FEDERAL BANKING LAW CONSIDERATIONS IN UNFRIENDLY TAKEOVERS OF DEPOSITORY INSTITUTIONS MICHAEL S. HELFER* RUSSELL J. BRUEMMER** TABLE OF CONTENTS Introduction .................................................... 310 I. Overview of the Regulatory Scheme ....................... 311 A . Commercial Banks .................................... 312 B. Thrift Institutions ..................................... 313 II. Unfriendly Takeovers of Commercial Banks ............... 313 A . Federal Statutes Governing Acquisitions of Commercial Banks .................................... 313 1. The Bank Holding Company A ct ................. 313 2. The Bank Merger A ct ............................. 316 3. The Change in Bank Control A ct ................. 317 B. Identifying the Would-Be Acquirors .................. 319 1. Domestic bank holding companies ................. 31 9 2. Companies other than bank holding companies ... 32 0 3. Foreign companies ................................ 32 2 4 . Individuals and groups that are not companies .... 32 3 C . Issues That May Arise in Unfriendly Attempts to Take Over a Commercial Bank or Bank Holding Company 32 4 1. CBCA or BHCA .................................. 32 4 2. Divestitures required to cure antitrust concerns .... 32 7 3. Financial and managerial standards ............... 32 9 4. Nonvoting equity agreements ...................... 330 III. Takeovers of Thrift Institutions ........................... 332 * Wilmer, Cutler & Pickering, Washington, D.C. Member, District of Columbia Bar. B.A., 1967, Claremont Men's College; J.D., 1970, Harvard University. ** Wilmer, Cutler & Pickering, Washington, D.C. Member, State Bar of Minnesota and District of Columbia Bar. B.A., 1974, Luther College; J.D., 1977, University of Michigan.
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IV. Critical Analysis of the Regulatory Scheme ................ 350
C onclusion ...................................................... 353
INTRODUCTION
Unfriendly takeover attempts' have become a common part of the
corporate landscape during the last ten years. Until recently, however,
depository institutions2 seemed virtually immune from hostile takeovers.
This immunity stemmed, at least in part, from the acquiror's fear of
being unable to clear the regulatory hurdles necessary to acquire "con-
trol" of a depository institution.
The acquisition of control over federally insured depository institu-tions3 requires the prior approval of one or more federal regulatory
agencies. 4 The approval process was intended to protect the safety and
soundness of insured depository institutions and to assure compliance
1. Unfriendly corporate takeovers, for the purposes of this Article, are tender or exchange
offers or merger proposals that are not endorsed by the target corporation's management.
2. Depository institutions, for the purposes of this Article, include commercial banks, savings
banks, savings and loan associations, and their holding companies.
3. The Federal Deposit Insurance Corporation (FDIC) insures the deposits of national andstate-chartered banks, savings banks, and mutual savings banks, regardless of their membership in
the Federal Reserve System. St 12 U.S.C. §§ 1811-1815 (1982). The Federal Savings and LoanInsurance Corporation (FSLIC) insures the accounts of all federal savings and loan associations and
federal savings banks not insured by the FDIC. The FSLIC also may insure the accounts of state-
chartered building and loan, savings and loan, and homestead associations and cooperative banks.
See 12 U.S.C. §§ 1724
-17 3
0g (1982).
4. Some acquisitions require affirmative approval, while others require notice to the regula-
tory agency and no disapproval before the running of a statutory time period. See izhfa notes 27-59
312 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
regulatory agencies must review a proposed acquisition.' 0 In any acqui-
sition the acquiring company would prefer to structure its takeover
strategy in a manner that minimizes regulatory delay. This goal is even
more important during a hostile takeover, because delay will give the
target more time to thwart the bidder's efforts to take control. Con-
versely, the target would find it advantageous to force the bidder to pur-
sue a regulatory route that increases the scope of required review or the
time frame within which that review is conducted."
A. CommercialBanks
The Comptroller of the Currency (Comptroller) reviews acquisitions ofnational banks under the Bank Merger Act (BMA)1 2 or the Change in
Bank Control Act (CBCA).13 Under the Bank Holding Company Act
(BHCA), the Board of Governors of the Federal Reserve System (Fed-
eral Reserve Board or Board) reviews acquisitions of bank holding com-
panies and acquisitions of commercial banks by companies that will
become bank holding companies as a result of the proposed transac-
tion. 14 Under the CBCA, 15 the Federal Reserve Board also reviews ac-
quisitions of bank holding companies and of state banks thatare
members of the Federal Reserve System by entities that are not "compa-
nies."'16 The Federal Deposit Insurance Corporation (FDIC) reviews ac-
quisitions of federally insured, state-chartered commercial banks that
are not members of the Federal Reserve system under the CBCA17 or
BMA.18
10. If the target is a state-chartered bank, or a bank holding company with state-chartered
bank subsidiaries, the acquiring company must also comply with the applicable state notice or prior
approval statutes in effect in the target's state of incorporation. See Whitney Nat'l Bank v. Bank ofNew Orleans & Trust Co., 379 U.S. 411, 424-25 (1965) (Federal Reserve Board cannot approve
acquisitions in violation of state law). The state law requirements are beyond the scope of this
Article. Nonetheless, they can be a significant hurdle to a successful acquisition. Where the target
is publicly held, the federal securities laws will also be applicable to depository institution takeovers,
but these laws are not discussed in this Article. They generally are enforced by bank or thrift
regulators for takeovers of commercial banks or savings and loan associations, and by the Securities
and Exchange Commission (SEC) for bank holding companies or savings and loan holding compa-
nies. See 15 U.S.C. §§ 77-78 (1982).
11 . As a matter ofpublic policy, Congress and the federal and state agencies should take steps
to eliminate such opportunities for procedural delays based on form in order to avoid inconsisten-
cies in the treatment of substantially similar transactions. See nihaotes 209-10 and accompanying
text (discussing various methods of eliminating inconsistencies).12. 12 U.S.C. § 1828 (1982) (§ 1828(c)(2) grants authority to review).
13. 12 U.S.C. § 1817 (1982) (§ 1817(j) grants power to review).
The regulatory scheme applicable to acquisitions of savings and loan
associations and other thrift institutions is less complicated than that
applicable to takeovers of commercial banks, primarily because the Fed-
eral Home Loan Bank Board (FHLBB) and the Federal Savings and
Loan Insurance Corporation (FSLIC), the two federal regulators of
thrift institutions, are affiliated.' 9 The Home Owners' Loan Act
(HOLA)2° governs mergers and consolidations of two or more savings
and loan associations.2 1 The FHLBB reviews combinations in which the
surviving institution is federally chartered. 22 The FSLIC reviews merg-
ers and consolidations that result in state-chartered entities,2 3 acquisi-
tions of stock by savings and loan holding companies or other companies
subject to the provisions of the National Housing Act (NHA),24 and,
pursuant to the Change in Savings and Loan Control Act (CSLCA),2 5
purchases of stock of insured thrift institutions by entities that are not
companies.26
II. UNFRIENDLY TAKEOVERS OF COMMERCIAL BANKS
A. FederalStatutes Governing Acquisitions of CommercialBanks
I. The Bank Holding Company Act
Section 3 of the BHCA requires the approval of the Federal Reserve
Board before a "company" 27 becomes a "bank holding company, '"28 or
before an existing bank holding company acquires more than five per-
cent of any class of voting securities in another "bank" 29 or bank hold-
19. The FSLIC is under the direction of the FHLBB, and operates under bylaws, rules, andregulations prescribed by the FHLBB. See 12 U.S.C. § 1725(a) (1982).
20. 12 U.S.C. §§ 1461-1468 (1982).
21. Id § 1464.
22. Ste 12 C.F.R. § 546.2(b) (1983) (merger effective only when approved by FHLBB).
23. Id § 563.22(a) (FSLIC must approve merger or consolidation with another institution).
serve Board's determination of whether a company controls the election
of a majority of the Board of another company or exercises a "control-
ling influence" over it.34
A bank holding company or another company that seeks prior ap-
proval under the BHCA must file an application in compliance with the
procedural requirements of the BHCA35 and the Federal Reserve
Board's Regulation y.36 These requirements can be time-consuming.
Despite the BHCA's stated deadline of ninety-one days within which the
Federal Reserve Board must act, 37 it is not unusual fo r an approval to
take six months or more.38
§ 1841(a)(2)(A) (1982). The company might, of course, control the bank under another part of§ 1841 (a)(2).
34. A company need not be capable of directing every decision made by a bank or another
company in order to have a "controlling influence" over it. See Citizens Inc., 66 Fed. Res. Bull. 907,908 (1982) (existence of controlling influence is question of fact based on past and prospective
relationships, and subtle pressures and influences); see also Patagonia Corp., 63 Fed. Res. Bull. 288,292 (1977) (exercising controlling influence inferred from structure of situation, though actual evi-dence not apparent).
35. 12 U.S.C. § 1842(b) (1982).
36. See Revised Regulation Y,supra note 29, at 822 (adopting 12 C.F.R. § 225.14). The appli-
cation is filed with the applicant's respective Federal Reserve Bank. Id The applicant must pub-
lish a notice of the proposed acquisition and of the public's opportunity to comment on the
acquisition in a newspaper of general circulation in the community in which the main office of the
bank to be acquired is located. 12 C.F.R. § 262.3 (1983). The staff of the Federal Reserve Bank
reviews the application to determine whether it contains the necessary information. Revised Regu-
lation Y, supra note 29 , at 822 (adopting 12 C.F.R. § 225.14(c)).
The application is also forwarded to other agencies for review, although they are not required to
comment on it. Se e 12 U.S.C. § 1842(b) (1982); 12 C.F.R. § 262.3(e) (1983). The Comptroller of the
Currency reviews the application if the acquired bank is a national or District of Columbia bank.
12 U.S.C. § 1842(b) (1982). A state supervisory agency reviews it if the bank is a state bank. Id
The Department of Justice also reviews the application for potential antitrust problems. Id
§ 1842(c). The Federal Reserve Board must hold a formal hearing on an application if the Comp-
troller or the state supervisory authority disapproves the application in writing. Id § 1842(b). The
Board rarely grants requests for formal hearings in other circumstances, although it presumably
will do so if material factual issues are in dispute. See generally Farmers & Merchants Bank v. Board
of Governors, 567 F.2d 1082, 1089 (D.C. Cir. 1977) (application may be approved after informal
proceedings); Northwest Bancorp. v. Board of Governors, 303 F.2d 832, 843-44 (8th Cir. 1962)
(hearing not required unless Comptroller disapproves in writing).
37. If the Board fails to act on an application "within the ninety-one-day period which begins
on the date of submission to the Board of the complete record on that application," the application
is deemed to have been approved. 12 U.S.C. § 1842(b) (1982).
38. There has been considerable dispute as to when the 91-day period begins to run and
whether a new 91-day period begins when the applicant submits new information. For a discussion
of the decisions that have considered this issue, see Republic ofTex. Corp. v. Board of Governors,
649 F.2d 1026, 1034-43 (5th Cir. 1981).
The Federal Reserve Board's recent revision of Regulation Y provides in part:
For the purpose of computing the 91-day period, the record shall be regarded as complete
on the latest of:
(i) The date of receipt by the Board of an application that has been accepted for
processing by the Reserve Bank,
(ii) The last day provided in any notice for receipt of comments and hearing requests
on the application;
(iii) The date of receipt by the Board of the last relevant material regarding the appli-
cation that is needed for the Board's decision, if the material is received from a source
316 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
The Federal Reserve Board reviews the application to determine
whether the acquisition violates the BHCA's antitrust, financial, and
managerial standards.39 The Federal Reserve Board must reject an ap-
plication that would create a monopoly, that would further an attemptto monopolize, or that would have other anticompetitive effects. If the
convenience and needs of the communities to be served advanced by the
transaction outweigh the anticompetitive effects of the acquisition, how-
ever, even a transaction that would have this effect can be approved.40
The Board also must consider "the financial and managerial resources
and the future prospects of the company or companies and the banks
concerned," '4 1 in particular the acquiror's resulting capital ratios, the
amount of debt the acquiror willincur, and the
prospectsof the com-
bined organization, in order to ensure that a holding company will serve
as a "source of strength" to its subsidiary banks.42
2. The Bank Merger Act
The provisions of the BMA apply to mergers, consolidations, and ac-
quisitions of assets and assumptions of liabilities43 of insured commercial
banks.44 The procedural requirements of the BMA are similar to those
imposed by the Federal Reserve Board under theBHCA.45 The
sub-stantive standards of the BMA, including its antitrust standards, are
identical to the BHCA standards.46
(iv) The date ofcompletion of any hearing or other proceeding [ordered by the Board].
