the terms of the
merger by the Director; ratification of the merger by the merging
Banks' member institutions; and final approval by the Director. In
developing the proposed rule, FHFA looked for guidance to governance
practices that are common under general principles of corporate law,
disclosure practices that are required under the federal securities
laws, and the approval standards required under federal banking laws
relating to mergers of insured depository institutions.
D. Considerations of Differences Between the Banks and the Enterprises
Section 1313 of the Safety and Soundness Act, as amended by HERA,
requires the Director, when promulgating regulations relating to the
Banks, to consider the following differences between the Banks and the
Enterprises (Fannie Mae and Freddie Mac) with respect to the Banks'
cooperative ownership structure; mission of providing liquidity to
members; affordable housing and community development mission; capital
structure; and joint and several liability.\8\ In preparing this final
rule, the Director considered the differences between the Banks and the
Enterprises as they relate to the above factors, and determined that
the rule is appropriate. No commenters raised any issues relating to
this statutory requirement.
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\8\ See 12 U.S.C. 4513.
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II. The Final Rule
FHFA received six comment letters in response to the proposed rule.
All twelve Banks jointly submitted one
[[Page 72824]]
comment letter which addressed the issues raised in the proposed rule
in a comprehensive manner. Three Banks submitted individual comment
letters to supplement the Banks' joint letter, and two trade
associations also provided comments. All six of the comment letters
expressed general support for the proposed rule, although there were a
number of recommendations regarding changes to be made in the final
rule.
FHFA considered all of the comments in developing the final rule,
which establishes merger conditions and procedures that are
substantially similar to those that were proposed, except that the two-
step preliminary/final FHFA approval process embodied in the proposed
rule has been replaced with a single-step approval in the final
version, as suggested by some commenters. FHFA has made a number of
minor revisions to the rule in order to address concerns raised by
commenters, as well as to provide greater clarity. Specific comments,
FHFA's responses, and changes adopted in the final rule are described
in greater detail below in the sections describing the relevant rule
provisions.
A. Section 1278.1--Definitions
Proposed Sec. 1278.1 set forth definitions of terms used in
proposed part 1278. With two minor exceptions, all of these definitions
have been adopted as proposed and are set forth in Sec. 1278.1 of the
final rule. A definition for the term ``Financial Statements'' has been
added to the final rule to refer to statements of condition, income,
capital, and cash flows, with explanatory notes, in such form as the
Banks are required to include in their filings made under the
Securities and Exchange Act of 1934 (Exchange Act).\9\ In addition,
definitions for the terms ``GAAP'' (referring to accounting principles
generally accepted in the United States as in effect from time to time)
and ``Record Date'' (referring to the date established by a Bank's
board of directors for determining the members that are entitled to
vote on the ratification of a merger agreement) have been added. A
definition for the term ``Office of Finance,'' which was inadvertently
omitted from the proposed rule, has also been added. The terms ``Record
Date'' and ``Financial Statements,'' as well as comments received on
certain proposed definitions and revisions to the definitions of the
terms ``Disclosure Statement'' and ``Effective Date'' are discussed
below in the context of the relevant substantive provisions of the
final rule.
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\9\ 15 U.S.C. 78a, et seq.
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B. Section 1278.2--Authority
Section 1278.2 of the proposed rule would have authorized any two
or more Banks to merge, provided that they satisfied the various
procedural and substantive requirements of proposed part 1278 relating
to the merger agreement, merger application, approval by the Director,
ratification by the members, and final consummation of the merger.
Proposed Sec. 1278.1 defined the words ``merge'' and ``merger''
broadly to include not only a traditional merger (where one surviving
entity absorbs another disappearing entity), but also a consolidation,
a purchase and assumption transaction, and any other type of business
combination that could occur between or among Banks. The intent behind
proposed Sec. 1278.2 was to permit each Bank wide latitude to pursue
beneficial business combinations with other Banks, subject to the
proviso that any such combination could be consummated only with the
express approval of the Director, obtained in accordance with the
conditions and procedures set forth in proposed part 1278. The Banks
expressed support for the broad definition of ``merge'' and ``merger,''
and no commenters opposed the definition, which the final rule retains
without change.
In the final rule, the introductory paragraph of Sec. 1278.2 has
been revised to make clear that the provisions of part 1278 apply only
to voluntary mergers undertaken pursuant to section 26(b) of the Bank
Act.\10\ Part 1278 is not intended to govern liquidations and
reorganizations of Banks carried out by the Director under section
26(a) of the Bank Act.\11\ Paragraphs (a) through (e) of Sec. 1278.2
have also been revised, principally to reflect the decision to replace
the two-step FHFA approval process with a single-step approval, but
also to provide greater clarity. Except for the revisions relating to
the changes in the approval process, the substance of the provisions
remains the same. Thus, the final rule continues to authorize any two
or more Banks to merge provided that they satisfy the procedural and
substantive requirements of part 1278.
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\10\ 12 U.S.C. 1446(b).
\11\ 12 U.S.C. 1446(a).
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C. Section 1278.3--Merger Agreement
Section 1278.3 of the proposed rule would have required that any
merger of Banks be consummated only pursuant to a written merger
agreement meeting the requirements of paragraphs (a) and (b) of that
section, which addressed the authorization of the agreement by the
Constituent Banks' boards of directors and the contents of the
agreement, respectively.\12\
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\12\ In this SUPPLEMENTARY INFORMATION, as in the rule, the term
``Constituent Bank'' refers to a Bank that is proposing to merge
with one or more other Banks, and the term ``Continuing Bank''
refers to a Bank that will continue following the merger of two or
more Constituent Banks.
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Specifically, proposed Sec. 1278.3(a) would have required that a
merger agreement be authorized by the affirmative vote of a simple
majority of a quorum of the board of directors of each Constituent Bank
at a meeting on the record and that it be executed by authorized
signing officers of each Constituent Bank. FHFA requested comment upon
whether a standard other than a majority vote of a quorum of the boards
of directors would be appropriate. The Banks opposed the imposition of
a regulatory standard for board authorization of a merger agreement,
preferring instead that each Bank be permitted to establish board
voting requirements under its bylaws, which they asserted is consistent
with the approach taken by most state corporation statutes. One
commenter questioned the sufficiency of a simple majority of a quorum
of the board of directors to authorize a merger agreement, and
advocated that the final rule instead require a supermajority of the
full board of each Constituent Bank.
As discussed in the proposed rule, section 26(b) of the Bank Act,
while requiring a board vote as part of the merger process, does not
address specific requirements with respect to such a vote. Although the
absence of statutory requirements would allow FHFA to include in the
final rule either of those suggestions, FHFA has decided to retain this
provision as proposed. As a matter of policy, FHFA believes that a
uniform standard for board authorization is preferable to allowing each
Bank to set its own approval standard. Unlike general business
corporations, all of the Banks are very similar in business model and
operations, as governed by the Bank Act and the regulations adopted
thereunder, and they were created to further uniform purposes. Given
those circumstances, FHFA believes that each Bank should also be
subject to the same approval standards in determining whether to enter
into a merger agreement. In addition, FHFA has concluded that the
appropriate uniform standard is one that corresponds with the manner in
which board decisions currently are made under the bylaws of all of the
Banks--that is, by vote of a majority of a quorum of the board.
[[Page 72825]]
Although a supermajority requirement may be permissible under state
corporate laws for mergers, FHFA does not believe that it is
appropriate in the case of cooperative institutions such as the Banks,
and does not believe that the comments suggesting the adoption of a
supermajority standard have provided persuasive reasons for doing so.
Moreover, the required ratification by each Banks' members, the
required approval of the Director, and the other detailed requirements
of the rule provide for sufficient deliberation by the various
constituencies.
Proposed Sec. 1278.3(b) addressed the minimum content for a merger
agreement. It would have required generally that the agreement set
forth all material terms and conditions of the merger, and would have
further required that the agreement include provisions addressing nine
specified matters. FHFA proposed to require agreement on those matters
early in the merger process because, in the agency's judgment, they
would be the central issues to be negotiated between Constituent Banks
under most merger scenarios, and are matters of major regulatory
concern to the agency. The nine matters enumerated in the proposed rule
were: (1) The proposed Effective Date of the merger; (2) the proposed
organization certificate and bylaws of the Continuing Bank; (3) the
proposed capital structure plan for the Continuing Bank; (4) the
proposed size and structure of the board of directors for the
Continuing Bank; (5) the formula to be used to exchange the stock of
the Constituent Banks for the stock of the Continuing Bank; (6) any
conditions that must be satisfied prior to the Effective Date of the
proposed merger; (7) a statement of any representations or warranties;
(8) a description of any legal opinions or rulings; and (9) a statement
that the board of directors of a Constituent Bank can terminate the
merger agreement before the Effective Date upon a determination that
certain events have occurred. FHFA's intent in including these
provisions in the proposed rule was to ensure that a merger agreement
reflects the understandings that the Banks have reached with respect to
each of these critical matters. The agency did not intend to require
that the documents that may be necessary to implement these
understandings be prepared at the same time as the merger agreement.
FHFA received a number of comments regarding the nine specific
matters to be addressed in a merger agreement. The agency has made some
minor revisions to Sec. 1278.3(b) in response to some of these
comments, which are discussed below, and has also made a few minor
wording changes for greater clarity and consistency.
Paragraph (1) of proposed Sec. 1278.3(b) would have required that
a merger agreement set forth the proposed Effective Date of the merger.
