On November 24, 2008, the SEC's Division of Corporation Finance issued guidance for financial institutions required to file proxy statements in connection with an issuance of securities to the U.S. Treasury Department (the Treasury) under the Emergency Economic Stabilization Act of 2008 (EESA) Capital Purchase Program (CPP). Federal securities laws generally require a public reporting company to file with the SEC, and deliver to shareholders, a proxy statement on Schedule 14A when soliciting shareholder approval for various actions, including certain issuance of securities. Recognizing that participating institutions face tight time constraints in obtaining shareholder approval required in conjunction with participation in the CPP, the Staff of Corporation Finance of the SEC (Staff) has issued sample comments to aid institutions in preparing such proxy materials.

The Staff cautions that the sample comments may not be applicable to each financial institution filing a proxy statement in connection with the CPP, and may not cover all disclosure items. The sample comments recommend disclosure of:

  • whether the financial institution has filed a CPP application, and the status of the application;

  • the material terms of the securities and warrants that will be issued, and the other material terms for participation in the CPP;

  • the estimated proceeds from the sale of the securities and the use of such proceeds;

  • any required changes to executive compensation arrangements and agreements to comply with the executive compensation limitations in Section 111 of EESA; and

  • the fact that the Treasury is not required to accept the application, if true, and that receipt of the estimated proceeds is not guaranteed.

Through the sample comments, the Staff has also suggested that financial institutions discuss:

  • why the financial institution is participating in the CPP;

  • how participation in the CPP will: (1) impact the holders of any outstanding senior securities; (2) impact the holders of common stock; and (3) cause dilution to common stockholders;

  • how participation in the CPP may require the issuer to expand its Board of Directors to accommodate any future Treasury appointees; and

  • the process anticipated to be followed to register for resale any securities issued to Treasury.

An institution should consider disclosing any material impact on the institution's liquidity, capital resources, or results of operations if its shareholders approve the issuance of the securities but the Treasury subsequently denies the institution's application.

Item 13 of Schedule 14A requires an issuer to include financial information for certain issuances of common stock or preferred stock. If the financial institution determines such financial information is not required, it should include proxy statement disclosure as to why such financial information is not material to the determination to be made by its shareholders. In evaluating the impact of the potential sale of securities to the Treasury, institutions should consider the material effect of the transaction, including how the proceeds of the transaction may affect the institution's net interest margin, how dividends payable on the preferred stock will impact net income available to common stockholders, and how the transaction will impact earnings per share, diluted earnings per share, and diluted shares outstanding.

If the sale of the securities to the Treasury is expected to have a material impact on the balance sheet or income statement of the financial institution, Article 11 of Regulation S-X requires the inclusion of pro forma financial statements in the proxy statement. The Staff has indicated that the requirement to include such pro forma financial statements may be satisfied, in the case of a sale of securities to the Treasury, by providing a textual discussion of the pro forma effect in lieu of pro forma financial statements.

Whether the financial institution elects to provide pro forma financial statements or a textual discussion in lieu of pro forma financial statements, the proxy statement should address the minimum and maximum estimated proceeds of the sale, as well as any relevant assumptions the institution has made, such as assumptions about interest savings on proceeds applied to pay down debt, and interest income earned on proceeds invested. The Staff has noted that institutions should only consider those plans for the use of proceeds from the CPP that meet factually supportable criteria. The institution should also describe the methodologies used to allocate the transaction proceeds among the securities issued to the Treasury (relative fair value) and to accrete the discount on the issued preferred stock. If true, the institution should state that the treasury stock method was used for purposes of evaluating the effect of the warrants on diluted shares outstanding.

Finally, if the institution does not expect the sale of the securities to the Treasury to have a material impact on its balance sheet or income statement, the issuer should include in its proxy statement a quantitative and qualitative analysis supporting such conclusion that discusses the impact to each of the items noted above, as well as to total shareholders' equity and the institution's capital ratios.

For more information on these new guidelines or for further information about the Emergency Economic Stabilization Act or Capital Purchase Program, please contact any of the following Ballard attorneys:

Dominic De Simone, Practice Leader, 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
Mary J. Mullany, Business and Finance Department 
Brian Pinheiro, Employee Benefits and Executive Compensation Group

Prior Alerts

November 26, 2008
Federal Reserve and Treasury Announce Two New Programs To Boost Credit Availability

November 18, 2008
Treasury Department Issues Term Sheet and Announces December 8, 2008 Deadline for Private Financial Institutions to Participate in the Capital Purchase Program

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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