Revised Regulation Y, supra note 29, at 822-23 (to be codified at 12 C.F.R. § 225.14(1)(2)).
39. 12 U.S.C. § 1842(c) (1982).
40. Id
41. Id The Federal Reserve Board may deny an application on the basis of adverse financial
or managerial factors even in the absence of anticompetitive effects. See Board of Governors v. First
Lincolnwood Corp., 439 U.S. 234, 243-48 (1978). It may not, however, deny an application merely
because the price paid to some shareholders of the bank or bank holding company is less than the
price paid to other shareholders. See Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749,
753 (10th Cir. 1973).
42. See Revised Regulation Y, supra note 38, at 822. The Federal Reserve Board may not use
the managerial resources test to establish a "good moral character requirement" for applicants
under the BHCA. See Security Bancorp. v. Board of Governors, 655 F.2d 164, 168 (9th Cir. 1980),
vacated on other grounds, 454 U.S. 1118 (1981). Moreover, the Federal Reserve Board cannot use
matters "unrelated to the operation of any bank" to deny an application on the basis that manage-
rial resources are unfavorable. Id at 166.
43. These transactions will be referred to as "mergers" in this Article.
44. 12 U.S.C. § 1828(c) (1982).
45. An application to merge an insured bank into a national bank is filed with the Comptrol-
ler. An application to merge an insured bank into a state member bank is filed with the FederalReserve Board, and an application to merge an insured bank into a state nonmember bank or an
uninsured bank or other institution is filed with the FDIC. Id Notice of the proposed merger must
be published for 30 days in a newspaper ofgeneral circulation in the community in which the main
offices of the banks involved are located unless an emergency exists. Id § 1828(c)(3). The agency
reviewing the application must request reports on competitive factors from the Department ofJus-
tice and the other two banking agencies "in the interests of uniform standards." Id. 1828(c)(4).
The reports must be submitted within 30 days of the date on which they are requested. Id
The BMA has been relatively insignificant in most hostile bank take-
overs for several reasons. First, the holding company structure domi-
nates the commercial banking industry, especially for midsize and large
banking organizations. Second, although the BMA often is used bybank holding company subsidiaries to complete friendly acquisitions,
4 7
completion of an unfriendly takeover requires acquisition of the shares
of another bank holding company or bank. Such a transaction is subject
to the BHCA, even if a merger with the acquired entity is planned.
Third, the BMA's procedural requirements provide another reason
for preference of the BHCA procedure for unfriendly takeovers. The
Comptroller requires that a merger application under the BMA include
a copy of an executed merger agreement and a certificate from the tar-get bank's corporate secretary that details the resolutions adopted by the
target's board of directors.48 The Federal Reserve Board's application
to acquire shares pursuant to the BHCA, in contrast, does not require
any documents executed by the target.49 In unfriendly acquisitions, it is
obviously impossible to comply with regulations that require the target
bank's cooperation. 50
3. The Change in Bank Control Act
The CBCA covers virtually every acquisition of "control" that is not
subject to the BHCA or the BMA.51 It requires any "person" proposing
to acquire "control" of an "insured bank" to give sixty days prior writ-
(BMA standards). The reviewing agency must immediately notify the Department ofJustice whena transaction is approved. Id. § 1828(c)(6). Applicants whose transactions are approved must wait30 days before consummating the transaction, except in emergencies. Id § 1828(c)(3)(C). The
waiting period is, in effect, a statute of limitations for antitrust violations, because the transaction
may no t subsequently be "attacked in any judicial proceeding on the ground that it alone and of
itself constituted a violation of any antitrust laws" other than the antimonopoly provisions of the
Sherman Act, 15 U.S.C. § 2 (1982), or of the antitrust laws for actions that occur after the consum-
mation of the transaction. 12 U.S.C. § 1828(c)(7)(C) (1982). The waiting period and bar against
subsequent suit provision is also contained in the BHCA. Id § 1849(b).
47. The BMA can be used to structure an acquisition to fall within the jurisdiction of the
Comptroller or the FDIC, and not the Federal Reserve Board. The parties to an acquisition should
examine the structure of a proposed acquisition because the agencies' application of the statutory
standards differs, although the statutes are similar.
48. See COMPTROLLER OF TH E CURRENCY, GENERAL INSTRUCTIONS AND PROCEDURES FO R
TH E PREPARATION OF AN APPLICATION FOR MERGER, CONSOLIDATION, OR PURCHASE OF ASSETS
AND ASSUMPTION OF LIABILITIES Form CC 7023-01, at 2, 7 (1983).
49. 12 U.S.C. § 1842(a) (1982).
50. The need for these barriers is questionable, because neither an executed agreement nor
the target's resolutions of approval are necessary to determine whether the statutory antitrust,
financial, and managerial standards are met. The legal staff of the FHLBB permits a procedure
that enables an acquiror to use the provisions applicable to mergers of savings and loan associa-tions, which are very similar to those of the BMA, in unfriendly acquisitions. Stt hnifa note 178 and
accompanying text. If the Comptroller made legal findings similar to those of the FHLBB legal
staff, the BMA could be used by banks or holding companies to effect unfriendly takeovers in the
same manner.51. See 12 U.S.C. § 1817(j)(8)(B) (1982) (transactions subject to BHCA or BMA not subject to
318 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
ten notice of the proposed acquisition to the "appropriate Federal bank-
ing agency."52 The CBCA defines "control" broadly,53 and regulations
adopted by the regulatory agencies have further expanded the defini-
tion. Each agency presumes that any person who acquires ten percent or
more of any class of voting securities of a bank holding company or a
state-member bank has control if the acquired institution has a class of
securities registered pursuant to the Securities Exchange Act of 1934,54
or if immediately after the acquisition no person will own a greater pro-
portion of the class of voting shares than the acquiring person.55 Any
proposed unfriendly takeover of a bank that is not governed by the
BHCA is almost certain to be subject to the provisions of the CBCA.
A notice filed with the appropriate bank regulatory agency that seeksprior approval fo r an acquisition subject to the CBCA must contain cer-
tain background information about the acquiring person. 56 The sixty-
day statutory period within which the agency must act does not begin to
run until this notice is deemed complete by the agency.
The acquiror may complete the transaction if within sixty days after
filing notice under the CBCA the agency has not issued a notice to dis-
approve the proposed acquisition or extended the time period for its
review.57
Within the review period, the agency may issue a notice stat-ing the agency's intent not to disapprove the proposed transaction,
which allows the acquiror to consummate the takeover, or a notice dis-
approving the proposed acquisition.58
The regulatory agency may disapprove any proposed acquisition
52. Id § 1817()(1). For the purposes of the CBCA the term "person" means "an individual
or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization, or any other form of entity no t specifically listed herein." Id
§ 1817(j)(8)(A). The term "insured bank" includes any "bank holding company" as defined in theBHCA, and the "appropriate Federal banking agency" in the case of a bank holding company is
the Federal Reserve Board. Id § 1817)(1).53. The CBCA defines "control" as "the power, directly or indirectly, to direct the manage-
ment or policies of an insured bank or to vote 25 per centum or more of any class of voting securities
of an insured bank." Id § 1817(j)(8)(B).54. 15 U.S.C. §§ 78a-78kk (1982).
55. See 12 C.F.R. § 15.3 (1983) (Comptroller); Revised Regulation Y, supra note 29, at 830
The presumption is, at least in theory, rebuttable.
56. The required information includes: the identity, personal history, business background,
and experience of each acquiring person, including any pending legal or administrative proceedings
to which he is a party; financial statements for each acquiring person; the terms and conditions ofthe proposed acquisition; the source and amount of funds to be used in making the acquisition;
plans or proposals to liquidate the bank, merge it with another company, or make major changes inits business, corporate structure, or management; copies of all tender offers; and any additional
information required by the statute or the banking agencies. See 12 U.S.C. § 18170j)(6)(A)-(H)
(1982).57. The agency may extend the review period for up to 30 days only if it concludes that the
acquiror has not submitted all material information or ha s provided substantially inaccurate infor-
under the CBCA if the proposed acquisition would violate the CBCA's
antitrust standards. In addition, approval of an acquisition may be de-
nied if the financial condition of any acquiror would jeopardize the in-
terests of the acquired bank or its depositors, or if the competence,experience, or integrity of an acquiror or proposed management person-
nel are such that it would not be in the interests of the depositors or the
public to allow that concern to control the bank. Finally, approval will
be withheld if an acquiring person fails or refuses to furnish information
required by the agency. 59
B. Identiying the Would-Be Acquirors
1. Domestic bank holding companies
The BHCA prohibits bank holding companies from acquiring more
than five percent of the outstanding voting shares of a bank or another
bank holding company without the prior approval of the Federal Re-
serve Board. Bank holding companies are in compliance with the
BHCA's provisions on nonbank activities by definition; they can acquire
control over other commercial banks, therefore, with minimal disrup-
tion to their other business activities. 6° Section 3(d) of the BHCA,6 1 the
Douglas Amendment, is a particularly important substantive require-
ment in considering unfriendly takeover proposals: it effectively prevents
the Federal Reserve Board from approving an application that would
result in acquiring control of a bank outside the state in which the ex-
isting bank holding company's operations are principally conducted.62
59. See id § 1817(j)(7). The CBCA establishes a different formula than the BHCA or BMA
for analyzing the applicant's financial and managerial resources. Under the BMA and the BHCA,
theappropriate agency is directed to "take into consideration the financial and managerial re-sources and future prospects" of the participants in the transaction. See 12 U.S.C. §§ 1828(c)(5),
1842(c) (1982). The Federal Reserve Board, on the basis of this language, requires a bank holding
company to serve as a "source of strength" to the banks it acquires. See, e.g., Citizens Bancorp, 61Fed. Res. Bull. 806 (1975); Northern States Fin. Corp., 58 Fed. Res. Bull. 827 (1972). The Supreme
Court has held that the agency may deny an application "solely on the grounds of financial ormanagerial unsoundness, regardless of whether that unsoundness would be caused or exacerbated
by the proposed transaction." Board of Governors v. First Lincolnwood Corp., 43 9 U.S. 234, 252
(1978). The CBCA, in contrast, permits the appropriate banking agency to deny an acquisition
only if the "financial condition of any acquiring person is such as might jeopardize the financial
stability of the bank or prejudice the interests of the depositors of the bank," or if the "competence,experience, or integrity of any acquiring person or of any proposed management personnel indi-
cates that it would no t be in the interest of the depositors of the bank, or in the interest of the public
to permit such person to control the bank." See 12 U.S.C. § 1817(j)(7)(C)-(D) (1982). If the agency
disapproves the proposed acquisition, the acquiror may request an agency hearing, and upon disap-
proval after the hearing, may appeal the decision in a federal court of appeals. Id § 1817(j)(4)-(5).60. See 12 U.S.C. § 1842(a) (1982); see nfra notes 68-72 and accompanying text.61. 12 U.S.C. § 1842(d) (1982).