In the proposed rule, the term ``Effective Date'' was defined as the
date on which the Constituent Banks consummate the merger, or, in the
case of a merger encompassing two or more component transactions, the
date on which the relevant Constituent Banks consummate each component
transaction. As discussed below, Sec. 1278.7 has been revised in order
to provide greater specificity as to the time that the organization
certificate of the Continuing Bank, and consequently the consummation
of the merger, becomes legally effective. In conjunction with this
change, the definition of ``Effective Date'' has been revised to refer
to the date on which the organization certificate of the Continuing
Bank (or Banks) becomes effective as provided under Sec. 1278.7. As
stated in the SUPPLEMENTARY INFORMATION to the proposed rule, the
proposed Effective Date need not be stated as a specific date, but
should be described in a manner such that the date can be reasonably
determined--for example, as within a specified period after the
occurrence of a particular event.
In the final rule, paragraph (1) of Sec. 1278.3(b) has been
revised to require that, in addition to the proposed Effective Date,
the merger agreement set forth the proposed acquisition date for
purposes of accounting for the transaction under GAAP, if that date is
to be different from the Effective Date. Under GAAP, a business
combination is recorded as of the ``acquisition date.'' Thus, among
other things, the fair value of the assets acquired, liabilities
assumed, and consideration exchanged is measured as of that date. The
acquirer also begins to consolidate the acquired entity's financial
position, results of operations, and cash flows as of that date. Under
GAAP, the ``acquisition date'' is considered to be the date on which
the acquirer obtains control of the acquiree. Typically, this would be
the date on which the acquirer legally transfers the consideration,
acquires the assets, and assumes the liabilities of the acquiree--i.e.,
the Effective Date in the case of a voluntary Bank merger under part
1278. However, for various reasons, control of the acquiree may pass to
the acquirer on a date that is either earlier or later than the date on
which the legal transfers occur.\13\ In a case where the Constituent
Banks intend to effect a transfer of control on a date other than the
Effective Date, this proposed acquisition date must be set forth in the
merger agreement. As with any aspect of a Bank merger, the
establishment of a separate GAAP acquisition date is subject to the
approval of the Director under Sec. 1278.5 of the final rule.\14\
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\13\ For example, this may be done by written agreement in order
to establish an acquisition date that is on the last day of a
financial reporting period.
\14\ See generally, FASB ASC 805-10-25-6 and 25-7.
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Paragraphs (2) and (3) of proposed Sec. 1278.3(b) would have
required that a merger agreement describe, respectively, the proposed
organization certificate and bylaws, and the proposed capital structure
plan, for the Continuing Bank. In their joint comment letter, the Banks
stated that the rule should not require descriptions of these items,
but should instead require the items to be attached to the merger
agreement. FHFA has considered this suggestion, but has decided to
adopt these requirements in their proposed form. In all cases, the
types of material understandings that are required to be addressed in
the merger agreement must precede the preparation of the detailed
documents that are intended ultimately to implement those
understandings. Although, in practice, the Constituent Banks may choose
to negotiate the specifics of the capital structure plan, organization
certificate, and bylaws prior to executing a final merger agreement,
FHFA can discern no compelling reason to require these documents to be
prepared contemporaneously with the agreement. In a legal sense, the
understandings memorialized in the merger agreement will determine the
scope and content of these implementing documents. FHFA believes that
the better approach is the one embodied in the proposed rule, which
requires that the merger agreement reflect the material understandings
that the Banks have reached with respect to each of these matters. That
approach allows the Banks the opportunity to prepare related documents
contemporaneously with the merger agreement if they so desire, but also
affords them the flexibility to agree in principle as part of the
merger agreement how certain matters, such as the organization
certificate, bylaws, or capital structure plan, are to be addressed,
but leave the drafting of those documents to a later date.
The final rule requires that a merger agreement set forth all
material terms and conditions of the merger. As
[[Page 72826]]
reflected by their inclusion in the non-exclusive list of issues that
must be addressed in the merger agreement, FHFA considers the major
features of the organization certificate, bylaws, and capital structure
plan of the Continuing Bank to be among the material terms of any Bank
merger. Therefore, even if these documents have not been finalized at
the time the merger agreement is executed, descriptions of their
material features must be included in the agreement. If the Constituent
Banks have developed these documents contemporaneously with the merger
agreement, the Banks may fulfill the requirements of paragraphs (b)(2)
and (3) of Sec. 1278.3 of the final rule by attaching the documents as
appendices to the agreement, so long as the documents are made part of
the agreement. For example, a merger agreement may state that ``the
capital structure plan for the Continuing Bank shall be as set forth in
Attachment X.''
Proposed Sec. 1278.3(b)(4) would have required that a merger
agreement address the proposed size and structure of the board of
directors for the Continuing Bank. The proposed rule also requested
comments on how best to address the transition from the separate boards
of the Constituent Banks to the combined board of the Continuing Bank,
and the manner in which FHFA should establish the size and composition
of the board for the Continuing Bank. In their joint comment letter,
the Banks requested that Constituent Banks be permitted to include in
either a merger agreement or a merger application their proposals as to
the size and composition of the board immediately following the merger,
and as to the gradual reduction in size of the board over time through
FHFA's annual designation of Bank directorships process. The Banks
opposed the imposition of any requirement to provide a detailed long-
term plan regarding such matters as the number and composition of board
committees and the responsibilities to be delegated to those
committees, stating that they wish to preserve the flexibility to allow
more detailed governance matters to evolve over time. Another commenter
also agreed that any reduction in post-merger directorships should be a
gradual process effected through the annual designation process.
FHFA has considered these comments and has decided to carry over
the language of proposed Sec. 1278.3(b)(4) without change. Final Sec.
1278.3(b)(4) allows the Banks some flexibility with respect to the
level of detail that must be included in the merger agreement. At a
minimum, the merger agreement must include the Banks' proposal for the
size and composition of the board of directors, i.e., the number of
directorships and their allocation among the states, of the Continuing
Bank immediately after the merger. The language is sufficiently broad,
however, to allow the Banks also to include in the agreement their
proposal for the longer term restructuring of the board of the
Continuing Bank if they choose to do so. If the Banks do not address
their proposal for the longer term board size and composition as part
of the merger agreement, FHFA expects that they will do so as part of
the merger application, which is consistent with the Banks' comment
letter. In this regard, FHFA has included a conforming revision to
Sec. 1278.4(a)(1)(vi) of the final rule making clear that if the size
and composition of the board over the longer term are not addressed in
the merger agreement, they must be addressed in the merger application
submitted to FHFA.
Ultimately, the size and composition of the board of the Continuing
Bank will be determined by the Director. Section 7 of the Bank Act
generally requires the Director to establish the size and structure of
the board of directors of each Bank and gives the Director additional
discretion to adjust the board size in connection with any Bank
merger.\15\ In order for the Director to make an informed decision
about the appropriate size and composition of the board of the
Continuing Bank, both immediately after the merger and over the longer
term, the Director should have the benefit of the Banks' views on those
matters, and thus the final rule requires the Banks to provide that
information. However, the rule does not require the Constituent Banks
to address, in either the merger agreement or merger application, such
details as the number and composition of board committees and the
responsibilities to be delegated to those committees.
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\15\ 12 U.S.C. 1427(a), (c).
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Proposed Sec. 1278.3(b)(7) would have required that a merger
agreement contain a statement of the representations or warranties, if
any, made or to be made by any Constituent Bank, or its officers,
directors, or employees. In their joint letter, the Banks requested
clarification that any representations and warranties made by Bank
officers, directors, or employees would not be signed in their
individual capacities, but on behalf of their respective Banks. The
proposed provision was not intended to require that any individual or
Bank make any particular representations or warranties in connection
with a merger, or to address the capacity in which any individual might
make such representations or warranties. Instead, it was intended
merely to require that the merger agreement set forth any
representations or warranties made by any of the parties in connection
with the merger. In recognition of the fact that the parties to the
merger agreement will be the Constituent Banks as corporate entities,
and in order to avoid any implication that Banks directors, officers,
or employees should be making representations or warranties in their
individual capacities, as opposed to doing so as a representative of
his or her Bank, FHFA has revised Sec. 1278.3(b)(7) in the final rule
to remove the reference to Banks' ``officers, directors, or
employees.'' Thus, the text of final Sec. 1278.3(b)(7) requires that
the merger agreement include ``a statement of the representations or
warranties, if any, made or to be made by any Constituent Bank.''
Section 1278.3(b)(8) of the proposed rule would have required that
a merger agreement describe any legal opinions or rulings that have
been obtained or furnished by any party in connection with the proposed
merger. In their joint comment letter, the Banks stated that if legal
opinions are required in connection with a merger, they are frequently
conditions to consummation and, therefore, are not available until
after the merger agreement is signed. Consequently, the Banks suggested
that FHFA modify the provision to require that a merger agreement
include descriptions of any legal opinions that are required to be
obtained as a condition to the consummation of the merger, as well as
those that have already been completed at the time the agreement is
executed. The Banks further suggested that the rule require that a
merger agreement describe any accounting opinions obtained or furnished
in connection with the merger. FHFA has accepted both of these
suggestions and has revised final Sec. 1278.3(b)(8) to require that a
merger agreement describe the legal or accounting opinions or rulings,
if any, that are required to be obtained or furnished by any party in
connection with the proposed merger.
