On November 17, 2008, the Treasury Department released a term sheet and FAQ describing the terms upon which private financial institutions may participate in the Capital Purchase Program (CPP). The program is open to Qualifying Financial Institutions (QFIs) which are not publicly traded¹ and which submit an application to their primary federal banking agency by December 8, 2008. The term sheet provides terms that are similar to those previously made available to public financial institutions.

Investment Securities and Principal Terms

A private QFI approved by its primary bank regulator may sell Preferred Shares (the Preferred) to the Treasury in an amount equal to not less than 1 percent of its risk-weighted assets and not more than the lesser of 3 percent of its risk-weighted assets or $25 billion. The Preferred is non-voting, has perpetual life, and ranks senior to common stock and pari passu with the QFI's highest existing Preferred Shares. Preferred issued by holding companies will pay cumulative dividends at a rate of 5 percent per annum for the first five years and 9 percent per annum thereafter. For Preferred issued by banks that are not subsidiaries of holding companies, the Preferred will pay noncumulative dividends at a rate of 5 percent per annum for the first five years and 9 percent per annum thereafter. The Preferred may not be redeemed for three years, except with the proceeds of a "qualified equity offering" that results in gross proceeds of at least 25 percent of the Treasury's initial investment in the QFI.  In addition to Preferred, the Treasury will, except for investments of $50 million or less in certified Community Development Financial Institutions, receive warrants to purchase additional preferred stock (the Warrant Preferred), which will have the same rights and privileges as Preferred, except that the Warrant Preferred will immediately pay dividends at 9 percent per annum. The Warrant Preferred will have an aggregate liquidation preference equal to 5 percent of the amount of the initial investment of Preferred Shares. The exercise price of the Warrant Preferred is the greater of $0.01 per share or the par value per share of Warrant Preferred. The Treasury has indicated that it intends to immediately exercise the warrants.

The Preferred may not be subject to any contractual restrictions or transfer restrictions under any stockholder's agreement or similar arrangement between the QFI and its shareholders, except that the Treasury will commit not to effect any transfer of the Preferred which would require the QFI to become subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended. However, if the QFI otherwise becomes subject to such reporting requirements, the institution will be required to 1) file a shelf registration statement covering the Preferred, the warrants, and the Warrant Preferred, 2) grant piggyback registration rights to the Treasury, and 3) take all action required to cause the registration statement to be declared effective as soon as possible. 

Restrictions on Dividends, Repurchases, and Related Party Transactions

The Treasury's consent is required for any increase in common dividends until the third anniversary of the Treasury's investment, unless the Preferred and Warrant Preferred have been redeemed in full or have been transferred by the Treasury to a third party. After the third anniversary and prior to the 10th anniversary of the Treasury's investment, the Treasury's consent will be required for any increase in aggregate common dividends per share greater than 3 percent per annum. The Treasury's consent will also be required for any repurchase of equity securities or trust preferred securities (other than repurchases of the Preferred or repurchases of junior shares in connection with a benefit plan in the ordinary course of business) until the 10th anniversary of the investment.  No dividends may be declared or paid on any junior shares, and no junior shares may be repurchased, in any case, unless the dividends on the Preferred have been paid in full. After the 10th anniversary of the Treasury's investment, no common dividends may be paid and no common shares or other securities junior to the Preferred may be redeemed until all of the shares owned by the Treasury have been redeemed or transferred to a third party. 

For as long as the Treasury holds any equity securities of the QFI, the QFI and its subsidiaries may not enter into a transaction with a related person unless such transaction is on terms no less favorable to the QFI and its subsidiaries than could be obtained from an unaffiliated third party, and have been approved by the audit committee or comparable body of independent directors of the QFI.

Restrictions on Executive Compensation

As a condition to closing, the QFI must implement any required changes to its compensation, bonus, incentive, and other benefit plans, arrangements, and agreements, including golden parachute, severance, and employment arrangements, with SEOs (Senior Executive Officers) that are required for the QFI to comply with the new executive compensation restrictions of Section 111 of the Emergency Economic Stabilization Act of 2008 (EESA). The QFI and each of its SEOs also must also execute waivers releasing the Treasury from any claims arising from the amendment or modification of such plans or arrangements.

¹ For these purposes, "publicly traded" means a company (1) whose securities are traded on a national securities exchange and (2) that is required to file, under the federal securities laws, periodic reports, such as the annual and quarterly reports with either the Securities and Exchange Commission or its primary federal bank regulator. Subchapter S Corporation and mutual depository institution structures are still being considered by the Treasury and are not subject to the December 8, 2008, deadline.

Our firm has been counseling our financial institution clients regarding the CPP. On November 3, we conducted a teleconference pertaining to the CPP. On Friday, November 21, from Noon until 1 pm, ET, we will be conducting another teleconference pertaining to the CPP as it is being applied to private financial institutions. If you would like to participate in the teleconference, please send an e-mail message to buchanans@ballardspahr.com and we will send you an invitation. If you have any questions about the CPP, please contact the following members of the firm's Capital Purchase Program Task Force: Alan Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Justin Klein at 215.864.8606 or kleinj@ballardspahr.com, or Brian Pinheiro at 215.864.8511 or pinheiro@ballardspahr.com.

For further information on the Emergency Economic Stabilization Act, please contact:

Dominic De Simone, Co-Chair, Commercial Real Estate Recovery
Joseph A. Fanone, Public Finance Department
Thomas Hauser, Business and Finance Department
Alan Kaplinsky, Banking and Consumer Financial Services
Justin P. Klein, Business and Finance Department
Vincent Marriott III, Bankruptcy, Reorganization and Capital Recovery Group
Brian Pinheiro, Employee Benefits and Executive Compensation Group

Prior Alerts

November 14, 2008
Kashkari Details Future TARP Deployment Strategy

November 12, 2008
Treasury Secretary Details TARP Strategy 

November 7, 2008
Treasury Department Announces Solicitation Regarding Asset Management Services in Connection with EESA Capital Purchase Program

November 6, 2008
Beware: Is There a "Trojan Horse" in the Capital Purchase Program Securities Purchase Agreement?

October 23, 2008
Kashkari Testifies Before Senate Banking Committee

October 14, 2008
Treasury, Federal Reserve, and FDIC Joint Statement Capital Purchase Program

October 13, 2008
Remarks on TARP to Institute of International Bankers

October 7, 2008
Emergency Economic Stabilization Act of 2008/TARP

October 6, 2008
Employee Benefits and Executive Compensation Issues Connected to Emergency Economic Stabilization Act of 2008

October 6, 2008
Emergency Economic Stabilization Act of 2008

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