62. Id The Douglas Amendment does not prohibit an acquisition that does not require Fed-eral Reserve Board approval, such as acquiring less than five percent of another bank's stock. It
applies, however, to acquisitions that require § 3 approval, including any acquisition of control
over a bank or bank holding company. See Letter from Theodore E. Allison, Secretary of Federal
320 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
Exceptions to the bar imposed by the Douglas Amendment are of
great practical importance. First, bank holding companies that had
multistate operations in 1956 are protected.63 Second, states may explic-
itly authorize out-of-state bank holding companies to acquire in-state
banks. 64 Some states have done this on a limited or reciprocal basis, and
many others are considering such provisions. 65 Third, the Garn-St
Germain Act provides a procedure for the approval of "extraordinary
acquisitions"-acquisitions of failing institutions in other states under
elaborate procedures set out in the statute.66
The Douglas Amendment ordinarily prevents out-of-state bank hold-
ing companies from becoming acquirors in unfriendly takeovers. A po-
tential target, however, should not be unduly comforted by thisimpediment; the Amendment also makes it more difficult to find a"white knight," and can lessen the number of bidders for a bank,
thereby possibly reducing the price the target's stockholders would
otherwise obtain in an unfriendly takeover situation.67
2. Companiesother than bank holding companies
Companies that are not bank holding companies face a different stat-
utory impediment, but one that is equally effective in deterring most
Reserve Board, to William C. Beaman, Clerk of the United States District Court for the District of
64. Id The acquisition by the out-of-state bank holding company must be "specifically au-
thorized by the statute laws of the state in which such bank is located, by language to that effectand not merely by implication." Id
65. Al of July 1, 1983, at least one state allowed acquisitions of banks by out-of-state bank
holding companies without limitation. ALASKA STAT. § 06.05.235(e) (1978 & Supp. 1982). Two
states allowed nationwide interstate banking on a reciprocal basis. N.Y. BANKING LAW § 142-b
(McKinney 1982); Act ofMay 18, 1983, ch . 302, § 2, 1983 Me. Legis. Serv. 910, 911 (to be codifiedat Me. Laws § 10-1013.2). Three New England states allow reciprocal interstate banking on aregional basis. Act of June 8, 1983, Pub. Act No. 83-411, § 2, 1983 Conn. Legis. Serv. 947, 950
(West) (to be codified at CONN. GEN. STAT. § 36-416); MASS. GEN. LAWS ANN. ch. 167A, § 2 (West1977 &Supp. 1983); Act of May 17, 1983, ch. 201, § 1(c), 1983 R.I. Pub. Laws 1861 (to be codified
at R.I. GEN. LAWS § 19-30-2) (reciprocal with New England states until 1984, then reciprocal na-
tionwide). At least one state permits an out-of-state bank holding company to acquire a bank orbank holding company if the acquired institution is in danger of failing. Act of Apr. 25, 1983, ch .157, § 9, 1983 Wash. Legis. Serv. 1258, 1266 (West) (to be codified at WASH. REV. CODE
§ 30.04.230). Three states allow out-of-state bank holding companies to ow n or control "limited
purpose" banks, but restrict in some manner the bank's provision of full services. See DEL. CODE
ANN. tit. 5, § 803 (West Supp. 1982); Act of May 10, 1983, § 1, 1983 Md. Laws 143 (to be codifiedat MD. FIN. INST. CODE ANN. § 5-901); S.D. CODIFIED LAWS ANN. § 51-16-40 (1980). See generall,Interstate Banking BarriersBujfted by BA-Seafrst, 2 BANKING EXPAN. REP. (Law & Business, Inc.),
May 16, 1983, at 7 (discussing various state law provisions that affect interstate banking).
66. See 12 U.S.C. § 1823(0 (1982).67. A well-structured, friendly transaction entered into before the unfriendly tender offer
may, however, enhance the deterrent use of an agreement with an out-of-state bank holding com-pany. For a discussion of acquisitions of nonvoting equity interests by out-of-state bank holding
companies in friendly transactions, see in/a notes 109-14 and accompanying text. Because suchnonvoting equity agreements generally require the cooperation of the target, they do not lend
unfriendly takeover attempts. The BHCA generally prohibits bank
holding companies from owning companies other than banks or compa-
nies that engage in activities closely related to banking.68 The restric-
tions on nonbanking activities are intended to separate the business ofbanking from most other commercial activities. 69 A company that be-
comes a bank holding company by acquiring control over a bank or an
existing bank holding company is subject to this prohibition.70 Because
of these restrictions, a company engaged in such nonbanking activities
may not acquire or retain control over a bank without divesting itself of
the unrelated business activities. The number of nonbank holding com-
panies able or willing to acquire commerical banks, therefore, is signifi-
cantly limited.Recently there has been a flurry of activity with respect to the acquisi-
tion or retention of "nonbank banks"7' by various types of financial in-
68. 12 U.S.C. § 1843(a) (1982). Among the exceptions to the general rule is an exemption for
any activity that the Federal Reserve Board determines to be "so closely related to banking or
managing or controlling banks as to be a proper incident thereto." Id § 1843(c)(8). The Federal
Reserve Board's regulations implementing this provision are contained in Revised Regulation Y,
supra note 29, at 826 (adopting 12 C.F.R. § 225.25).
69. The Federal Reserve Board has recently stated that separation of banking from nonbank-
ing activities was intended to eliminate potential conflicts of interest and concentration of resourcesinherent in the commingling of banking and commerce, to maintain banks as impartial providers of
credit, to avoid the anticompetitive effects that arise from close ties between the control and use of
credit, and to protect the banking system and the economy from the instability that could resultfrom bank participation in commerce. Se BankAmerica Corp., 69 Fed. Res. Bull. 105, 108, af'd sub
nom. Securities Indus. Ass'n v. Board of Governors, 716 F.2d 92 (2d Cir. 1983), cert. granted, 52
U.S L.W. 3544 (U.S. Jan. 23, 1984) (No. 83-614).
70. Section 4(a)(2) of the BHCA, 12 U.S.C. § 1843(a)(2) (1982), requires a company to divest
its impermissible nonbanking activities within two years from the date on which it becomes a bank
holding company. Id The Federal Reserve Board may extend that period for up to three one-year
periods, if the extension would not be detrimental to the public interest. Id
71, "Nonbank banks" are commercial banks that either do not accept deposits withdrawable
on demand, or do not make commercial loans. Cf 12 U.S.C. § 1841(c) (1982) (definition of
"bank"); supra note 29 and accompanying text. An acquiror ofa "nonbank bank" is not subject to
the BHCA's procedural requirements or its substantive provisions on nonbank activities because
these financial institutions are not "banks" for purposes of the BHCA.
In the past, the Federal Reserve Board has permitted commercial corporations to acquire a bank
on the condition that it divest the bank's commercial loan portfolio. More recently, the Federal
Reserve Board has opposed such acquisitions unconditionally. For example, in connection with its
opposition to the acquisition of a nonbank bank by a mutual fund underwriter and advisor, the
Federal Reserve Board asserted that a bank is engaged in making a commercial loan if it purchases
commercial paper, bankers acceptances, or certificates of deposit, extends broker call loans, sells
federal funds, deposits interest bearing funds, or engages in similar lending vehicles. See Letter fromWilliam W. Wiles, Secretary of Federal Reserve Board to William M. Isaac, Chairman of FDIC
(Dec. 10 , 1982) (commenting on Notice of Change in Bank Control filed by Dreyfus Corporation,
New York, N.Y., with respect to Lincoln State Bank, East Orange, N.J.). But see, e.g., Letter from
Margaret L. Egginton, Deputy to the Chairman of FDIC, to William W. Wiles, Secretary of Fed-eral Reserve Board (Dec. 29, 1982) (challenging Federal Reserve Board's definition of commercial
loan). The Federal Reserve Board's recent revision of Regulation Y also adopts definitions of "de-
mand deposit" and "commercial loan" that are designed to limit the use of nonbank banks to avoid
the requirements of the BHCA. See Revised Regulation Y, supra note 29 , at 818-19 (to be codifiedat 12 C.F.R. § 225.2(a)). Both the FIDA, supra note 8, and various "moratorium" bills introduced
in the 98th Congress, see, e.g., S. 1682, § 101, 98th Cong., 1st Sess., 129 CONG. REc. S 10,890-92
may engage in activities of any kind outside the United States, and may
engage in or maintain within the United States activities incidental to
its foreign operations or its international commerce.76
4. Individuals andgroups that arenot companies
Many commercial banks, even relatively large ones, are vulnerable to
unfriendly takeover attempts by individuals or groups of individuals. 77
An acquisition by an individual or by a group of individuals without
sufficient formal links to constitute a company for purposes of the
BHCA is subject only to the CBCA.78 The determination of whether
the acquiror is a company may affect the success of an unfriendly take-
over attempt fo r two reasons. First, compliance with the requirements of
CBCA presents fewer burdens to an acquiror and offers fewer opportu-
nities for the target to challenge the acquisition. Second, the BHCA
prohibits a company that is not a bank holding company from acquir-
ing a controlling interest in a bank or bank holding company without
divesting itself of ownership of its nonbanking activities. 79 An acquisi-
tion subject only to the CBCA thus allows an opportunity to purchase a
significant block of the target's stock before launching an unfriendly
tender offer.80
CBCA procedural requirements provide targets with few defenses
against unfriendly takeover proposals. The CBCA does not require the
acquiror to publish notice of the application, nor does it require notice
to the target bank.8 t The CBCA also does not explicitly grant the target
76. The Federal Reserve Board generally has not rigidly applied the prohibitions on non-
banking activities contained in the BHCA with respect to applications in which the applicant is
owned by a foreign government. See Banca Commerciale Italiana, 68 Fed. Res. Bull. 423 (1982)
(approval of foreign government-owned bank's acquisition of existing U.S. bank consistent with
public interest). The Board has expressed concern, however, in cases in which the foreign govern-ment applicant is engaged in a wide range of banking and other commercial activities, that there
will be a higher probability ofconflict between banking and nonbanking operations contrary to the
stated purposes of the BHCA. Id at 425. In addition, the Board has expressed particular concern
about the prospect that a foreign government-owned entity might be "established for the principal
purpose of evading the interstate banking prohibitions. . . of the act .... " Id.
77. &egenerall Riggs Nat'l Bank v. Allbritton, 516 F. Supp. 164 (D.D.C. 1981) (individual
attempting unfriendly tender offer for control of bank with $2.8 billion in assets).
78. An acquisition by a "company" may be subject to the CBCA, the BHCA, or both, de-pending on the structure of the transaction. For a discussion of the relationship of the CBCA and
the BHCA, see infra notes 27-42 & 51-59 and accompanying text.
79. See supra notes 68-69 and accompanying text.
80. For a discussion of securities law issues regarding acquisitions of a target corporation's
stock prior to a tender offer, see Tobin & Maiwurm, BeachheadAcquizions: Creating Waves in the
Marketplace and Uncertainty in the Regulatog Framework, 38 Bus. LAW. 419 (1983).
81. Notice to the target may be necessary under securities or other laws. See, e.g., Williams
Act § 13, 15 U.S.C. § 78m(d) (1982) (notice to issuer ofcertain securities required within 10 days of
324 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
standing to participate in the agency's review proceedings8 2 or standing
to appeal a determination by the agency not to disapprove an
acquisition.
C Issues That May Arise i Unfriendy~Attempts to Take Over a Commercial
Bank orBank Holding Company
. CBCA or BHCA
A critical factor in a hostile takeover is whether a group of individuals
acting together to acquire control of a bank or bank holding company
will be a "company" for purposes of the BHCA.83 Several advantages
accrue to an acquiror thatstructures itself to fall outside the definition
of "company." A group that is not a company is not subject to the
BHCA and, after passing OBCA review, could acquire all the stock of a
bank or bank holding company. In addition, gaining approval of an
application under the CBCA is easier and faster than under the BHCA.
For that reason, when faced with a hostile tender offer, the target will
find it advantageous to assert that the acquiring group is a company
and thus subject to the BHCA.
The Federal Reserve Board recently stated, consistent with earlier de-
terminations of the Board and the courts, that individuals bound to-
gether in a "formalized structure for the purpose of acquiring or
managing a bank holding company" are a company for purposes of the
BHCA. 84 As a company, a group may have to comply with both the
Act's notification provisions, see id § 18a(c)(7), but acquisitions subject to clearance only under the
CBCA are not. Id § 18a(c).
The bank regulatory agencies differ as to whether a target may gain access under the Freedom of
Information Act (FOIA), 5 U.S.C. § 552 (1982), to filings made by a would-be acquiror once the
target learns that notice has been filed. The Comptroller of the Currency denies access to change inbank control notices until consummation of the acquisition, and then provides only summary no-
tice. Its policy rests on the confidentiality of the notice required by the CBCA, 12 U.S.C.
§ 18170)(6) (1982), and the exemption from disclosure of confidential information under FOIA.
See 5 U.S.C. § 552(b)(8) (1982). The FDIC, at its discretion, makes available to the public informa-
tion concerning changes in the control ofan insured bank. 12 C.F.R. § 309.4(c)(2) (1983) (informa-
tion publicly available to extent notice contains name of target, names of sellers and purchasers of
stock, number of shares involved, and number of shares outstanding). The CBCA notice is not
made available by the FHLBB. 12 C.F.R. § 563.18(2)(O (1983) (no disclosure without consent of
acquiror or until consummation of acquisition).