Section 1278.3(b)(9) of the proposed rule would have required that
a merger agreement contain a statement that the board of directors of a
Constituent Bank may terminate the agreement before the Effective Date
of the merger upon a determination by the Bank, with the concurrence of
FHFA, that: (i) The information disclosed to members contained material
errors or omissions; (ii) material misrepresentations were
[[Page 72827]]
made to members regarding the impact of the merger; (iii) fraudulent
activities were used to obtain members' approval; or (iv) an event
occurred between the time of the members' vote and the merger that
would have a significant adverse impact on the future viability of the
Continuing Bank. In their joint comment letter, the Banks expressed
concern that this requirement could be interpreted as limiting the
circumstances under which a merger agreement may be terminated prior to
the Effective Date, but questioned whether this was the intent of the
proposed provision. The Banks requested that FHFA clarify this
provision to make clear that Constituent Banks may negotiate
termination rights in addition to those enumerated. The Banks also
opposed requiring the concurrence of FHFA before a merger agreement may
be terminated, stating that the decision to terminate should be made by
the parties.
In the final rule, FHFA has removed the requirement for FHFA
concurrence with a termination decision, but has otherwise retained the
substance of the proposed provision. The intent behind the proposed
requirement of FHFA concurrence was primarily to aid FHFA in carrying
out its supervisory duties, and to a lesser extent, to decrease the
likelihood of a Bank alleging the existence of fraud as a pretext for
terminating a merger agreement. FHFA acknowledges that the language of
the proposed rule lacked standards for the agency's concurrence, and
thus could be construed as authorizing it to compel an unwilling Bank
to consummate a merger that the statutory regime intends to be
voluntary, even if one of the Banks has concluded that grounds for
termination exist, although such a result was not intended.
As in the proposed rule, final Sec. 1278.3(b) states that a
written merger agreement must set forth all material terms and
conditions of the merger, including, ``without limitation,'' provisions
addressing each of the matters enumerated in paragraphs (b)(1) through
(b)(9). While, under paragraph (b)(9), the Constituent Banks are
required to include within the merger agreement a provision authorizing
a Bank to terminate the agreement for the reasons enumerated in the
regulation, nothing in the language of Sec. 1278.3 precludes the Banks
from including in the agreement other grounds for termination that may
be agreed upon by the respective boards and, in the case of a
termination occurring after the member votes, by the members
themselves. Thus, to the extent that Banks wish to include within a
merger agreement provisions specifying additional grounds for
termination of the agreement, they are free to do so under the final
rule.
D. Section 1278.4--Merger Application
Section 1278.4 of the proposed rule addressed the application
process to be followed in order to obtain FHFA approval for any merger
of Banks. Proposed Sec. 1278.4(a) would have required that the
Constituent Banks submit to FHFA a merger application addressing all
material aspects of the merger including, at a minimum: (1) A written
statement summarizing the material features of the proposed merger and
addressing certain enumerated issues; (2) a copy of the executed merger
agreement and certified copies of the board resolutions authorizing the
merger agreement; (3) a copy of the proposed organization certificate
of the Continuing Bank; (4) a copy of the proposed bylaws of the
Continuing Bank; (5) a copy of the proposed capital structure plan of
the Continuing Bank; (6) the most recent annual audited financial
statements for each Constituent Bank; and (7) pro forma financial
statements for the Continuing Bank. No commenter objected to these
proposed application requirements, but there were several comments
regarding particular aspects of the requirements. Section 1278.4(a) of
the final rule retains the proposed requirements, with some minor
revisions as noted below.
As a general matter, the Banks expressed concern over the treatment
of confidential commercial information that may be included in a merger
application and requested that the final rule permit the submission of
confidential information in a separate binder, specify that such
information is exempt from disclosure under the Freedom of Information
Act (FOIA), and give examples of types of information that would be
considered confidential. FHFA has adopted only the first of these
suggestions. The introductory clause of final Sec. 1278.4(a) has been
revised to include a new sentence specifying that a Bank may submit
separately any portions of the merger application that it believes
contain confidential or privileged trade secrets or commercial or
financial information, and that such information will be handled in
accordance with FHFA's FOIA regulations set forth at 12 CFR part 1202.
The procedures for the handling of information submitted to FHFA
that the submitter believes to be confidential commercial information
protected from FOIA disclosure under 5 U.S.C. 552(b)(4) and 12 CFR
1202.4(a)(4) are set forth in 12 CFR 1202.8. Section 1202.8(b)
specifies that submitters of commercial information should use good-
faith efforts to designate, by appropriate markings, either at the time
of submission or at a reasonable time thereafter, those portions of the
information they deem to be protected. Once so designated, such
information may be released only pursuant to the procedures set forth
in 12 CFR 1202.8(c) through (i), which provides in most cases for prior
notice to the submitter and an opportunity for the submitter to object
to the release of the information. Because the handling of confidential
commercial information is addressed directly by FHFA's FOIA
regulations, FHFA has declined to address separately in final part 1278
the FOIA status of any materials or information submitted as part of
the merger application process.
With regard to the contents of the merger application, proposed
Sec. 1278.4(a)(1) would have required a written statement including:
(i) A summary of the material features of the proposed merger; (ii) the
reasons for the proposed merger; (iii) the effect of the proposed
merger on the Constituent Banks and their members; (iv) the planned
Effective Date of the merger; (v) a summary of the material features of
any related transactions and the bearing that the consummation of, or
failure to consummate, the related transactions is expected to have
upon the merger; (vi) the names of the persons proposed to serve as
directors and senior executive officers of the Continuing Bank; (vii) a
description of all proposed material operational changes; (viii)
information demonstrating that the Continuing Bank will comply with all
applicable capital requirements after the Effective Date; (ix) a
statement explaining all officer and director indemnification
provisions; and (x) an undertaking that the Constituent Banks will
continue to disclose all material information, and update all items, as
appropriate. The topics required to be addressed in the application
statement under Sec. 1278.4(a)(1) of the final rule are substantially
the same as those that were proposed, although the final version
reflects a few minor additions and clarifications.
The first of these appears in paragraph (a)(1)(iv), which has been
revised to require the statement to include, in addition to the
proposed Effective Date: the Record Date established by each
Constituent Bank's board of directors for purposes of determining the
rights of member institutions to participate in the merger ratification
vote (discussed in detail below); and the GAAP acquisition
[[Page 72828]]
date (discussed in detail above), if that date is to be different from
the Effective Date, including an explanation of the reasons for
establishing an acquisition date that is different from the Effective
Date.
Second, paragraph (a)(1)(vi), which as proposed would have required
the names of the persons to serve as directors and senior officers of
the Continuing Bank, has been revised to require the Banks also to
include in the merger application information regarding their proposal
for the ultimate size and composition of the board of directors, i.e.,
the size and composition of the board for the longer term, along with
their proposed transition plan for reducing the size of the board, if
that matter is not addressed in the merger agreement. If the merger
agreement includes provisions dealing with the Banks' proposals for
both the immediate and long-term size and composition of the board,
that information need not be resubmitted as part of the merger
application. The final rule also retains the proposed requirement that
the Banks identify the persons who will serve as directors and
executive officers immediately after the merger.
Third, paragraph (a)(1)(vii), which in its proposed form would have
required that the application statement address any staff reductions as
part of a discussion of anticipated material operational changes, has
been revised to require that the statement address such reductions only
to the extent such information is known. This revision was made in
response to the Banks' comment that it may be more prudent to defer
decisions about specific reductions in staff until after the merger has
occurred and management of the Continuing Bank has assessed its
staffing needs and that, therefore, the Banks should not be required to
provide such specific information at the time the merger application is
filed. The fourth revision appears in paragraph (a)(1)(x), and is meant
to clarify that the Constituent Banks' undertaking to update ``all
items,'' as appropriate, applies specifically to items required to be
included in the merger application.
FHFA has declined to make a requested change to proposed paragraph
(a)(1)(vi), which would have required that the merger application set
forth the names of the persons proposed to serve as directors and
senior executive officers of the Continuing Bank. In their joint
comment letter, the Banks expressed concern that the identity of the
directors and senior executive officers of the Continuing Bank may not
yet be determined at the time that the merger application is submitted,
and requested that the rule permit this information to be added later
as a supplement to the application. Although FHFA believes that the
better practice would be for the Banks to file a complete merger
application as a single submission, the rule does not require the Banks
to do so, and therefore would allow the Banks to file portions of the
required materials as a supplement to their initial merger application.
Thus, if the Constituent Banks have not reached agreement as to the
identity of the persons who will serve as directors and senior
executives of the Bank when they initially file the merger application,
they may submit this information as a supplement to the initial merger
application. However, if they choose to do so, FHFA will not deem the
application to be complete, and the time periods for FHFA review
prescribed under Sec. 1278.5 will not commence, until all information
required by the final rule has been submitted. Corporate governance of
the Continuing Bank is a critical issue, and the Director must know the
identity of these individuals in order to determine whether the
Continuing Bank will have adequate managerial resources--a factor that
the Director is required to consider as part of the decision to approve
or deny a merger request under Sec. 1278.5(a).
Paragraphs (2) through (7) of proposed Sec. 1278.4(a) addressed
the additional items to be included as part of the merger application.
Paragraph (a)(2) would have required that a merger application include
a copy of the executed merger agreement, accompanied by a certified
copy of the resolution of the board of directors of each Constituent
Bank authorizing the execution of the merger agreement. In addition,
paragraphs (a)(3) through (a)(5) would have required the Banks to
provide, respectively, copies of the proposed organization certificate,
the proposed bylaws, and the proposed capital structure plan of the
Continuing Bank. These paragraphs have been carried over unchanged in
the final rule. As discussed previously, if the items addressed in
paragraphs (a)(3) through (a)(5) have already been attached to the
merger agreement, additional copies need not be provided so long as the
application makes clear that they are so attached.
Proposed paragraph (a)(6) would have required that the Banks
include as part of a merger application the most recent annual audited
financial statements for each Constituent Bank. In the final rule, this
provision has been revised to require that the Banks also provide their
quarterly financial statements for the current year-to-date. The most
current available financial information for each of the Constituent
Banks will obviously be a critical element of the official record to be
reviewed by the Director, and the omission of this requirement from the
proposed rule was an oversight. As mentioned above, FHFA also has added
a definition of the term ``Financial Statements'' to Sec. 1278.1 to
clarify that these are to comprise statements of condition, income,
capital, and cash flows, with explanatory notes, in such form as the
Banks are required to include in their filings made under the Exchange
Act.
Paragraph (a)(7) of proposed Sec. 1278.4 would have required the
Banks to include as part of a merger application pro forma financial
statements for the Continuing Bank in such form as would be required to
be included in the Disclosure Statement that the Banks must provide to
their members in connection with the member vote under proposed Sec.
1278.6--i.e., those that would be required in completing a Form S-4
promulgated by the United States Securities and Exchange Commission
(SEC) (as discussed in more detail below).\16\ In the Supplementary
Information to the proposed rule, FHFA stated that the Form S-4
provides merging entities with the option to include either purely
historical pro forma statements, or pro forma statements including
forecasted results for up to twelve months following the date of the
most recent statement of condition, and stated that it was considering
whether it should require the Constituent Banks to provide as part of
the merger application pro forma forecasted results for as many as
three years following the date of the most recent statement of
condition.
---------------------------------------------------------------------------
\16\ See 17 CFR 239.25.
---------------------------------------------------------------------------
In their joint comment letter, the Banks asserted that Regulation
S-X \17\ (which is incorporated, in part, into the Form S-4) does not
permit inclusion of forward-looking pro forma statements in a Form S-4
where historical pro forma information is required under Generally
Accepted Accounting Principles (GAAP), as they assert is the case with
the Banks. For this reason, the Banks believe that the pro forma
statements required to be included in the Disclosure Statement should
be historical only. The Banks therefore supported the language of the
proposed rule, which, based on their reading of the Form S-4 and GAAP
requirements, would not have required forward-looking pro forma
statements to be included in either the merger application or in the
Disclosure
[[Page 72829]]
Statement. The Banks further stated that, if FHFA decided to require
any pro forma forecasts to be prepared under the final rule, such
forecasts should be limited to twelve months, should be required as
part of the merger application only, and should remain confidential.
---------------------------------------------------------------------------
\17\ See 17 CFR part 210.
---------------------------------------------------------------------------
Having concluded that the Form S-4 requirements are the appropriate
template upon which to base the requirements for the Disclosure
Statement under part 1278, and given the detailed nature of the Form
(including the SEC regulations cross-referenced), FHFA has further
concluded that it is best to minimize any variations therefrom with
respect to the Disclosure Statement requirements. Accordingly, the
final rule continues to require only that the pro forma statements
included in the Disclosure Statement correspond with those that would
be required under the Form S-4. If a Constituent Bank and its attorneys
and accountants conclude that the Form S-4 would require inclusion of
only historical pro forma information in a particular case, then it
should provide that information in the Disclosure Statement.
However, in order to approve any merger application under Sec.
1278.5 of the final rule, the Director must be provided with
information to establish that the Continuing Bank will be viable and
will be able to serve its members effectively immediately following the
merger and for some period thereafter. The agency also recognizes that
the longer the time period covered by a pro forma forecast, the less
accurate the forecast is likely to be. With this in mind, the agency
has decided to revise Sec. 1278.4(a)(7) to require the Banks to
include forward looking pro forma financial statements for the
Continuing Bank for each of at least two years following the date of
the most recently filed quarterly statement of condition for the
Constituent Banks. In order to establish a baseline for these
forecasts, final paragraph (a)(7) also requires that the merger
application include pro forma financial statements for the Continuing
Bank as of the date of the most recently filed quarterly statement of
condition for the Constituent Banks. FHFA requires Banks to provide
two-year forward looking pro forma statements when they apply for
approval of amendments to their capital structure plans,\18\ and a
similar approach is warranted in the case of a merger. The agency
retains the right to request pro forma forecasts covering a longer
period under Sec. 1278.4(b) if it concludes that this information is
necessary to assess the merger application.
---------------------------------------------------------------------------
\18\ See Federal Housing Finance Board Advisory Bulletin 03-4
(Mar. 18, 2003).
---------------------------------------------------------------------------
Section 1278.4(b) of the proposed rule would have authorized FHFA
to require the Constituent Banks to submit any additional information
that the agency determined was necessary to assess a particular merger.
Under the proposed rule, if the agency had determined a merger
application to be complete under Sec. 1278.4(c), FHFA could have
required the Constituent Banks to submit additional information only
with respect to matters derived from or prompted by the materials
already submitted, or matters of a material nature that were not
reasonably apparent previously. Under proposed Sec. 1278.4(b), FHFA
would have been permitted to use a Constituent Bank's failure to
provide the required information in a timely manner as grounds to deny
a merger application. No commenters objected to these provisions and
Sec. 1278.4(b) has been adopted as proposed.
Section 1278.4(c) of the proposed rule addressed the timing for
determining whether a merger application is complete. As proposed, FHFA
would have had 30 days after the receipt of a merger application to
determine whether it was complete or whether any additional information
was required. The proposed rule would have required FHFA to inform the
Constituent Banks in writing if the agency determined that an
application was complete and that it had all information necessary to
evaluate the proposed merger, and also if it determined that an
application was incomplete or that it required additional information.
In the latter case, FHFA would have been required to specify the number
of days within which the Constituent Banks must provide any additional
information or materials, and within 15 days of receipt of such
information or materials, to again determine whether a merger
application is complete and so inform the Banks. Again, no commenters
objected to this provision and it has been adopted as proposed.
E. Section 1278.5--Approval by Director
Under the proposed rule, the review and approval of a merger by the
Director would have been a two-step process. The first step, addressed
by proposed Sec. 1278.5, would have encompassed a review of all
substantive aspects of a proposed merger, followed by either a
preliminary approval or a denial of the merger application. Merger
transactions that had been granted preliminary approval, and which had
been ratified by the members of each Constituent Bank, would then have
been subject to a final review and approval under Sec. 1278.7 of the
proposed rule. At the final review step, the Director would have been
permitted to deny final approval of a merger only for limited reasons.
The Banks opposed this two-step process as being overly lengthy and
burdensome. They recommended that the rule be revised to provide for a
process similar to that which they asserted is employed by the federal
depository institution regulators--i.e., a single approval is granted
prior to the member ratification vote, but is made subject to written
conditions that must be met and certified to the agency before the
merger may be consummated. FHFA has adopted this suggestion and has
revised the rule to provide for a single-step approval process.
However, as discussed below, Sec. 1278.7 of the final rule continues
to provide that no merger may be consummated until the Director accepts
the organization certificate of the Continuing Bank pursuant to the
receipt of satisfactory evidence that the conditions of the approval
under Sec. 1278.5 have been met.
Final Sec. 1278.5(a), which establishes standards for approving a
merger, has been adopted as proposed and provides that, in deciding
whether to approve or deny a merger application, the Director must take
into consideration the financial and managerial resources of each of
the Constituent Banks, the future prospects of the Continuing Bank, and
the effect of the proposed merger on the safety and soundness of the
Continuing Bank and the Bank System. These standards are similar to
those used by the federal depository institution regulators in
considering mergers and acquisitions of federally insured depository
institutions.\19\ No commenters objected to the use of these standards
as the basis for merger decisions made by the Director under the rule
and Sec. 1278.5(a) has been adopted substantially as proposed, save
for a minor wording change made for better clarity and consistency.
---------------------------------------------------------------------------
\19\ See 12 U.S.C. 1467a(e)(2) (acquisitions of savings
associations); 12 U.S.C. 1817(j)(7)(C),(D) (bank change in control);
12 U.S.C. 1828(c)(5) (bank mergers).
---------------------------------------------------------------------------
Section 1278.5(b) of the proposed rule addressed procedural aspects
of the merger application process. As proposed, Sec. 1278.5(b) would
have permitted the Director 30 days after determining the merger
application to be complete to consider the information and materials
provided in the application and either grant or deny preliminary
approval of the merger. The
[[Page 72830]]
proposed provision would have required that FHFA provide written notice
to each Constituent Bank, as well as to each other Bank and the Office
of Finance in the case of either a preliminary approval, or a denial,
of the merger application. A notice of preliminary approval would have
been required to set forth any conditions to the approval, while a
notice of denial would have been required to state the reasons for the
denial.
In the final rule, Sec. 1278.5(b) has been revised, and a new
Sec. 1278.5(c) has been added, to reflect the new one-step approval
process. Final Sec. 1278.5(b) continues to require that, within 30
days of FHFA's determination that a merger application is complete, the
Director either approve or deny the merger application. This section
has been revised to provide that an approval of a merger application
may include any conditions the Director determines to be appropriate.
While FHFA has not included in the final rule a requirement that the
Banks must submit their Disclosure Statements to the agency for review
prior to sending the document to their members, the Director will have
the ability to require such a review as a condition of approval.