82. The Federal Reserve Board has developed an informal procedure that allows target banks
or other interested persons to submit information for consideration in the Federal Reserve Board's
review. Sometimesit conducts "nonhearing hearings." No court, however, has decided to what
extent, if any, a target is entitled to participate. See, e.g., Hodgson &Douglas, The Change In Bank
ControlAct. A Screening Statute Transformed, I BANKING EXPAN. REP. Sept. 6, 1982, at 1, 10.
83. "Company" is defined more narrowly in the BHCA than "person" is defined by the
CBCA. See supra note 16 and accompanying text.
84. See Letter from James McAfee, Associate Secretary of Federal Reserve Board, to John D.
Hawke, Jr. (Sept. 13, 1982) (regarding CBCA notice filed by shareholders group). The Federal
Reserve Board determined that a group of individuals and partnerships that had entered into a
written agreement regarding a planned acquisition of stock was a "company." Id The agreement
gave control of the group's stock to three representatives elected by the group and to the group
CBCA and the BHCA under certain circumstances. Any individual,
group, or company that is not already a bank holding company gener-
ally can acquire up to ten percent of the outstanding voting shares of a
bank or bank holding company without triggering either the BHCA orthe CBCA.8 5 If the group is a company, the BHCA requires it to obtain
the Federal Reserve Board's approval for any acquisition of twenty-five
percent or more of the outstanding shares of voting stock of a bank or
bank holding company.86 A company that acquired more than ten per-
cent of a bank holding company's voting stock and later decided to ex-
ceed twenty-five percent would have to comply first with the CBCA
procedures, and then with the BHCA procedures.
A company might have to submit a BHCA application even if it seeksless than twenty-five percent of the stock of a bank or bank holding
company. In addition to defining control with a stock ownership thresh-
old,8 7 the BHCA defines control to include a "controlling influence over
the management or policies of the bank or company."8 8 The Federal
Reserve Board has established by regulation rebuttable presumptions of
control in certain situations despite ownership of as little as five percent
of a bank's or company's voting shares.89 Moreover, the Federal Re-
itself. Id at 2. Any sale of shares subject to the agreement required group authorization, and the
group could bind all of the shares to a sale with a third party. Id
Factors that may cause a group to be deemed a "company" include the existence of a formal
organizational structure that governs the operation of the group's holding of the shares in the bank
or bank holding company, and the potential for or the practical likelihood of perpetual existence.
See P. HELLER, supta note 32, at 1-4. The Federal Reserve Board considers "whether there are any
agreements relating to sale, transferability, or voting of the shares of the proposed target by the
components of the alleged company and whether or not some type of formalized structure exists
among the components of the alleged company with respect to control of the proposed target."
Hawke, Adler & Kaplan, Banks' Immunity to Hostile Takeovers Has Dissolved, Legal Times of Wash.,
Aug. 10, 1981, at 44, col. 1; see also WISCUB, Inc., 65 Fed. Res. Bull. 773, 776-77 (1979) (formal
structure needed for shareholders collectively to constitute company); SYBCorp., 63 Fed. Res. Bull.587, 588 (1977) (shareholder group may become company through agreement or structure). The
BHCA was designed to prevent the formation of entities that may be used as a means of acquiring
and maintaining in perpetuity management and control of banks' shares or assets. SENATE COMM.
ON BANKING AND CURRENCY, S. REP. No. 1095, 84th Cong., 2d Sess. 7 (1955), reprinted n 1956
U.S. CODE CONG. & AD. NEws 2482, 2488. An important indicator of permanency is whether
dispersion or dissolution of the group's control over shares of the issuer's stock will result after the
death of a member of the group. See id
85. The bank regulatory agencies expanded the statutory definition of control by establishing
a rebuttable presumption of control if a person acquires the power to vote 10% or more of any class
of a publicly held company's voting securities. See 12 C.F.R. § 15.3 (1983) (Comptroller); Revised
target can be expected to demand Federal Reserve Board action when-
ever it perceives a violation of the conditions, especially when the CBCA
proceeding is the first step toward an unfriendly takeover.
2. Divestitures required to cure antitrust concerns
Antitrust issues are an important hurdle for many acquisitions subject
to the BHCA, and conceivably could present problems in transactions
subject to the CBCA as well.9 3 For a proposed acquisition of a direct
competitor, the Federal Reserve Board analyzes whether the takeover
will have a substantial adverse effect on existing competition in the af-
fected banking markets. 94 If the acquisition unreasonably reduces ex-
enable the company to proceed under the CBCA rather than the BHCA. See Letter from James
McAfee, Associate Secretary of Federal Reserve Board, to John D. Hawke, Esq., supra note 91, at 4.93. The antitrust analysis required by the BHCA can be conducted only after the relevant
geographic and product markets within which the acquisition will have an effect on competition
have been defined. Commercial banking is the relevant "line of commerce," or product market,
within which to analyze the effect on competition of the acquisition of one bank by another. See,
e.g., United States v. Connecticut Nat'l Bank, 41 8 U.S. 656, 663-66 (1974) (savings banks distin-
guishable from commercial banks for antitrust analysis); United States v. Philadelphia Nat'l Bank,
374 U.S. 321, 356-57 (1963) (commercial banking constitutes distinct line of commerce). The
evolution of nonbank financial services offered by savings and loan associations, commercial and
consumer lending companies, insurance companies, securities firms, and other entities may, how-ever, require that these other competitors be included in the relevant product market. See e.g.,
Note, The Line ofCommerce Fo r Commercial Bank Mergers.:A Product-OrientedRedefiton, 96 HARv. L.
REv. 907, 917-26 (1983) (recognizing need to redefine commercial banking market to include
nonbank financial services). The Supreme Court has defined the relevant geographic market for
competitive analysis as the local area within which "bank customers that are neither very large norvery small find it practical to do their banking business." PhiladelphiaNat' Bank, 374 U.S. at 361.
If the relevant product market is broadened, it also may be necessary to reevaluate the appropriate
geographic market within which the competition defined by the new product market is affected.The Federal Reserve Board must find that a transaction actually violates antitrust laws in order
to deny the application. See, e.g., County Nat'l Bankcorp. v. Board of Governors, 654 F.2d 1253,1254 (8th Cir. 1981) (multibank holding company and its subsidiary acquired unaffiliated bank
holding company); Republic of Tex. Corp. v. Board of Governors, 649 F.2d 1026, 1043 (5th Cir.
1981) (bank holding company acquisition of bank); Mercantile Texas Corp. v. Board of Governors,
638 F.2d 1255, 1263 (5th Cir. 1981) (proposed merger of bank holding companies).
94. The Federal Resecve Board has traditionally applied criteria similar to the standards in
the 1968 Department of Justice Merger Guidelines. U.S. DEPARTMENT OF JUSTICE, MERGER
GUIDELINES (1968). In June 1982, however, the Department of Justice issued new guidelines thatreflect its current policy on acquisitions and mergers. See U.S. DEPARTMENT OF JUSTICE, MERGER
GUIDELINES (1982). Although the Federal Reserve Board has not adopted the 1982 guidelines for-mally, it is apparent that the Board is analyzing proposed acquisitions under both the 1968 and the
1982 guidelines. The Federal Reserve Board has given no clear indication with regard to what itwill do in the event of a conflict between the two guidelines.
The Federal Reserve Board also considers the transaction's effect on potential competition inmarkets where only one of the parties is present. See United States v. Marine Bancorp., Inc., 418U.S. 602, 623-42 (1974) (geographic market extension merger analyzed under potential competition
doctrine). Recent court cases call into question the continued existence of the potential competi-
tion doctrine. See, e.g., Republic of Tex. Corp. v. Board of Governors, 649 F.2d 1026, 1044-48 (5thCir. 1981); Mercantile Tex. Corp. v. Board of Governors, 638 F.2d 1255, 1263-72 (5th Cir. 1981).
The Federal Reserve Board has issued proposed guidelines for determining when to apply "intense
scrutiny" to a proposed acquisition raising potential competition concerns. See Policy Statement ofthe Board of Governors of the Federal Reserve System for Assessing Competitive Factors under the
Bank Merger Act, 47 Fed. Reg. 9017 (1982). Although the Board has not formally adopted thepolicy statement, it has applied the statement's guidelines to analyze recent bank holding company
Even these solutions, however, may delay the acquisition of the target
bank. The ultimate purchaser of the divested bank must itself obtain
clearance under the BHCA, CBCA, or BMA. That additional review
provides the reluctant target with yet another opportunity to challenge
the acquisition. Moreover, even an interim owner, including a trustee,
might have to pass regulatory clearance, at least under the CBCA notice
procedure, before it could acquire the shares of the bank to be divested.
The concurrent divestiture issue, therefore, is ripe fo r Federal Reserve
Board review in a rulemaking proceeding.
The Comptroller's policy regarding procompetitive divestitures is less
rigid than that of the Federal Reserve Board. The Comptroller consid-
ers the timing of required divestitures on a case-by-case basis. It mayeven allow an applicant to make a required divestiture after the con-
summation of the transaction in an unfriendly takeover.
3. Financialandmanagerial tandards
The financial standards used by the Federal Reserve Board in review-ing BHCA applications9 8 can also have a significant effect in contested
takeover situations. In certain takeover situations, the financial stan-
dards applied by the Federal Reserve Board during BHCA review canbe decisive. For example, in the recent battle for control of Union Com-
merce Corporation, Union Commerce employed the time-honored tech-
nique of seeking a "white knight" when confronted with a hostile tender
offer by Huntington Bancshares, Inc. Union Commerce cooperated
with its white knight, Central Bancorporation, which launched a com-
peting tender offer for control.9 9 The Federal Reserve Board denied
Central's application to acquire Union Commerce, however, because
the Board determined that the acquisition would substantially weakenCentral's financial condition and flexibility.' °° Huntington's applica-
tion, which the Federal Reserve Bank approved, t0 1 went forward and, as
a result, its tender offer was successful.
In friendly situations, the Board's initial determination that a propo-
sal's adverse financial results requires denial may not be fatal. For ex-ample, applicants can restructure the financial aspects of proposed
transactions previously denied by the Federal Reserve Board, thereby
alleviating the Board's concerns. 02 In a contested takeover, however,
98. See supra notes 41-42 and accompanying text.
99 . Se e Central Bancorp., Inc., 68 Fed. Res. Bull. 789 (1982).100. See td at 790. The Board was concerned that Central would incur a substantial increase
variant of the target's traditional search fo r a white knight. A party that
might be dubbed a "white knight-in-waiting" agrees to purchase a sub-
stantial nonvoting equity interest in the target without acquiring the
proscribed percentage of voting shares. These agreements are fre-quently with entities presently ineligible to acquire actual control of the
target, notably out-of-state bank holding companies. 109
Nonvoting equity agreements have several effects on a target bank or
bank holding company. Nonvoting equity agreements facilitate the
eventual acquisition of the target bank by the investing bank should the
barriers to interstate banking fall." 0 Often viewed as a preliminary step
to acquisition, they signal the market and potential hostile acquirors
that the target has been claimed. In addition, the purchase of a smallpercentage of common stock and additional amounts of preferred stock
injects capital into the target institution. Finally, even with the Federal
Reserve Board's guidelines, interstate equity agreements further insulate
the target bank from attack. Having entered into an equity agreement,
the target can marshal against an acquiror a block of five percent of the
outstanding voting shares in hands presumably friendly to incumbent
management. If the hostile acquisition succeeds, the acquiror would un-
doubtedly prefer to free its newly acquired bank from the terms of the
interstate equity agreement. This would require the redemption of the
equity capital invested by the out-of-state bank holding company"'
and, perhaps, payment of a premium fo r the termination of the invest-
ment agreement.
In July 1982 the Federal Reserve Board issued guidelines for deter-
mining cases in which nonvoting equity investments confer control of
the bank or bank holding company on the investor. 12 These guidelines
109. Out-of-state bank holding companies generally cannot acquire control of a bank or abank holding company. See supra notes 61-66 and accompanying text. Although nonvoting equity
agreements most commonly involve out-of-state bank holding companies, foreign banks and domes-tic and foreign nonbank holding companies may also use this procedure. See, e.g., United Midwest
Bancshares, 68 Fed. Res. Bull. 713, 715 (1982).