Final Sec. 1278.5(b) also provides that, in every case, approval
will be conditioned on each Constituent Bank demonstrating that it has
obtained the members' ratification of the merger agreement in
accordance with the requirements of Sec. 1278.6 by submitting to FHFA:
(1) A certified copy of the members' resolution ratifying the merger
agreement, on which the members cast their votes; and (2) a
certification of the member vote from the Bank's corporate secretary or
from an independent third party. These materials, as well as any others
necessary to prove that all conditions of approval have been met, must
be provided to FHFA before the Director may effect the consummation of
the merger by accepting the organization certificate of the Continuing
Bank under Sec. 1278.7 of the rule (discussed below).
Final Sec. 1278.5(c) contains the same notice requirements that
appeared in Sec. 1278.5(b) of the proposed rule. Thereunder, FHFA must
provide written notice to each Constituent Bank, as well as to each
other Bank and the Office of Finance, in the case of either an approval
or a denial. As in the proposed rule, a notice of approval must set
forth any conditions to that approval and a notice of denial must state
the reasons for the denial.
F. Section 1278.6--Ratification by Bank Members
Section 1278.6 of the proposed rule addressed the requirements for
the ratification of a merger agreement by vote of the Constituent
Banks' member institutions. This section has been adopted substantially
as proposed, with the exceptions discussed below.
Proposed Sec. 1278.6(a) would have required that no merger of
Banks be consummated unless the merger agreement had been ratified by
the members of each Constituent Bank in a voting process meeting the
requirements of paragraphs (a)(1) through (a)(4) of that section. As
proposed, paragraph (a)(1) would have required that each Constituent
Bank deliver a ballot and a Disclosure Statement to each of its
members. As defined in Sec. 1278.1 of the proposed rule, a Disclosure
Statement would have been required to contain all of the items that the
Constituent Bank providing the statement would be required to include
in a Form S-4 Registration Statement promulgated by the SEC under the
Securities Act of 1933 (or any successor form promulgated by the SEC
governing disclosure required for securities issued in business
combination transactions) when prepared as a prospectus as directed in
Part I of the Form. In addition, proposed paragraph (a)(1) would have
required that the Disclosure Statement establish a closing date for the
Bank's receipt of completed ballots that was no earlier than 30 days
after the date that the ballot and Disclosure Statement were delivered
to its members.
In the final rule, paragraph (a)(1) has been revised slightly to
require that the enumerated items be delivered to ``each institution
that was a member as of the Record Date,'' as opposed to merely ``its
members.'' This change was made to reflect the fact that the
eligibility of an institution to participate in the merger vote is to
be determined as of the record date established by the Constituent
Bank's board of directors (discussed in more detail below) and that,
consequently, it is the institutions that are so eligible that must
receive the ballot and the Disclosure Statement.
In addition, the definition of ``Disclosure Statement'' has been
modified slightly in the final rule. In their joint comment letter, the
Banks agreed that the Form S-4 is a useful and widely-accepted model
for comprehensive shareholder disclosure in a merger transaction.
However, the Banks asserted that a number of the Form S-4 requirements
are clearly not applicable to the Banks, and requested that the rule
make clear that the Form S-4 prospectus information needs to be
included only to the extent applicable. Similarly, the Banks asserted
that, pursuant to various statutory provisions and SEC no-action
letters, the Banks are not required to comply with certain requirements
that would otherwise apply in the preparation of their Annual Reports
on Form 10-K. They requested that the rule also make clear that, to the
extent that these Form 10-K requirements are also Form S-4
requirements, these items need not be included in the Disclosure
Statement.
FHFA recognizes that, due to the unique corporate and capital
structure of the Banks, certain items regarding the Banks or the
transactions that are required to be disclosed in the Form S-4 will be
inapplicable. The agency also recognizes that the Banks have been
exempted by statute and through SEC no-action letters from a number of
disclosure requirements that would otherwise be applicable. The Form S-
4 and the SEC regulations that are cross-referenced therein make clear
in several places that information need only be furnished to the extent
appropriate.\20\ However, for clarity, the definition of ``Disclosure
Statement'' in Sec. 1278.1 of the final rule has been revised to refer
to a written document that contains, ``to the extent applicable,'' all
of the items that a Bank would be required to include in a Form S-4.
This additional clause is intended to make clear that, the Form S-4
requirements notwithstanding, a Bank need not include in its Disclosure
Statement information that is not appropriate given the unique
structure of the Banks or that they are not required to provide as part
of their disclosures made under the Exchange Act. FHFA will provide
formal or informal guidance as necessary with regard to the preparation
of the Disclosure Statement.
---------------------------------------------------------------------------
\20\ See, e.g., Form S-4, General Instruction D.2 (stating that
where the Form directs the registrant to furnish information
required by Regulation S-K and the item of Regulation S-K so
provides, information need only be furnished to the extent
appropriate).
---------------------------------------------------------------------------
In discussing proposed Sec. 1278.6 in the Supplementary
Information to the proposed rule, FHFA stated that, under the terms of
the Form S-4, the Banks would be permitted to supply much of the
required information through incorporation by reference of their Form
10-Ks and other periodic SEC filings. The Banks supported this option,
but pointed out that the incorporation by reference into a Form S-4 is
permitted under the SEC's regulatory authority, which would not extend
to the Disclosure Statement. They therefore
[[Page 72831]]
requested that the rule state expressly that such filings may be
incorporated by reference in the Disclosure Statement. FHFA has
declined to make the suggested change to the final rule. The final rule
requires that a Constituent Bank follow the Form S-4 requirements, to
the extent applicable, in preparing its Disclosure Statement. The Form
S-4 permits the incorporation by reference of various SEC filings,
including the Form 10-K, under certain circumstances. Therefore, where
those circumstances apply and the referenced filing is one that the
Bank is required to prepare, the Bank is permitted under the final rule
to incorporate that filing by reference in the manner prescribed by the
Form S-4.
Paragraph (a)(2) of proposed Sec. 1278.6 addressed the voting
rights of shareholders of the Constituent Banks and the requirements
for the casting of ballots. With respect to the latter, proposed
paragraph (a)(2) would have required that each voting entity cast all
of its votes either for or against the ratification of the merger
agreement or to abstain with respect to all of its votes, and that each
entity's vote be made by resolution of its governing body, either
authorizing the specific vote or delegating to an individual the
authority to vote. Both of these requirements, which mirror
requirements that apply to the election of Bank directors, have been
carried over unchanged in the final rule.\21\
---------------------------------------------------------------------------
\21\ See 12 CFR 1261.8.
---------------------------------------------------------------------------
However, the approach to the determination of the voting rights of
each member of a Constituent Bank in a vote to ratify a merger
agreement has been modified from that which appeared in the proposed
rule. As proposed, paragraph (a)(2) stated that each member of each
Constituent Bank would be entitled to cast the same number of votes
that the member may cast in that year's election of Bank directors. By
statute, in the election of Bank directors, a member is entitled to
cast one vote for each share of Bank stock the member was required to
hold as of the record date (set by statute at December 31 of the prior
year in the case of elections for Bank directors \22\), subject to a
cap which is equal to the average number of shares of Bank stock
required to be held by all members located in the same state.
---------------------------------------------------------------------------
\22\ See 12 U.S.C. 1427(b)(1).
---------------------------------------------------------------------------
Most commenters supported tying members' merger voting rights
closely to those that apply to the election of Bank directors, although
one requested that the rule permit each Bank to amend its bylaws to
govern members' merger voting rights in a way that the Bank's board
believes is appropriate. One commenter expressly supported the
application of the cap on the number of shares that a member may vote,
explaining that this will ensure that small members will continue to
have a voice in Bank governance. Another commenter supported the voting
cap in theory, but opined that in the case of a district-wide merger
vote the cap should be applied uniformly for all of the members within
the Bank's district and not on a state-by-state basis, as is done in
the case of the election of directors.
FHFA has considered these comments and believes, on balance, that
the requirements for the merger voting process should be closely tied
to those that are established by statute for the election of Bank
directors. This is because the voting process enshrined in the Bank Act
is the only manifestation of general Congressional intent on the
subject of member voting, and because it is consistent with the
cooperative structure of the Bank System and will reduce the
possibility that a few large stockholders will control the outcome of a
vote on a merger. However, in the light of the comments received, the
agency has reconsidered the application of the vote cap and has
determined that because a merger ratification vote would be a district-
wide ``at large'' election, the cap on the number of votes that may be
cast by a member institution should be calculated based upon the
average number of shares held by all members in the Bank's district, as
opposed to the average number held by all members within the state in
which that member institution is located.
FHFA recognizes that this will result in certain large Bank members
being eligible to cast more or fewer votes--in some cases by
significant margins--than the member would be eligible to cast in the
election of directors. However, it is the agency's view that, as a
matter of equity and appropriate corporate governance, the final rule
should not permit a result where one Bank member is authorized to vote
a materially different number of shares than another similarly-sized
member that is located within a different state in the same Bank
district. Therefore, paragraph (a)(2) has been revised in the final
rule to provide that each member of each Constituent Bank shall be
entitled to cast one vote for each share of Bank stock that the member
was required to own as of the Record Date, provided that the number of
votes that any member may cast shall not exceed the average number of
shares of Bank stock required to be held by all members of that Bank,
calculated on a district-wide basis, as of the Record Date.
In the Supplementary Information to the proposed rule, FHFA
explained that the effect of applying the statutory and regulatory
requirements governing the election of Bank directors to the merger
ratification vote is that not all Bank stock would carry the right to
vote in such an election. For example, stock controlled by a non-member
institution as a result of the acquisition of a Bank member, and stock
held by a member in excess of the statutory cap applicable to that
member's state, could not be voted in a director election and,
therefore, could not have been voted in a merger election under the
proposal. In their joint comment letter, the Banks expressed concern
about both of those examples, pointing out that the long-standing
policy of both FHFA and the former Federal Housing Finance Board
(Finance Board) has been that: (1) If a non-member institution acquires
a Bank member after the record date, but prior to the election, the
acquiring non-member may vote the acquired member's shares, despite the
fact that it is not a Bank member; and (2) if a member that is subject
to the statutory cap in a particular state acquires another member in
the same state subsequent to the record date, but prior to the
election, the acquiring member is permitted to cast the eligible votes
for the acquired member, as well as its own votes, in that year
only.\23\
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\23\ See 63 FR 65683, 65685-86 (Nov. 30, 1998) (Supplementary
Information to final rule governing the election of Bank directors).
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FHFA did not intend to imply in the Supplementary Information to
the proposed rule that these policies would not apply also to a merger
vote under part 1278. The counter-examples given by the Banks apply to
particular situations that may occur due to the fact that voting rights
are determined as of the record date (December 31 in the case of
director elections), whereas the vote itself may not occur until many
months later. During the interim, stock that is eligible to be voted by
a member as of the record date may be transferred to another entity--
which could be a member or non-member--through the acquisition of the
member by the other entity. In these cases, the acquiring entity may
vote the shares that were deemed eligible as of the record date as the
successor to the disappearing member. Because these voting rights are
those of the disappearing member, the status of the acquirer as a non-
member or the fact the acquirer may be a member whose own voting power
is limited by the vote cap have no bearing
[[Page 72832]]
on its ability to vote the shares of the acquired member. For the same
reasons, these policies would apply also to merger ratification votes
undertaken pursuant to final part 1278. That is, the determinative
factor will be whether the stock was owned by a member as of the Record
Date established by the board of directors of the Constituent Bank. If
so, the stock will have voting rights that may be exercised by the
current holder, regardless of the holder's membership status or whether
all of the shares held by the holder would currently be eligible to be
voted.
Paragraph (a)(3) of proposed Sec. 1278.6 addressed the Constituent
Banks' handling of ballots and the determination of the results of the
ratification vote. It would have prohibited each Constituent Bank from
reviewing any ballot until after the closing date of the election,
counting any ballot received after the closing date, or disclosing how
any member voted, while requiring each to tabulate the ballots
immediately after the closing date and to retain all ballots for at
least two years after the date of the election. Importantly, as
proposed, paragraph (a)(3) provided that a merger agreement would be
considered to be ratified if a majority of votes cast in the election
have been cast in favor of the merger. One commenter, while otherwise
supporting the parallel to the director election process, advocated
requiring the approval of a supermajority of members for any proposed
merger. FHFA has declined to adopt that suggestion because it
interprets section 26(b) of the Bank Act as having the purpose of
facilitating the ability of the Banks to voluntarily merge, and the
imposition of a supermajority requirement would not further that
purpose. Accordingly, paragraph (a)(3) has been adopted as proposed.
Paragraph (a)(4) of proposed Sec. 1278.6 would have required that,
within 10 calendar days of the election closing date, a Constituent
Bank deliver to its members, to each Constituent Bank with which it
proposes to merge, and to FHFA a statement of: the total number of
eligible votes; the number of members voting in the election; and the
total number of votes cast both for and against ratification of the
merger agreement, as well as those that were eligible to be cast by
members that abstained and by members who failed to return completed
ballots. No commenters objected to any aspect of this provision, and it
has been adopted as proposed.
Section 1278.6(b) of the proposed rule stated that, in connection
with a proposed merger, no Bank, or any director, officer, or employee
thereof, shall make any statement, written or oral, which, at the time
and in the light of the circumstances under which it is made, is false
or misleading with respect to any material fact, or which omits to
state any material fact necessary in order to make the statement not
false or misleading, or necessary to correct any earlier statement that
has become false or misleading. No commenter objected to this
provision, and it has also been adopted as proposed.
G. Section 1278.7--Consummation of the Merger
Section 1278.7 of the final rule governs the process for the
consummation of a merger after the members of each Constituent Bank
have voted to ratify the merger agreement. As proposed, Sec. 1278.7
would have governed the second step of the preliminary/final approval
process that was provided for in the proposed rule. The proposed
provision would have required that the Director grant a second, final,
approval prior to consummation of the merger, and would have provided
the Director with limited authority to deny approval of the merger in
cases where: the member vote was not carried out in accordance with the
requirements of Sec. 1278.6; one or more Constituent Banks failed to
fulfill a condition of the preliminary approval; or an event had
occurred since the time of the preliminary approval that would have had
a significant adverse impact on the future viability of the Continuing
Bank.
For the reasons discussed above, the final rule now requires only
one approval by the Director to be obtained, prior to the member votes
under Sec. 1278.6. However, because this approval is conditional,
Sec. 1278.7 has been retained in revised form as a procedural
mechanism to ensure that the merger cannot be consummated until the
Director has received satisfactory evidence that the conditions of the
approval have been met. Section 1278.7 has also been revised to provide
for greater certainty as to the time that the merger becomes effective.
Section 1278.7(a) of the final rule addresses the materials that
the Constituent Banks are required submit after their respective member
institutions have voted to ratify the merger. Final Sec. 1278.7(a)(1)
requires that the Constituent Banks submit to FHFA evidence acceptable
to the Director that all conditions imposed in connection with the
approval of the merger application have been satisfied, which shall in
all cases include for each Bank a certified copy of its members'
resolution ratifying the merger agreement and a certification of the
member votes from the corporate secretary or from an independent third
party. Final Sec. 1278.7(a)(2) requires that the Constituent Banks
also submit an organization certificate for the Continuing Bank, ``in
such form as FHFA may specify'' that has been executed by the
individuals who will constitute the board of directors of the
Continuing Bank. Although FHFA currently has no regulations or
guidelines governing the form of a Bank's organization certificate,
final Sec. 1278.4(a)(3) requires that the Constituent Banks submit a
proposed organization certificate as part of the merger application,
and the agency anticipates that it will provide appropriate guidance as
to the form and content of the final certificate as part of the merger
approval process.\24\
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\24\ Section 12(a) of the Bank Act requires each Bank to make
and file with the Director an ``organization certificate'' upon the
establishment of the Bank, but leaves the form and content of the
certificate to the discretion of the Director. See 12 U.S.C.
1432(a). Of the 12 existing Banks, eight are still operating under
their original 1932 organization certificates and four are operating
under more recent versions. All of these certificates (the contents
of which are set forth in the Banks' respective Form 10-12g
Registration Statements filed with the SEC) follow the same format
and FHFA expects that it would require any organization certificate
that becomes effective in the future to be substantially similar to
those currently in effect.
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Final Sec. 1278.7(b) governs the method of acceptance and timing
of the effectiveness of the Continuing Bank's organization certificate.
Under the proposed rule, after obtaining the Director's final approval,
the Constituent Banks would have been required to submit to FHFA an
organization certificate for the Continuing Bank and, upon its
acceptance by the agency, the corporate existence of the Continuing
Bank would have commenced ``as of the Effective Date.'' This approach
lacked clarity in a number of respects. First, as discussed above, the
proposed rule defined ``Effective Date'' to mean ``the date on which
the Constituent Banks consummate the merger,'' but left unclear what
actions were required for the Banks to consummate the merger. In
addition, while the proposed rule would have required FHFA to provide
notice of its final approval to all of the Banks, it neither specified
any particular overt action to be taken by FHFA to signify
``acceptance'' of the Continuing Bank's organization certificate, nor
provided for any prior or subsequent notice of the fact or timing of
such acceptance, or of
[[Page 72833]]
the Effective Date of the new organization certificate.
Final Sec. 1278.7(b) is intended to provide the specificity that
the proposed rule lacked. It states that, upon determining that all
conditions of the Director's approval have been satisfied and that the
organization certificate has been properly executed and is in the
required form, the Director shall accept the organization certificate
by endorsing it with the date of acceptance and the Effective Date.
Paragraphs (1) and (2) of Sec. 1278.7(b) govern the method by which
the Director shall determine the Effective Date. If the merger
agreement states a proposed Effective Date (whether expressed in terms
of a specific date or a specific number of days after a particular
event) and that date has not passed, the Director shall establish that
date as the Effective Date. If the merger agreement sets forth a
proposed range of dates within which the Effective Date may occur
(e.g., ``within thirty days of the ratification of the merger by the
members of both Constituent Banks'') and that range of dates has not
expired, the Director shall establish an Effective Date that is within
that range of dates. If the Effective Date set forth in the merger
agreement (in whatever form it is expressed) has passed, the Director
shall establish the tenth business day following the date of acceptance
as the Effective Date. However, if the merger agreement provides that
the agreement will terminate if the merger has not become effective by
a particular date, and that termination date is fewer than 10 business
days following the date of acceptance, the Director shall establish the
latest possible business-day prior to the date on which the merger
agreement will terminate as the Effective Date.