110. For example, First National Boston Corporation of Massachusetts and Casco-Northern
Corporation of Maine entered into a nonvoting equity agreement in 1982. First National Bostonpurchased from Casco-Northern nonvoting, redeemable preferred stock with warrants to purchase
common stock at book value. After Massachusetts and Maine enacted legislation allowing recipro-
cal interstate banking in 1983, the two bank holding companies announced their intention tomerge. Se FirstNatzonal Boston Signs to Buy Casco-Northen, Wall St . J., Mar. 11 , 1983, at 2, col. 3.
111.This amount
may beup
to 25%of the bank's total equity, or even higher amounts if theissuing bank holding company has been in financial difficulty.
112. See Board of Governors of the Federal Reserve Board, Policy Statement on Nonvoting
Equity Investments by Bank Holding Companies, 47 Fed. Reg. 30,965 (1982) (codified at 12 C.F.R.
§ 225.143 (1983)). The Federal Reserve Board policy statement is not limited to investments by
out-of-state bank holding companies, and its provisions may be applied equally to agreements with
foreign banks and domestic and foreign nonbank holding companies. Id. For a general discussion
of these guidelines, see Heifer & Bruemmer, The FederalReserve Board'sPoliy Statement on BHC on-Voting Equity Investments, I BANKING EXPAN. REP. Aug. 2, 1982, at 1; Heifer &Bruemmer, Interstate
Nonvoting Equity Agreements and "Control" Under the Bank Holding Company Act, 39 Bus. LAw. 383
332 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
may facilitate agreements between banks and bank holding companies
located in different states because they permit a bank holding company
to purchase up to twenty-five percent of the nonvoting equity of a bank
or another bank holding company and contingent rights to acquire upto twenty-five percent of its voting stock before the acquiror is deemed
to be in control.113 Overly restrictive investment agreements may lead
to a determination that the out-of-state bank holding company controls
the target bank,114 and the Federal Reserve Board's policy statement is
sufficiently flexible to accommodate such arguments. Even in the ab-
sence of such a determination, however, would-be acquirors will proba-
bly prefer more inviting opportunities and targets in the markets they
wish to enter.
III. TAKEOVERS OF THRIFT INSTITUTIONS
The statutory framework for acquiring control of a savings and loan
association is similar to that for acquiring control of a commercial bank.
There are, however, differences that can make the acquisition of a sav-
ings and loan association less complicated and less disruptive of the ac-
quiror's other business activities.
In spite of these differences,unfriendly takeover attempts have not
been as prevalent in the savings and loan industry largely because the
majority of savings institutions are mutual associations, which the de-
positors, as members of the association, "own." An individual or corpo-
ration cannot acquire control of a mutual savings and loan association
unless the association converts to the stock form of ownership in accord-
ance with FHLBB regulations. 1 5 Prior to 1982, the FSLIC regulations
on acquiring the stock of a converted association further limited the
(1984); Hawke, Fed Shows Frustration in Latest Investment Guidelines, Legal Times of Wash., Aug. 9,
1982, at 34, col. 1.113. See 12 C.F.R. § 225.143(d)(4) (1983).
114. See, e.g., Letter from Michael Bradfield, General Counsel of Federal Reserve Board, to
Peter P. Bartholow, Executive Vice President-Finance, Mercantile Texas Corporation (Mar. 24,
1983) (proposed nonvoting equity agreement inconsistent with BHCA and Board guidelines), Let-
ter from William W. Wiles, Secretary of Federal Reserve Board, to Richard S. Simmons, Esq. (July
8, 1982) (agreements between two bank holding companies inconsistent with control provisions of
BHCA).
115. See 12 C.F.R. § 563b.1-.10 (1983). The FHLBB adopted regulations in April 1982 that
permit, on a test-case basis, the conversion of an association from the mutual to the stock form of
ownership in connection with the establishment of a holding company, the acquisition of the con-
verting association by an existing holding company, or the merger of the converting associationwith an existing stock association. See FHLBB Conversions from Mutual to Stock Form, 47 Fed.
Reg. 19,672, 19,682 (1982) (codified as amended at 12 C.F.R. § 563b.9-.10). The FHLBB removed
the test-case restriction in 1983 as part of a general restructuring of the conversion regulations. See
48 Fed. Reg. 15,591, 15,604 (1983) (to be codified at 12 C.F.R. §§ 563b.9-.10).
The statutory and regulatory framework also limits the possibility that a contested proxy fight for
control of a mutual savings and loan association will be used to try to merge the two institutions.
Members of a mutual association may communicate with other members on matters of interest to
the association. No savings and loan holding company, or any director, officer, employee, or con-
The absence of unfriendly takeover activity in prior years in the sav-
ings and loan industry also may have reflected the historically limited
scope of savings and loans' financial activities. The industry's depressedfinancial condition over the past few years, coupled with the difficulty of
ascertaining from public information the value of an association's loan
portfolio, also limited unfriendly takeover attempts.
These factors, however, seem to be diminishing. The value of many
stock savings and loan associations may be higher than the current mar-
ket price of their stock because of the expanded powers Congress re-
cently granted to savings and loan associations" t 7 and because of falling
interest rates. Moreover, many savings and loan associations have con-verted from the mutual to the stock form of ownership, recognizing the
potential for an increase in their net worth through infusions of equity
capital. Substantial modifications in FHLBB regulations, including a
reduction in the required waiting period for acquiring more than ten
percent of a converted association's stock from three years to one year,
have eased the conversion process.1 8
trolling person of the holding company, can hold, solicit, or exercise voting rights in a mutualsavings and loan association. See 12 C.F.R. § 584.9(a) (1983).
116. Under prior FHLBB regulations, no person could, directly or indirectly, acquire or offer
to acquire more than 10% of any class of voting securities for a period of three years after the
conversion, except with the prior written approval of the FSLIC. Set 12 C.F.R. § 563b.9(d) (1982)
(amended 47 Fed. Reg. 19,672, 19,682 (1982)).
117. The Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No.
96-221, 94 Stat. 13 2 (codified in scattered sections of 12 U.S.C.) (Deregulation Act), took effect
January 1, 1981. The Act removed many of the restrictions on services that federally chartered
thrift institutions could offer. It authorized federal savings and loan associations to make commer-
cial real estate loans and secured and unsecured consumer loans and to invest up to 20% of their
assets in commercial paper and corporate debt securities. 12 U.S.C. § 1464(c)(2) (1982). Further, it
authorized thrift institutions to provide credit card services, id § 1464(b)(4), to offertrust and otherservices previously available only from commercial banks and trust companies, id § 1464(n), and to
operate remote service units. Id § 1464(b)(1).
The Garn-St Germain Act, supra note 7, expanded the authorized activities of thrift institutions.
The Act authorizes thrift institutions to invest in government securities, to make commercial, agri-
cultural, and corporate loans (up to 10% of assets as of January 1, 1984), and to accept demand
deposits from commercial, corporate, and agricultural customers that have a lending relationship
with the institution. 12 U.S.C. § 1464(c) (1982). Although these enhanced powers were intended
"to provide such institutions the flexibility necessary to maintain their role of providing credit for
housing," id § 1464(a), they will enable thrift institutions to compete for business far beyond their
traditional activities. See Vartanian & McFarlane, FHLBB Helps Bring About Major Change n
Thrifts, Legal Times of Wash., Nov. 1, 1982, at 16, 23, col. 1 (federally chartered savings and loan
associations can invest up to 75% of assets in "commercial-type" investments).
118. The FHLBB and Congress have expanded the ability of both federally and state-
chartered savings and loan associations to convert from the mutual to the stock form of ownership.
See 47 Fed. Reg. 19,672-79 (1982) (codified at 12 C.F.R. § 563b.1-.10 (1983)); 48 Fed. Reg. 15,591
(1983) (to be codified in scattered sections of 12 C.F.R. §§ 552, 563b). The 1982 amendments
allowed officers, directors, and persons other than depositors to acquire larger shares of the conver-
sion stock and compressed the solicitation and offering period. Under those amendments, no per-
son could acquire more than five percent of the converted association's outstanding shares in the
conversion offering unless the plan of conversion raised this number to 10%. See 47 Fed. Reg.
19,676, 19,679 (1982). Converting associations could also adopt charter provisions that prohibited
334 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
In addition, new legislation may significantly increase the number of
thrift targets. FIDA and other legislation that would permit bank hold-
ing companies to acquire federally insured thrift institutions is pending
in the 98th Congress.' 19 The Federal Reserve Board has traditionally
allowed bank holding companies to acquire thrift institutions only when
the thrift is financially troubled or, in certain states, for what amounts to
historical reasons.' 20 Healthy thrift institutions would face the prospect
of unfriendly takeovers from bank holding companies if the bill is en-
acted. The holding companies could view the thrifts as a means to ex-
pand their deposit-taking operations to other states indirectly, even
though the Douglas Amendment prohibits such an expansion through
the acquisition of a bank.'2
'Thus, the agencies that regulate thrifts may soon confront the same
issues that have arisen in unfriendly acquisitions of commercial banks.
Precedent from the commercial banking agencies should be useful in
deciding these issues because of the similarity in the statutes that govern
acquisitions of thrifts and acquisitions of commercial banks.' 22 Never-
theless, special issues that reflect differences in the statutes governing
thrift acquisitions may also arise. This section discusses some of those
similarities and differences.
the acquisition by any person of more than 10% of the association's stock for up to three years and
could renew the provisions on a year-to-year basis after the expiration of the original three-yearperiod. Id at 19,679. Associations that converted before the rules were adopted remained subject to
the three-year limitation on holding more than 10% contained in 12 C.F.R. § 563b.9(d) (1983)
(amended 1982), until at least May 5, 1983. See 47 Fed. Reg. 24,252, 24,253 (1982) (to be codified
at 12 C.F.R. § 563b).The FHLBB further modified the conversion regulations in 1983. These modifications retain the
10% limit for one year for "standard conversions," but allow a converting association to adopt
further antitakeover charter provisions only if permitted by the law of the state in which the princi-
pal office of the converted insured association is located. Id. at 15,594, 15,602 (to be codified at 12C.F.R. § 563b.3(i)(7)). Moreover, a federally chartered association can include an optional an-
titakeover provision only if it terminates within one year of the completion of the conversion. Id at
15,594, 15,601 (to be codified at 12 C.F.R. § 552.4). The new regulations also provided for the "sale
of control" in connection with conversions subject to special procedural rules. Id at 15,594-97,15,606-11 (to be codified at 12 C.F.R. §§ 552, 563b), but a notice proposing the recission of thoseregulations was published in January 1984. Set 49 Fed. Reg. 415 (1984); infra notes 184-93 and
accompanying text. On February 29 , 1984, the FHLBB adopted a further revision of its conversion
regulations, reextending the 10% restriction to three years. See 49 Fed. Reg. 7356 (1984).
Congress also has eased the conversion process for some mutual associations. Amendments to the
HOLA enacted in 1982 provide that the FHLBB may authorize the conversion of a financially
troubled mutual savings and loan association into a federal stock association, notwithstanding anyother provision of state or federal law. See 12 U.S.C. § 14 6 4 (p) (1982).
119. See supra note 8.
120. See infra notes 194-206 and accompanying text.121. See 12 U.S.C. § 1842(d) (1982). The FIDA and its progeny,supra note 8, also would permit
thrift holding companies to acquire banks. A thrift holding company that acquired a bank would
become a bank holding company as well, and therefore would be subject to the BHCA. Id.
122. Cf Kaneb Servs., Inc. v. FSLIC, 650 F.2d 78, 80 & n.5, 82 & n.12 (5th Cir. 1981) (apply-
ing cases construing BHCA to construe National Housing Act).
336 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
The FSLIC's procedural requirements are similar to those established
by the Federal Reserve Board under the BHCA.128 The antitrust stan-
dards of the NHA also are virtually identical to those of the BHCA. 129
In evaluating an acquisition of control, the FHLBB, like the Federal
Reserve Board, also considers the financial and managerial resources of
the acquiring company, the future prospects of the company and the
insured institution, and the convenience and needs of the communities
to be served by the resulting entity. 130
Restrictions on the nonthrift-related business activities of a savings
and loan holding company depend on whether the holding company is
a unitary or a multiple holding company. If it is unitary, the asset char-
acteristics of the association it controls also affect the restrictions.'3
'
the management and policies of an [insured] institution." Id § 1730a(a)(2)(D); accord 12 C.F.R.