Final Sec. Sec. 1278.7(c)(1) and (2) provide that, after the
Director has accepted the organization certificate as provided under
Sec. 1278.7(b), the Continuing Bank shall, as of the commencement of
the Effective Date specified on the certificate, become or remain a
body corporate (depending on the type of transaction) operating under
such organization certificate with all powers granted to a Bank under
the Bank Act, and shall succeed to all rights, titles, powers,
privileges, books, records, assets, and liabilities of the Constituent
Bank or Banks, as provided in the merger agreement. In the proposed
rule, Sec. 1278.7(b) stated that, after acceptance of the organization
certificate, the Continuing Bank would ``be a body corporate operating
under the new organization certificate.'' The Banks expressed concern
about this phrasing because they believed that such language may imply
that a new corporate entity has been formed even in the case of a
traditional merger (where an existing Bank absorbs a disappearing
Bank). In response, FHFA has specifically provided in final Sec.
1278.7(c) that, after acceptance of the organization certificate, the
Continuing Bank shall ``become or remain a body corporate (depending on
the type of transaction) operating under such organization
certificate.'' This phrasing is intended to address both those business
combinations where the Continuing Bank is a continuation of one of the
existing Constituent Banks, as well as those where the Continuing Bank
is considered to be an entirely new entity. Regardless of the form of
the transaction, FHFA will not consider the merger to have been legally
consummated until the new or revised organization certificate becomes
effective.
In addition, final Sec. 1278.7(c)(3) provides that the corporate
existence of any Constituent Bank that is not a Continuing Bank shall
cease as of the Effective Date of the organization certificate of the
Continuing Bank, except as provided in the merger agreement. The latter
clause is intended to provide for those cases in which it may be useful
or necessary for a disappearing Constituent Bank to continue in
existence for a short period following the consummation of a merger--
for example, where a ``shell'' Bank that has transferred its territory
and most of its assets and liabilities to another Bank may need time
wind down its affairs, or where the disappearing Bank is being acquired
by two or more other Banks and the transactions are not to be
consummated simultaneously. Section 25 of the Bank Act provides that
each Bank shall have succession until dissolved by the Director (or by
Act of Congress) and final Sec. 1278.7(c)(3) is intended to make clear
that the Director's approval of the merger application and endorsement
of the new organization certificate are sufficient to dissolve any non-
Continuing Banks without further action in cases where the merger
agreement does not provide for the temporary continuation of a
disappearing Constituent Bank. In the case of a shell Bank that is
winding down its affairs, the Director will issue a separate order of
dissolution at the appropriate time. Under the rule, any Constituent
Bank that is a party to a merger (as that term is broadly defined in
the rule) that continues in existence after the consummation of the
merger without specific provision for its eventual disposition (either
through dissolution or another merger) will be considered to be a
Continuing Bank and will be subject to all applicable requirements.
Final Sec. 1278.7(d) provides that, after the Director accepts the
organization certificate for the Continuing Bank, FHFA shall provide
prompt written notice of that fact to the Constituent Banks, as well as
to each other Bank and the Office of Finance. This notice must include
the date of acceptance and the Effective Date of the organization
certificate for the Continuing Bank.
III. Paperwork Reduction Act
The final rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.). Therefore, FHFA has not submitted any information to the Office
of Management and Budget for review.
IV. Regulatory Flexibility Act
The final rule applies only to the Banks, which do not come within
the meaning of small entities as defined in the Regulatory Flexibility
Act (RFA). See 5 U.S.C. 601(6). Therefore in accordance with section
605(b) of the RFA, FHFA certifies that this final rule will not have
significant economic impact on a substantial number of small entities.
List of Subjects in 12 CFR Part 1278
Banks, banking, Federal home loan banks, mergers.
For the reasons stated in the Supplementary Information, the
Federal Housing Finance Agency hereby amends chapter XII of title 12 of
the Code of Federal Regulations by adding new part 1278 to subchapter D
to read as follows:
PART 1278--VOLUNTARY MERGERS OF FEDERAL HOME LOAN BANKS
Sec.
1278.1 Definitions.
1278.2 Authority.
1278.3 Merger agreement.
1278.4 Merger application.
1278.5 Approval by Director.
1278.6 Ratification by Bank members.
1278.7 Consummation of the merger.
Authority: 12 U.S.C. 1432(a), 1446, 4511.
Sec. 1278.1 Definitions.
Bank, written in title case, means a Federal Home Loan Bank
established under section 12 of the Bank Act (12 U.S.C. 1432).
Bank Act means the Federal Home Loan Bank Act, as amended (12
U.S.C. 1421 through 1449).
Constituent Bank means a Bank that is proposing to merge with one
or more
[[Page 72834]]
other Banks. Each Bank entering into a merger is a Constituent Bank,
regardless of whether it is also a Continuing Bank.
Continuing Bank means a Bank that will exist as the result of a
merger of two or more Constituent Banks, and when used in the singular
shall include the plural.
Director, written in title case, means the Director of FHFA or his
or her designee.
Disclosure Statement means a written document that contains, to the
extent applicable, all of the items that a Bank would be required to
include in a Form S-4 Registration Statement under the Securities Act
of 1933 (or any successor form promulgated by the United States
Securities and Exchange Commission governing disclosure required for
securities issued in business combination transactions) when prepared
as a prospectus as directed in Part I of the form, if the Bank were
required to provide such a prospectus to its shareholders in connection
with a merger.
Effective Date means the date on which the organization certificate
of the Continuing Bank becomes effective as provided under Sec.
1278.7.
FHFA means the Federal Housing Finance Agency.
Financial Statements means statements of condition, income,
capital, and cash flows, with explanatory notes, in such form as the
Banks are required to include in their filings made under the
Securities and Exchange Act of 1934.
GAAP means accounting principles generally accepted in the United
States as in effect from time to time.
Merge or Merger means:
(1) A merger of one or more Banks into another Bank;
(2) A consolidation of two or more Banks resulting in a new Bank;
(3) A purchase of substantially all of the assets, and assumption
of substantially all of the liabilities, of one or more Banks by
another Bank or Banks; or
(4) Any other business combination of two or more Banks into one or
more resulting Banks.
Office of Finance means the Office of Finance, a joint office of
the Banks established under part 1273 of this chapter.
Record Date means the date established by a Bank's board of
directors for determining the members that are entitled to vote on the
ratification of the merger agreement and the number of ballots that may
be cast by each in the election.
Sec. 1278.2 Authority.
Any two or more Banks may merge voluntarily under authority of
section 26(b) of the Bank Act, provided that each of the following
requirements has been satisfied:
(a) The Constituent Banks have executed a written merger agreement
that satisfies all requirements of Sec. 1278.3;
(b) The Constituent Banks have jointly filed a merger application
with FHFA that satisfies all requirements of Sec. 1278.4;
(c) The Director has approved the merger application in accordance
with the requirements of Sec. 1278.5;
(d) The members of each Constituent Bank have ratified the merger
agreement as provided under Sec. 1278.6; and
(e) The Director has determined that the Constituent Banks have
satisfied all conditions imposed in connection with the approval of the
merger application, and has accepted the properly executed organization
certificate of the Continuing Bank, as provided under Sec. 1278.7.
Sec. 1278.3 Merger agreement.
A merger of Banks under the authority of Sec. 1278.2 shall require
a written merger agreement that:
(a) Has been authorized by the affirmative vote of a majority of a
quorum of the board of directors of each Constituent Bank at a meeting
on the record and has been executed by authorized signing officers of
each Constituent Bank; and
(b) Sets forth all material terms and conditions of the merger,
including, without limitation, provisions addressing each of the
following matters--
(1) The proposed Effective Date and the proposed acquisition date
for purposes of accounting for the transaction under GAAP, if that date
is to be different from the Effective Date;
(2) The proposed organization certificate and bylaws of the
Continuing Bank;
(3) The proposed capital structure plan for the Continuing Bank;
(4) The proposed size and structure of the board of directors for
the Continuing Bank;
(5) The formula to be used to exchange the stock of the Constituent
Banks for the stock of the Continuing Bank, and a provision prohibiting
the issuance of fractional shares of stock;
(6) Any conditions that must be satisfied prior to the Effective
Date, which must include approval by the Director and ratification by
the members of the Constituent Banks;
(7) A statement of the representations or warranties, if any, made
or to be made by any Constituent Bank;
(8) A description of the legal or accounting opinions or rulings,
if any, that are required to be obtained or furnished by any party in
connection with the proposed merger; and
(9) A statement that the board of directors of a Constituent Bank
may terminate the merger agreement before the Effective Date upon a
determination that:
(i) The information disclosed to members contained material errors
or omissions;
(ii) Material misrepresentations were made to members regarding the
impact of the merger;
(iii) Fraudulent activities were used to obtain members' approval;
or
(iv) An event occurred subsequent to the members' vote that would
have a significant adverse impact on the future viability of the
Continuing Bank.
Sec. 1278.4 Merger application.