§ 583.26 (1983).
128. Compare 12 C.F.R. §§ 543.2(c)-(f), 58 4
.4
(g) (1983) (FSLIC procedures) with supra notes 34-36 and accompanying text (BHCA procedures). An application is filed with the FHLBB's Office ofExaminations and Supervision and the Supervisory Agent of the district in which the insured insti-
tutions involved have their home offices. 12 C.F.R. § 584.4(o (1983). The FSLIC also requires anapplicant to file public notice in the community in which the home office of any institution to be
acquired is located, and in the community in which the home office of the largest subsidiary insuredinstitution of the acquiring holding company is located. Id. § 584.4(g). The Supervisory Agent
gives notice of the application to the state official who supervises savings and loan associations andto any other persons the Supervisory Agent "believes might have an interest in the application." I
§ 543.2(d)(3). The FSLIC need not notify the Department ofJustice. The rules provide for public
comments or protests, responses to protests, and oral argument on the merits of the application incertain cases. Id § 543.2(e)-(f.
The NHA requires the FSLIC to make a decision on the application within 90 days after itsfiling. See 12 U.S.C. § 1730a(e)(2) (1982). The 90-day period begins to run when all the required
information is received by the FSLIC, including amendments to the application and supporting
data, material submitted by protesting parties or other commentators, staff reports and recommen-
dations, and any comment submitted by the Department of justice. See Fort Worth Nat'l Corp. v.FSLIC, 69 F.2d 47 , 58 (5th Cir. 1972); Fidelity Fin. Corp. v. FSLIC, 359 F. Supp. 324, 327 (N.D.Cal. 1973). Failure to act within the 90-day period, however, does not result in an automatic ap-
proval, nor does it affect FSLIC's jurisdiction.S.ee
ort Worth Nat'l Corp. v. FSLIC, 469 F.2d 47,57-58 (5th Cir. 1972). The failure of the Federal Reserve Board to act on an application filed under
the BHCA, in contrast, is deemed to be an approval of the application. See 12 U.S.C. § 1842(b)
(1982).129. The NHA provides that the FSLIC shall not approve any proposed acquisition that may
reduce competition or create a monopoly, unless the public benefit from the acquisition clearlyoutweighs the anticompetitive effects. 12 U.S.C. § 1730a(e)(2) (1982); see 12 C.F.R. § 584.4(c)
(1983) (FHLBB antitrust standards).
130. 12 U.S.C. § 1730a(e)(2) (1982). The statutory command to consider the financial and
managerial resources and future prospects of the parties grants the FSLIC authority coextensivewith that of the Federal Reserve Board under the BHCA, and permits the FSLIC to imposefinancial conditions on an approval. See Kaneb Servs., Inc. v. FSLIC, 650 F.2d 78, 80 & n.5, 82 &
n.12 (5th Cir. 1981)(imposing
dividend andnet
worthrestrictions
on associationbeing
acquired bycompany) (citing Board of Governors v. First Lincolnwood Corp., 439 U.S. 234, 249-53 (1978)).The FSLIC has also required acquiring companies to guarantee the ne t worth of the acquired
savings and loan association. See Leibold, Mergers ofFSLIC InsuredSavings and Loan Associations, 37
Bus. LAW. 868, 875 (1982).
In 1983, the FHLBB delegated to its principal supervisory agents the authority to approve acqui-
sitions that fall within certain market-share parameters and do not raise significant policy issues.
See FHLBB Delegation of Authority Regarding Holding Company Acquisition and Debt, 48 Fed.
Reg. 170 (1983) (to be codified at 12 C.F.R. § 584).131. See 12 U.S.C. § 1730a(c)(1) (1982).
Multiple savings and loan holding companies are quite restricted in
business activities unrelated to the thrift industry.1 32 A unitary savings
and loan holding company whose subsidiary association fails to qualify
as a domestic building and loan association under the Internal RevenueCode 133 must meet the same restrictions.134 The unrelated business ac-tivities of unitary savings and loan holding companies that qualify as
domestic building and loan associations, however, are not restricted.135
The proposed FIDA136 would change these provisions significantly. The
bill would treat unitary savings and loan holding companies the same as
multiple savings and loan holding companies for purposes of their future
nonthrift activities.137
.2 The Home Owners' Loan Act
Savings and loan associations may merge under the Home Owners'
Loan Act (HOLA). t38 The HOLA grants to the FHLBB rulemaking
and regulatory power over reorganizations, consolidations, liquidations,
dissolutions, and mergers of associations with other FSLIC-insured insti-
tutions. 139 Pursuant to this authority, the FHLBB has issued regula-
132. The NHA limits multiple savings and loan holding companies and their subsidiaries to
the following business activities:
(A) furnishing or performing management services for a subsidiary insured institution, (B)
conducting an insurance agency or an escrow business, (C) holding or managing or liqui-
dating assets owned by or acquired from a subsidiary insured institution, (D) holding or
managing properties used or occupied by a subsidiary insured institution, (E) acting as
trustee under deed of trust, or (F) furnishing or performing such other services or engaging
in such other activities as the [FSLIC] may approve or may prescribe by regulation as
being a proper incident to the operations of insured institutions and not detrimental to
the interests of savings account holders therein.
Id § 1730a(c)(2). The services and activities that the FSLIC has determined are "a proper incident
to the operations of insured institutions" are set out in 12 C.F.R. § 584.2-1(a) (1983).133. See LR.C. § 7701(a)(19) (1976).134. 12 U.S.C. § 1730a(n) (1982). A "domestic building and loan association" must meet the
supervisory, business purpose, and assets tests of I.R.C. § 7701(a)(19) (1976). The association must
be an "insured institution" or subject to supervision and examination by a state or federal regula-
tory authority; it must be engaged principally in "acquiring the savings of the public and investing
in loans"; and it must have at least 60% of its assets invested in cash, government obligations,
deposit insurance company securities, passbook loans, residential or church real property loans,urban renewal loans, institutional loans, foreclosed property, educational loans, or property used by
the association in the conduct of its business. I.; see Treas. Reg. § 301.7701-13A (1979) (Internal
Revenue Service regulations).
135 Such prominent commercial corporations as Sears, Roebuck &Co., National Steel Corpo-
ration, and The Parker Pen Company are unitary savings and loan holding companies. See
FHLBB, MEMBERS OF THE FEDERAL HOME LOAN BANK SYSTEM 1982, at 82, 84, 86 (1983).
136. Supra note 8.137. Id See also Depository Institution Equity Act of 1983, S. 1682, 98th Cong., 1st Sess., 129
CONG. REC. S 10,890-92 (daily ed . July 26, 1983) (requiring similar treatment for unitary and mul-
tiple savings and loan holding companies). Senator Garn's recent bill, however, would put no re-
strictions on the nonthrift activities of the owner of a "qualified thrift lender," essentially a thriftwith 60% or more of its assets in mortgage or mortgage-related loans or 25% or less in commercial
loans. See S. 2181, 98th Cong., 1st Sess., 129 CONG. REc. 16,952 (1983).
338 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
tions that govern mergers resulting in federally chartered savings and
loan associations or federally insured, state-chartered associations.1 40
3. The Change in Savings and Loan ControlAct
Congress passed the Change in Savings and Loan Control Act of 1978
(CSLCA),' 4 ' as it did the CBCA, to close a gap in the application of
laws that control acquisitions of thrift institutions. The CSLCA applies
when neither the NHA nor the merger provisions of HOLA apply to an
acquisition of an insured association.42
The provisions of the CSLCA are similar to those of the CBCA. They
requirea
person
43 seeking to acquire "control"' 44 of an "insured insti-
tution" or savings and loan holding company to give sixty days prior
written notice to the FSLIC. 45 If the notice is deemed informationally
complete and the FSLIC has not issued a notice disapproving the pro-
140. See 12 C.F.R. § 546.1-.4 (1983) (federally chartered associations); id § 563.22 (1983) (fed-
erally insured, state-chartered associations). Two-thirds of each participant's board of directors
must approve a merger plan prior to submitting a merger application. The application must in-
clude copies of the executed merger agreement and certified copies of the minutes from the boards
of directors' meetings approving the plan, and a shareholders vote may be required. Id § 546.2(c),
(e).After the staff reviews the application to ensure that it is complete, notice of the proposed merger
must be published, and the application is subject to public review and comment for a period of
between 25 and 32 days. Id §§ 543.2(d), (e), 546.2(d)(1). The time period for consideration may
be extended further if a protest is filed against the proposed merger. An opportunity for oral argu-
ment may be provided in certain circumstances. See id §§ 543.2(e)-(), 546.2(d)(1).
The FHLBB approves merging an insured association into a federally chartered savings and loan
association, and the FSLIC approves other mergers of insured associations. In certain cases, the
Principal Supervisory Agency may approve a merger pursuant to authority delegated by the
FHLBB or the FSLIC. See id §§ 546.2(i), 563.22(e). Only the FHLBB or the FSLIC may deny a
merger application. Id
141. 12 U.S.C. § 1730 (1982).
142. The NHA applies only when the acquisition is being made by a savings and loan holdingcompany or other company. See id. 1730a(l)(A). The HOLA applies when one insured associa-
tion is acquiring another insured association through merger. See 12 U.S.C. § 1464(d)(1 1) (1982). If
a transaction is subject to either of these provisions, the CSLCA is expressly inapplicable. See 12
posed acquisition or extending the review period fo r another thirty days,
the proposed transaction may be consummated at the end of the review
period.146 The FSLIC may issue written notice of its intent not to disap-
prove the acquisition before the expiration of the review period, at
which point the acquiror may consummate the proposed transaction.147
The grounds fo r disapproving a notice filed under the CSLCA are
similar to those of the CBCA.148 A person whose proposed acquisition is
disapproved may request a hearing by the FSLIC on the acquisition,
and may appeal an unfavorable decision after the hearing.' 49 CSLCA
standards differ from NHA standards applicable to a savings and loanholding company, just as CBCA standards differ from BHCA standards
applicable to a bank holding company.
B. Identiing he Would-Be Acquirors
1. Savings and loan holding companies
A savings and loan holding company that seeks to acquire additional
savings and loan associations faces hurdles similar to those that bank
holding companies face when they acquire banks. Acquisitions of addi-
tional savings and loan associations by savings and loan holding compa-
nies are subject to the antitrust, financial, and managerial standards ofthe NHA. t50 Moreover, a unitary savings and loan holding company
that becomes a multiple savings and loan holding company by acquir-
ing another association must meet the restrictions on nonthrift-related
activities. 1 5 '
Unitary savings and loan holding companies with significant non-
thrift business activities may be reluctant to acquire additional associa-
tions for the same reason that nonbank holding companies are reluctant
to acquire banks. 52 The FSLIC, however, allows a unitary savings andloan holding company to maintain its status by merging an acquired
savings and loan association into its existing thrift subsidiary immedi-
146. 12 U.S.C. § 1730(q)(1) (1982). The FSLIC may extend the review period beyond the
additional 30 days "only if the [FSLIC] determines that any acquiring party has not furnished all
the information required [by the CSLCA] or that in [the FSLIC's] judgment any material informa-
tion submitted is substantially inaccurate." Id
147. 12 C.F.R. § 563.18-2(g) (1983).
148. The FSLIC may disapprove the acquisition if it would violate the CSLCA's antitrust
standards; if the financial condition of the acquiror would jeopardize the interests of the acquiredassociation; if the competence of the acquiror's management is questionable; or if any acquiror fails
or refuses to supply required information. 12 U.S.C. § 1730(o)(7) (1982).
149. Id § 1730(q)(4)-(5).150. See supra notes 128-30 and accompanying text (discussing NHA's antitrust, managerial,
and financial requirements).
151. See supra notes 132-35 and accompanying text (discussing restrictions on nonthrift activi-
ties of multiple savings and loan holding companies).152. Se e supra notes 68-70 and accompanying text (discussing restrictions on nonbanking activi-
C Issues That May Arise in Unfriendly Takeover Attempts
Many of the issues that have been discussed in the context of un-
friendly takeovers of commercial banks have not yet arisen in actions
before the FHLBB or the FSLIC. If they should arise, however, they
would raise considerations with respect to unfriendly or contested take-
overs similar to those in the commercial banking area. The decisions of
the bank regulatory agencies, therefore, provide some precedent for
resolving the issues.1 75
Laws governing savings and loans associations and the characteristics
of that industry present three other issues, however, that would-be ac-
quirors of savings and loan associations must consider.