(a) Contents of application. Any two or more Banks that wish to
merge shall submit to FHFA a merger application that addresses all
material aspects of the proposed merger. As provided in Sec. 1202.8 of
this chapter, a Bank may submit separately any portions of the
application that it believes contain confidential or privileged trade
secrets or commercial or financial information, which portions will be
handled in accordance with FHFA's Freedom of Information Act
regulations set forth in part 1202 of this chapter. The application
shall include, at a minimum, the following:
(1) A written statement that includes--
(i) A summary of the material features of the proposed merger;
(ii) The reasons for the proposed merger;
(iii) The effect of the proposed merger on the Constituent Banks
and their members;
(iv) The proposed Effective Date, the proposed acquisition date for
purposes of accounting for the transaction under GAAP, if that date is
to be different from the Effective Date (including the reasons for
designating a different acquisition date), and the Record Date
established by each Constituent Bank's board of directors;
(v) If the Constituent Banks contemplate that the proposed merger
will be one of two or more related transactions, a summary of the
material features of any related transactions and the bearing that the
consummation of, or failure to consummate, the related transactions is
expected to have upon the proposed merger;
[[Page 72835]]
(vi) If not addressed by the merger agreement, the Banks' proposal
for the ultimate size and composition of the board of directors for the
Continuing Bank and their plan for reducing the board to its ultimate
size and composition, as well as the names of the persons proposed to
serve as directors and senior executive officers of the Continuing Bank
immediately after the merger;
(vii) A description of all proposed material operational changes
including, but not limited to, reductions in the existing staffs of the
Constituent Banks (to the extent such information is known), whether
and how Bank operations will be combined, and whether any Constituent
Bank will continue to operate as a branch of the Continuing Bank;
(viii) Information demonstrating that the Continuing Bank will
comply with all applicable capital requirements after the Effective
Date;
(ix) A statement explaining all officer and director
indemnification provisions; and
(x) An undertaking that the Constituent Banks will continue to
disclose all material information, and update all items of the
application, as appropriate;
(2) A copy of the executed merger agreement and a certified copy of
the resolution of the board of directors of each Constituent Bank
authorizing the merger agreement;
(3) A copy of the proposed organization certificate of the
Continuing Bank;
(4) A copy of the proposed bylaws of the Continuing Bank;
(5) A copy of the proposed capital structure plan of the Continuing
Bank;
(6) The most recent annual audited Financial Statements, and any
interim quarterly financial statements for the year-to-date, for each
Constituent Bank; and
(7) Pro forma Financial Statements for the Continuing Bank as of
the date of the most recent statement of condition supplied under
paragraph (a)(6) of this section, and forecasted pro forma Financial
Statements for each of at least two years following such date.
(b) Additional information. FHFA may require the Constituent Banks
to submit any additional information FHFA deems necessary to evaluate
the proposed merger. If FHFA has determined a merger application to be
complete as provided in paragraph (c) of this section, FHFA may require
the Constituent Banks to submit additional information only with
respect to matters derived from or prompted by the materials already
submitted, or matters of a material nature that were not reasonably
apparent previously, including matters concealed by the Constituent
Banks or relating to developments that arose after the determination of
completeness. If the Constituent Banks fail to provide the additional
information in a timely manner, the Director may deem the failure to
provide the required information as grounds to deny the application.
(c) Completion of application. Within 30 days of the receipt of a
merger application, FHFA shall determine whether the application is
complete and whether FHFA has all information necessary for the
Director to evaluate the proposed merger.
(1) If FHFA determines that the application is complete and that it
has all information necessary to evaluate the proposed merger, it shall
so inform the Constituent Banks in writing.
(2) If FHFA determines that the application is incomplete, or that
it requires additional information in order to evaluate the
application, it shall so inform the Constituent Banks in writing, and
shall specify the number of days within which the Constituent Banks
must provide any additional information or materials. Within 15 days of
receipt of the additional information or materials, FHFA shall inform
the Constituent Banks in writing whether the merger application is
complete.
Sec. 1278.5 Approval by Director.
(a) Standards. In determining whether to approve a merger of Banks
under the authority of Sec. 1278.2, the Director shall take into
consideration the financial and managerial resources of the Constituent
Banks, the future prospects of the Continuing Bank, and the effect of
the proposed merger on the safety and soundness of the Continuing Bank
and the Bank system.
(b) Determination by Director. After FHFA determines that a merger
application is complete, as provided in Sec. 1278.4(c), the Director
shall, within 30 days, either approve or deny the merger application.
An approval of a merger application may include any conditions the
Director determines to be appropriate, and shall in all cases be
conditioned on each Constituent Bank demonstrating that it has obtained
its members' ratification of the merger agreement in accordance with
the requirements of Sec. 1278.6 by submitting to FHFA:
(1) A certified copy of the members' resolution ratifying the
merger agreement, on which the members cast their votes; and
(2) A certification of the member vote from the Bank's corporate
secretary or from an independent third party.
(c) Notice. If the Director approves the merger application, FHFA
shall provide written notice of the approval and any conditions to each
Constituent Bank, as well as to each other Bank and the Office of
Finance. If the Director denies the merger application, FHFA shall
provide written notice of the denial to each Constituent Bank, as well
as to each other Bank and the Office of Finance, and the notice to the
Constituent Banks shall include a statement of the reasons for the
denial.
Sec. 1278.6 Ratification by Bank Members.
(a) Requirements for member vote. No merger of Banks under the
authority of Sec. 1278.2 may be consummated unless a merger agreement
meeting the requirements of Sec. 1278.3 has been ratified by the
affirmative vote of the members of each Constituent Bank in a voting
process that meets the following requirements:
(1) Notice of vote. Each Constituent Bank shall submit the
authorized merger agreement to its members for ratification by
delivering to each institution that was a member as of the Record
Date--
(i) A ballot that permits the member to vote for or against the
ratification of the merger agreement, or to abstain from such vote; and
(ii) A Disclosure Statement that establishes a closing date for the
Bank's receipt of completed ballots that is no earlier than 30 days
after the date that the ballot and Disclosure Statement are delivered
to its members.
(2) Voting rights and requirements. In the vote to ratify the
merger agreement, each member of each Constituent Bank shall be
entitled to cast one vote for each share of Bank stock that the member
was required to own as of the Record Date, provided that the number of
votes that any member may cast shall not exceed the average number of
shares of Bank stock required to be held by all members of that Bank,
calculated on a district-wide basis, as of the Record Date. A member
must cast all of its votes either for or against the ratification of
the merger agreement, or may abstain with respect to all of its votes.
Each member's vote shall be made by resolution of its governing body,
either authorizing the specific vote, or delegating to an individual
the authority to vote.
(3) Determination of result. No Constituent Bank shall review any
ballot until after the closing date established in the Disclosure
Statement or include in the tabulation any ballot received after the
closing date. A Constituent
[[Page 72836]]
Bank shall tabulate the votes cast immediately after the closing date.
The members of a Constituent Bank shall be considered to have ratified
a merger agreement if a majority of votes cast in the election have
been cast in favor of the ratification of the merger agreement. The
Constituent Bank, or the Continuing Bank, as appropriate, shall retain
all ballots received for at least two years after the date of the
election, and shall not disclose how any member voted.
(4) Notice of result. Within 10 days of the closing date, a
Constituent Bank shall deliver to its members, to each Constituent Bank
with which it proposes to merge, and to FHFA a statement of--
(i) The total number of eligible votes;
(ii) The number of members voting in the election; and
(iii) The total number of votes cast both for and against
ratification of the merger agreement, as well as those that were
eligible to be cast by members that abstained and by members who failed
to return completed ballots.
(b) False and misleading statements. In connection with a proposed
merger, no Bank, nor any director, officer, or employee thereof, shall
make any statement, written or oral, which, at the time and in the
light of the circumstances under which it is made, is false or
misleading with respect to any material fact, or which omits to state
any material fact necessary in order to make the statement not false or
misleading, or necessary to correct any earlier statement that has
become false or misleading.
Sec. 1278.7 Consummation of the merger.
(a) Post-approval submissions. After the members of each
Constituent Bank have voted to ratify the merger agreement, the
Constituent Banks shall submit to FHFA:
(1) Evidence acceptable to the Director that all conditions imposed
in connection with the approval of the merger application under Sec.
1278.5 have been satisfied, including the items specified in Sec. Sec.
1278.5(b)(1) and (2); and
(2) An organization certificate for the Continuing Bank, in such
form as FHFA may specify, that has been executed by the individuals who
will constitute the board of directors of the Continuing Bank.
(b) Acceptance of organization certificate. Upon determining that
all conditions have been satisfied and that the organization
certificate meets the requirements of Sec. 1278.7(a)(2), the Director
shall accept the organization certificate of the Continuing Bank by
endorsing thereon the date of acceptance and the Effective Date, which
date shall be:
(1) The proposed Effective Date set forth in the merger agreement
or, if the merger agreement expresses the proposed Effective Date in
terms of a range of dates, a date within the applicable range of dates;
or
(2) If the proposed Effective Date set forth in the merger
agreement has passed, the earlier of:
(i) The 10th business day following the date of acceptance of the
organization certificate by the Director; or
(ii) The last business day preceding any date specified in the
merger agreement by which the merger agreement will terminate if the
merger has not become effective.
(c) Effectiveness of merger. After the Director has accepted the
organization certificate of the Continuing Bank as provided in Sec.
1278.7(b), and as of the commencement of the Effective Date specified
on such organization certificate:
(1) The Continuing Bank shall become or remain a body corporate
(depending on the type of transaction) operating under such
organization certificate with all powers granted to a Bank under the
Bank Act;
(2) The Continuing Bank shall succeed to all rights, titles,
powers, privileges, books, records, assets, and liabilities of the
Constituent Banks, as provided in the merger agreement; and
(3) The corporate existence of any Constituent Bank that is not a
Continuing Bank shall cease, unless otherwise provided in the merger
agreement.
(d) Notice. After accepting the organization certificate for the
Continuing Bank, the Director shall provide to the Constituent Banks,
and to each other Bank and the Office of Finance, prompt written notice
of that fact, which shall include the date of acceptance and the
Effective Date of the organization certificate.
Dated: November 17, 2011.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2011-30487 Filed 11-25-11; 8:45 am]
BILLING CODE 8070-01-P