I Unfriendly acquisitionsby merger
Savings and loan associations unaffiliated with holding companies
can make acquisitions only under the merger provisions of the
HOLA.176 The FHLBB's merger procedures, however, are not suitable
for regulating unfriendly acquisitions. The regulations require, fo r ex-ample, that an application for prior approval of a merger be accompa-
nied by an executed merger agreement and certified copies of minutes
from a meeting of the target's board of directors endorsing the
merger. 77 This requirement would be impossible to fulfill in an un-
friendly situation until the acquiror obtains control of the target.
In friendly merger transactions, on the other hand, the FSLIC and
FHLBB have routinely allowed savings and loan associations to hold the
shares of other associations fo r very short periods of time prior to con-summation of the transaction after they have entered into friendly
merger agreements. 78 A savings and loan association's inability to hold
the types of entities which, because of their capacity to bring together diverse stockhold-
ings and exercise their voting power under single control for substantial periods, would be
most likely to be able to raise the necessary capital to finance the acquisition of savings
and loan associations and to engage in holding company operations.HR. REP. No. 997, 90th Cong., 2d Sess. 7, reprintedin 1968 U.S. CODE CONG. & AD. NEWS 1601,
1607, Like the CBCA, the CSLCA is relatively uncomplicated procedurally. See supra notes 145-46and accompanying text. The CSLCA, also like the CBCA, does not explicitly provide standing for
the target to oppose a notice of application filed under it or to appeal any FSLIC decision. Anacquisition made under the CSLCA therefore generally will be easier than one under the NHA orthe HOLA.
175. See supra notes 83-92 and accompanying text.
176. See supra notes 138-40 and accompanying text.
177. See 12 C.F.R. § 546.2(c) (1983).178. In these transactions, the regulatory agency requires the acquiring association to file a
merger application in connection with its tender offer or other purchase contract, and to place inescrow, but not to purchase, any shares that are tendered or are subject to an option contract, until
the merger application is approved. See Letter from Michael Klein, Esq., Wilmer, Cutler & Picker-
ing, to James J. Finn, Secretary of FHLBB 9 (Jan. 31, 1983). If the merger application is not
approved, any shares in escrow are returned to the offering shareholder. The acquiring associationis allowed to purchase the shares only after the merger application is approved, in connection with
344 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
the shares of another association apparently makes control for a longer
period inconsistent with the provisions of the HOLA.
In City Federal Savings and Loan Association's recent acquisition of
Home Federal Savings and Loan Association the FHLBB's legal staffmay have provided a detour around this difficulty. City Federal, a fed-
erally chartered savings and loan association not affiliated with a hold-
ing company, approached Home Federal with a merger proposal.
When that proposal was not accepted by Home Federal's board ofdirec-
tors, which instead endorsed a competing proposal, City Federal an-
nounced an unfriendly tender offer and submitted to the FHLBB the
filings required by the federal securities laws.
City Federal further requested an opinion from the FHLBB that itsacquisition of Home Federal shares prior to its filing an application for
approval of a merger of the tw o associations did not violate the HOLA's
limitation on permissible investments or the FHLBB's policy restrictions
on interstate acquisitions. The FHLBB's General Counsel responded
that acquiring and holding at least two-thirds of Home Federal's shares"solely for the purpose of facilitating a merger" was permissible, pro-
vided that City Federal would divest itself of the Home Federal shares ifit was unable to complete a merger agreement and gain approval of its
application by the FHLBB.17 9 Under this interpretation, a federal sav-
ings and loan association may not have to file an application for the
FHLBB's prior approval before purchasing the shares if its intent is im-mediately to propose a merger that will be approved with the very
shares it purchased. 180
a "simultaneous" closing of the merger agreement. The shares are thus "held" by the acquiror-
arguably in technical violation of the statute-for an insignificant period of time before the tw oassociations are merged.
179. Letter from Thomas P. Vartanian, General Counsel of FHLBB, to Robert C. Sheehan,
Esq., Counsel to City Federal Savings and Loan Association (Jan. 19, 1983).180. The exchange of letters between the FHLBB and City Federal was ambiguous as to
whether City Federal was required to file an application for approval before purchasing two-thirds
of the outstanding voting shares and thus obtaining "control" over Home Federal. In litigationfiled in response to the FHLBB staff action, the FHLBB's and FSLIC's legal staff took the position
that no prior approval was required if a merger application was filed within 90 days of the acquisi-tion. See FHLBB and FSLIC Memorandum in Support of Motion to Dismiss and in Opposition toPlaintiff's Motion For Temporary Restraining Order at 15-18, C&C Interstate Fin. Corp. v. City
Fed. Sav.&Loan Ass'n, No. 83-0225 (D.D.C. filed Jan. 28, 1983). The FHLBB Opposition Memo-
randum also acknowledged explicitly that the opinions expressed in the letter and in documents
filed with the court were not orders of the FHLBB or the FSLIC, and that the agencies were not
bound by the opinions. See id at 5.The Federal Reserve Board's policy with respect to the acquisition of shares in anticipation of a
merger is much stricter. The Board requires an application for its prior approval under the BHCA
of acquisitions of "a bank or bank holding company, if the acquisition results in the company'scontrol ofmore than 5 percent of the outstanding shares of any class of voting securities of the bank
or bank holding company," Revised Regulation Y,supra note 29 , at 821 (to be codified at 12 C.F.R.§ 225.11 (c)), and an application for approval of a "merger or consolidation of bank holding compa-
nies." Id (to be codified at 12 C.F.R. § 225.11 (e)). Although the Federal Reserve Board exempts
from application for approval mergers or consolidations of subsidiary banks or bank holding com-
Whether the FHLBB staffs opinion will be followed by the FHLBB
or FSLIC is unknown at this point. The issue was not decided in the
City Federal proposal because the competing bidder withdrew its offer
and Home Federal's board agreed to accept a revised offer from City
Federal. There is a strong argument that acquisition of control for a
period that may extend six months or longer while the FHLBB or the
FSLIC reviews the application contravenes the language and statutory
purposes of the HOLA and NHA. At a minimum, it is the only instance
in which an acquiror can deliberately acquire control of a depository
institution for more than an insignificant period of time without someform of prior review of its acquisition by a regulatory agency.18 1
The staff decision gives a significant advantage to a savings and loanassociation in a takeover contest with a company that cannot use the
merger provisions in HOLA. Further, it raises questions regarding the
risks to minority shareholders if shares subsequently must be divested by
the acquiror. 182 On the other hand, it may merely reflect a willingness
on the part of the FHLBB's staff to relax the FHLBB's otherwise rigid
regulations with respect to merger proposals. Either way, a revision of
the regulations under established rulemaking provisions would be
preferable.
183
2 Sale of control conversions
In a "standard conversion," whereby an association converts from the
mutual to the stock form of ownership, no person can acquire more than
ten percent of the stock of the association fo r at least one year after the
panics with other banks, the exemption does not include mergers of nonsubsidiary banks and non-
operating subsidiary banks formed by a company for the purpose of acquiring the nonsubsidiarybank. Id (to be codified at 12 C.F.R. § 225.12(d)). Moreover, the Board requires a BHCA applica-
tion for an acquisition of shares followed by a merger if the acquisition and the merger "do not
occur simultaneously." 48 Fed. Reg. 23,525-26 (1983) (background and summary of Proposed Re-
vision of Regulation Y).181. Acquisitions under this procedure stand in contrast to those in which a person is permit-
ted to acquire shares by devise or inheritance, 12 U.S.C. § 1730a(e)(l)(B) (1982), by foreclosing on
debt contracted for previously in good faith, 12 U.S.C. § 1842(a) (1982), or in a good faith fiduciary
capacity. Id. The transfer of the shares was subject to the control of a third party other than the
acquiror in each of those instances. There was some informal staff review prior to City Federal's
proposed acquisition, because the staff was familiar with City Federal and was aware of its planned
acquisition through its request for a staff opinion. The review, however, was not of the kind that is
ordinarily required before control of a depository institution changes hands.182. For example, divestiture may result in a significant decline in the market value of shares
held by a minority shareholder.
183. The scope of the staff's opinion is unclear in several situations that may be logical exten-
sions of its reasoning. For example, the opinion does not address whether this mechanism can beused to acquire shares of a savings and loan holding company "solely for the purpose of facilitating
a merger" with a subsidiary association of the holding company. Further, it does not address
whether current savings and loan holding companies and state-chartered associations, which are
not restricted by the investment limitations of the HOLA, can acquire shares of a savings and loanassociation to facilitate a merger without first obtaining prior approval under the NHA.
When the association's board of directors had approved a sale of con-
trol conversion, other bidders could offer competing bids to the associa-
tion's members. The right to make competing offers was protected by
the requirement that the association distribute immediately and widely
a press release setting forth the principal terms of the proposed sale of
control conversion.'8 8 Persons who wished to make competing offers
thus would be on notice that control of the association is available. 8 9
The right to make competing offers was also protected because the con-
verting association had an obligation to distribute materials concerning
the competing offer to its members when an offer had been filed with
and approved by the FSLIC. 19° Further, the meeting of the associa-tion's members to vote on the originally proposed sale-of-control conver-
sion was automatically postponed for seventy days. 191
These provisions were designed to protect the association and enhance
the control premium in a sale-of-control conversion. 92 For would-be
acquirors, they provided an opportunity, similar in form to an un-
friendly takeover, to acquire the association without obtaining the ap-
proval of the target's board of directors.'9 3
3. Cross-indusig , acquisitions
The possibility that a commercial bank or bank holding company
would attempt an unfriendly takeover of a savings and loan association
or savings and loan holding company, or vice versa, has always been
remote. The regulatory steps that must be traversed have made such
attempts impractical. The Garn-St Germain Act 194 has done nothing to
change those steps, although it has enhanced the prospects of cross-in-
dustry acquisitions in supervisory situations.
95
187. See 12 CTF.R. §§ 563b.4(a)(3), 563b.6(e) (1983).
188, 48 Fed. Reg. 15,596 (1983) (to be codified at 12 C.F.R. § 563b.14(c)).189. A person making a competing offer must file a sale-of-control conversion application with
the FSLIC within 20 days of the date on which management's proxy statement is sent or given tothe association's members. 48 Fed. Reg. 15,597 (1983) (to be codified at 12 C.F.R. § 563b.lb(c)(1)).
190. 48 Fed. Reg. 15,597 (1983) (to be codified at 12 C.F.R. § 563b.1).
191. 48 Fed. Reg. 15,597 (1983) (to be codified at 12 C.F.R. § 563b.16(d)).
192. 48 Fed. Reg. 15,595 (1983). The principal purpose of the regulations was to enhance the
possibilities of raising capital in the conversion process. Id
193. FHLBB regulations also ensured that the acquiror does not acquire additional sharesother than at the presumably higher sale-of-control price. The plan for a sale-of-control conversionmust provide that no acquiring person can receive, or be entitled to, subscription rights in connec-
tion with the conversion. 48 Fed. Reg. 15,596 (1983) (to be codified at 12 C.F.R. § 563b.12). More-
over, no acquiring person can purchase any shares involved in the conversion except the shares
issued in connection with the sale-of-control agreement. Id
194. 12 U.S.C. § 1823(0 (1982).
195. FIDA, supra note 8, however, would completely change this result. The bill would allow
bank holding companies to acquire savings and loan associations, and vice versa, thus making un-
friendly takeover attempts more likely. See supra notes 8-9 and accompanying text.
348 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
Prior to the passage of the Garn-St Germain Act, cross-industry ac-
quisitions were governed solely by the provisions of the BHCA and the
NHA. The NHA offered no real impediment to the acquisition of a
single savings and loan association by a bank holding company becausethere were no restrictions on the unrelated business activities of unitary
savings and loan holding companies. The FHLBB, however, had gener-
ally opposed the acquisition of savings and loan associations by bank
holding companies except in supervisory situations.196
In addition, under the provisions of section 4(c)(8) of the BHCA, the
Federal Reserve Board consistently denied acquisitions of even one sav-
ings and loan association under the BHCA by a bank holding company,
except in states in which banks and savings and loan associations havehistorically been affiliated. 197 In fact, the Board has specifically in-
cluded the operation of a savings and loan association on its list of non-
bank activities that are not permitted fo r bank holding companies. 9 8 In
denying such acquisitions, the Federal Reserve Board found that the
operation of a savings and loan association, although "closely related" to
banking, was not a "proper incident" thereto. 199
In 1982 the Federal Reserve Board approved for the first time acquisi-
tions of financially troubled savings and loan associations by bank hold-
196. STAFF OF TH E BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, BANK HOLD-
ING COMPANY ACQUISITION OF THRIFT INSTITUTIONS 4 (1981).
197. The Federal Reserve Board has allowed savings and loan associations to acquire commer-
cial banks, and thus become bank holding companies, in Rhode Island. Se e Old Colony Co-op.Bank, 58 Fed. Res. Bull. 417 (1972); Newport Say. and Loan Assoc., 58 Fed. Res. Bull. 313 (1972).
Although banks were acquired by savings and loan associations in those cases, the applicationsraised the same issues as would a bank's acquisition of a thrift institution. See Old Colony Co-op.Bank, 66 Fed. Res. Bull. 665 (1980) (operation of building and loan association closely related toRhode Island banking). The Federal Reserve Board also has approved the acquisition of guaranty
savings banks by bank holding companies in New Hampshire. See First Fin. Group of N.H., Inc.,
66 Fed. Res. Bull. 594 (1980); Profile Bankshares Inc., 61 Fed. Res. Bull. 901 (1975). In both the
Rhode Island and the New Hampshire situations, the Board found that the historical affiliation ofbanks and thrifts made the acquisitions permissible nonbank activities in those states.
198. See 12 C.F.R. § 225.126 (1983).199. See, e.g., D.H. Baldwin Co., 63 Fed. Res. Bull. 327 (1977); American Fletcher Corp., 60
Fed. Res. Bull. 868, 870 (1974).In 1981, in dismissing an application filed by National Detroit Corporation, a bank holding
company, to acquire Landmark Savings and Loan Association, the Federal Reserve Board re-quested public comments on the potential effect of the acquisition of thrift institutions by banks
and bank holding companies. National Detroit Corp., 67 Fed. Res. Bull. 440 (1981). The com-ments were used to prepare a study the Board prepared for Congress, in September 1981. SeeLetter from Paul A. Volcker, Chairman, Board of Governors of the Federal Reserve System, to
Senator Jake Garn, Chairman, Senate Committee on Banking, Housing and Urban Affairs (Sept.21, 1981) (enclosing BANK HOLDING COMPANY AcQUISITION OF THRIFT INSTITUTIONs,: A STUDY
BY THE STAFF OF THE BOARD OF GOVERNORS OF TH E FEDERAL RESERVE SYSTEM (1981)). Stud-
ies were also prepared by the Comptroller of the Currency, the FHLBB, and the FDIC in responseto a similar request from Congress. See, e.g., Cross-Industry Acquisitions Between Thrift Institu-
tions and Commercial Banks: A Paper by the Staff of the Office of the Comptroller of the Currency(January 1982), reprinted in Comptroller ofCurrency Report to Senate Banking Committee on Cross-lndustrvAcquiritions, 13 WASH. FIN. REP. T-1 (Mar. 29, 1982). These studies generally supported cross-
industry acquisitions, although they preferred express authorization by Congress.
ing companies in states other than those with historical ties between the
two kinds of institutions.200 In order to secure the approvals, the acquir-
ing bank holding companies agreed to several conditions designed to
ensure that the acquired associations retained their identities as thrift
institutions.21 The conditions were also intended to prevent the acquir-
ing bank holding companies from deriving any competitive advantage
from affiliation with a savings and loan association. 20 2
The quasi-supervisory nature of these acquisitions diminishes their
value as models for unfriendly acquisitions. The active participation of
the regulatory agencies, and the Federal Reserve Board's efforts to fit
these decisions within the framework of its earlier denials of such acqui-
sitions, limit the value of these decisions as precedent without an expan-
sion of the Board's interpretation of the "proper incident" language in
the BHCA.
The Garn-St Germain Act may have further limited the opportunities
for unfriendly, cross-industry acquisitions. The Act amended the Fed-
eral Deposit Insurance Act 20 3 and the NHA to provide authority for"extraordinary acquisitions," including cross-industry and out-of-state
200. &e Citicorp, 68 Fed. Res. Bull. 656 (1982) (acquisition of Fidelity Federal Savings and
Loan Association by out-of-state bank holding company); Interstate Fin. Corp., 68 Fed. Res. Bull.
316 (1982) (acquisition of Scioto Savings Association by in-state bank holding company).
201. For example, Citicorp agreed: that Fidelity would be operated as a federal savings and
loan association with the primary purpose of providing residential housing credit; that Fidelity
would not "establish or operate a remote service unit" outside California; that Fidelity would not"establish or operate branches at locations not permissible for national or state banks located in
California"; that Fidelity would be operated as a "separate, independent profit-oriented corporate
entity" distinct from other Citicorp subsidiaries; that certain transactions between Citicorp andFidelity would be subject to the prior approval of the Federal Reserve Bank of New York; that
Fidelity's name would not be changed to include the word "bank or any other term that might
confuse the public" as to its status as a nonbank thrift institution; and that Fidelity's charter wouldnot be converted to that of a state savings and loan association, a state-chartered thrift institution,
or a state or national commercial bank without the prior approval of the Federal Reserve Board.
See Citicorp, 68 Fed. Res. Bull. 656, 659 (1982). The acquiring bank holding companies in both
cases also agreed not to engage in activities through the acquired association that were not other-
wise permitted activities of bank holding companies. In 1982 the Federal Reserve Board also dis-missed a bank holding company's application to acquire a savings and loan association when the
bank holding company refused to accept a similar limitation on its activities. See Central Pac.
Corp., 68 Fed. Res. Bull. 382 (1982) (application to acquire Kern Savings and Loan Association).In 1983 Citicorp was granted approval to expand the activities of its subsidiary saving and loan
associations consistent with the increased powers granted to thrifts by the Garn-St Germain Act. See
Citicorp, 69 Fed. Res. Bull. 554 (1983).
Since 1982 at least three other applications by bank holding companies to acquire financially
troubled savings and loan associations have been approved by the Federal Reserve Board. See Cit-
icorp, 70 Fed. Res. Bull. 157 (1984) (acquisition of Biscayne Federal Savings and Loan Association);Citicorp, 70 Fed. Res. Bull. 149 (1984) (acquisition of First Federal Savings and Loan Association);Old Stone Corp., 69 Fed. Res. Bull. 812 (1983) (acquisition of Perpetual Savings and Loan
Association).
202. See Carrington, Citicorp Wis FedApproval to Buy 2 S&Ls, Wall St. J., Jan. 23, 1984, at 7,col. 3 (Citicorp's recent acquisitions will blur distinction between thrift and banking industries).
350 THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 33:309
acquisitions, to prevent failures of insured depository institutions. 20 4 Ex-traordinary acquisitions are subject to elaborate procedural require-
ments and supervisory findings; consequently, they are unlikely to
provide a basis for unfriendly acquisitions. 20 5 Moreover, the FederalReserve Board and other regulatory agencies may interpret the provi-sions of the Garn-St Germain Act as an expression of Congress' unwill-ingness to allow cross-industry acquisitions, except in supervisory
acquisitions of failing institutions.20 6
IV. CRITICAL ANALYSIS OF THE REGULATORY SCHEME
Federal laws provide target institutions and potential acquirors withboth opportunities and barriers in a takeover contest. Nevertheless, the
federal regulatory structure that governs the acquisition of depositoryinstitutions-notably, commercial banks, thrifts, and their holding com-panies-is complex, confusing, and sometimes inconsistent, and shouldbe revised. If Congress does not change the present regulatory structure,
the structure will continue to impose unnecessary costs on depository
institutions and will deter economically justified unfriendly takeoversfo r reasons unrelated to the acquisition proposal.
The inconsistent treatment of commercial banks and thrifts is particu-
larly difficult to understand as a matter of policy. There is no valid rea-
son for federal regulation of changes in control of depository institutions
to treat thrifts and commercial banks differently, especially in light ofthe increasing similarity of their product powers. Further, it is not clearwhy the classification of an acquiror as a company, an individual, or anoncompany group results in different treatment. Finally, there are few
rational policy reasons fo r applying different procedural standards, in-
cluding different opportunities fo r public participation, when control ofthe target depository institution is being acquired by an informal group
204. 12 U.S.C. § 1730a(m) (1982).205. For example, the FDIC can use this authority only when an insured bank with more than
$500 million in total assets is closed. 12 U.S.C. § 1823(f(2)(A) (1982). The FSLIC can use itsextraordinary authority only when it has determined that "severe financial conditions exist whichthreaten the stability of a significant number of insured institutions or of insured institutions pos-sessing significant financial resources." 12 U.S.C. § 1730a(m)(l)(A)(i) (1982). Both the FDIC and
FSLIC must consult with the state official who has jurisdiction over the institution before invokingthe extraordinary procedure. See id § 1730a(m)(l)(B)(i) (FSLIC); 12 U.S.C. § 1823(0(2)(B)(i)(1982) (FDIC). The acquisition is then subject to a formal bidding procedure in which a bidder ofthe same type as the acquired institution is preferred. See id. § 1823(0(5) (FDIC); 12 U.S.C.§ 1730a(m)(2) (1982) (FSLIC). The first opportunity for the FDIC to use this procedure was inconnection with the failure of the United American Bank of Knoxville. For an interesting insightinto the complexity of complying with the Act's procedures and preferences, see TraascreptofFDICMeeting on FailedBank, AM. BANKER, Mar. 14, 1983, at 4, col. 1.
206. See, e.g., BHC Acquisitions of S&Ls to Be DecidedSolly Under BHCAct, Fed's General Counsel
Says, 39 WASH. FIN. REP. 771 (Oct. 25, 1982) (interview with Federal Reserve Board general
view, particularly in contested takeover cases. The current practice of
the Federal Reserve Board, which rigidly requires divestiture simultane-
ous with the closing of the contested transaction, imposes an artificial
and unnecessary barrier to contested takeovers. A better approach
would be to review contested transactions on a case-by-case basis, be-
cause there are other means of ameliorating short-term anticompetitive
effects before divestiture.
A public policy issue with regard to financial and managerial stan-
dards and community needs is whether to require the acquiror of a de-
pository institution to bring additional "strength" to the institution.
Although the Federal Reserve Board has adopted that requirement for
bank holding companies,2 11 the CBCA standard is simply that the ac-
quisition must not jeopardize depositors and stockholders. If depository
institutions really are special because of their role in the nation's econ-
omy, then perhaps the higher standard of the BHCA is justified. In any
event, there is no compelling justification for different financial and
management standards depending on the structure of the transaction.
The main procedural problem in the BHCA is the length and com-
plexity of the review required. The opportunity for disruption and de-
lay is obvious because there are no effective time limits. The CBCA, on
the other hand, does not formally provide for public participation in the
review process, which could lead to decisions made without relevant in-
formation. An intermediate approach would address this problem:
filing a notice together with detailed information relevant to the appli-
cable statutory standards; public notice through newspapers and the
Federal Register; and a thirty-day comment period for all transactions,
not only those controlled by the BHCA. A fixed review period could be
provided, after which the transaction could go forward unless theagency disapproved the proposed acquisition, as in the CBCA and
CSLCA.212
A decision to enact uniform definitions, substantive standards, and
procedural requirements for changes in control of depository institutions
gives rise to a logical question: is it desirable to have a single agency
responsible for regulating changes in control of depository institutions?
community orother nonantitrust factors are sufficiently compelling to override an antitrust viola-tion. This suggested change is not as significant as others, however, because the issue rarely arises.
But see Indiana Bancorp., 69 Fed. Res. Bull. 913, 913 (1983) (public benefits outweighed anticom-
petitive effects).
211. See supra note 42 and accompanying text.
212. An interesting possibility would be to prohibit anyone but the applicant from appealing
the regulator's decision. The proposed FIDA, supra note 8, § 10 , contains such a provision in a
complete revision of § 4(c)(8) of the Bank Holding Company Act, which governs nonbanking sub-
sidiaries of bank holding companies. Moreover, the federal regulator's decisions to approve a
change in control are infrequently challenged and virtually impossible to overturn.